Ladies and gentlemen, thank you very much for standing by, and welcome to the SEI third quarter 2018 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given to you at that time. If you should require assistance during today's call, please press star then zero, and an operator will assist you offline. Also, as a reminder, today's conference is being recorded. I would now like to turn the conference over to your Chairman and CEO, Al West. Please go ahead.
Thank you, and welcome everyone. All of our segment leaders are on the call, as well as Dennis McGonigle, SEI's CFO, and Kathy Heilig, SEI's Controller. I'll start by recapping the third quarter of 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. Then finally, Kathy Heilig will provide you with some important company-wide statistics. As usual, we will field questions at the end of each report. Let me start with the third quarter of 2018. Third quarter earnings increased by 26% from a year ago. Diluted earnings per share for the third quarter of $0.80 represents a 27% increase from the $0.63 reported for the third quarter of 2017.
We also reported a 6% increase in revenue from third quarter 2017 to third quarter 2018. Also during the third quarter of 2018, our non-cash asset balances under management increased by $3.6 billion. At the same time, LSV assets under management increased by $2.9 billion during the third quarter. These increases in assets under management were due to market appreciation. In addition, during the third quarter of 2018, we repurchased approximately 1.7 million shares of SEI stock at an average price of $61.55 per share. That translates to over $102 million of stock repurchases during the quarter. Finally, in the third quarter, as part of the investments we make to create growth, we capitalized approximately $8.8 million of the SWP development and amortized approximately $11.4 million of previously capitalized SWP and IMS development.
Third quarter 2018 sales events net of client losses totaled approximately $27.9 million and are expected to generate net annualized recurring revenues of approximately $22.5 million. Our sales results reflect the fact that activity is very high and our pipelines are large. Still, we are experiencing that larger sales events are particularly complex and take longer to close. Each of our units will speak to their specific sales results. Now, this concludes my formal remarks. I will turn it over to Dennis to give you an update on LSV and the investment in our new business segment. I'll then turn it over to the other business segments heads. Dennis?
Thanks, Al. Good afternoon, everyone. I'll cover the third quarter results for the Investments in New Business segment and discuss the results of LSV Asset Management. During the third quarter of 2018, the Investments in New Business segment continued its focus 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 $2.8 million, which compared to a loss of $3.3 million during the third quarter of 2017. This improvement reflects the growth of our Private Wealth Management business. Regarding LSV, our earnings from LSV represent our approximate 39% ownership interest during the third quarter. LSV contributed $41.7 million in income to SEI during the third quarter. This compares to a contribution of $39.3 million in income during the third quarter of 2017.
Assets grew approximately $2.9 billion for the quarter. LSV experienced net positive cash flow during the quarter of approximately $300 million. Revenue was approximately $133.9 million, of which less than 1% was performance fee related. During the quarter, our effective tax rate was 18.6%. I'll now take any questions.
Okay, thank you. Ladies and gentlemen, if you would like to ask a question, please press star then one on your phone keypad. If you're using a speakerphone, please pick up your handset before pressing the numbers. We do have a question from the line of Chris Schaeffler. Please go ahead.
Hey, Dennis, how are you?
Great, Chris. Yourself?
Good. A couple of questions. One was just on the tax rate, just what we should expect from here.
I think we'll probably be back, starting tax rate closer to what we were second quarter.
Okay, got it.
The corporate overhead expense was down a little quarter-over-quarter. I think it's usually up sequentially in Q3. What happened in Q3 there, and how should we look at that line going forward?
We applied for a tax credit from the State of Pennsylvania, wouldn't flow through taxes or through to expenses because of our investment in our data center operations. That came through in the third quarter. That helped a little bit. I would say that kind of across the company, we had a concerted effort on expenses during the third quarter.
Okay. Going forward, it's probably not going to tick back up to the Q2 level, somewhere in between?
No, that's probably a good range.
Okay. Thank you.
Yep.
We do have a question from the line of Robert Lee with KBW. Please go ahead.
Great. Thank you. Good afternoon, Dennis.
Hey, Rob.
Hey. Just a quick question on LSV. I just was curious if, maybe, possibly get any color on, do they have one or two specific, maybe strategies that are kind of bucking the broader industry trend and seeing, generating their flows? Just trying to get a sense of kind of drilling down a little bit on what may be driving this.
Yeah, most of their, let's see, more smaller-cap, mid-cap regional products are closed to new money. Their flows are still going into their more, I'd say, their bread-and-butter foundational products. Now, the good news for them is that their distribution activities, their asset flows are also coming globally. They're not just from U.S. clients. They're coming from other geographies into U.S. products. It's still their bread-and-butter stuff is-
helping them.
Great. Thank you very much.
You're welcome.
If there are additional questions, please press star one at this time. Thank you. We'll go back to the line of Chris Schaeffler with William Blair. Please go ahead.
Hey, Dennis. Sorry to ask another one here, on LSV, could you give us any update on that performance in the third quarter or I guess so far in October? We don't have great visibility into that, except like through June 30th. I know they had some challenges earlier this year. Great long-term performance, just wanted to get an update.
Yeah, again, on their more traditional strategies, their performance is okay. Value's been a tough segment of the market, as you're probably aware. That did continue to play out during the third quarter. Maybe the market cycle we're kind of getting into now, that'll change a little bit. Some of their other strategies, their performance is actually pretty good. You can see it in their performance fees number coming down a little bit. Last year to this year, even first to second or second to third quarter is down a little bit. Yeah, performance has been a little bit tougher.
Okay. Makes sense. Thank you.
You're welcome.
I have no further questions. Please continue.
Thank you.
Thank you, Dennis. I'm now going to turn it over to Joe Ujobai to discuss our Private Banking segment. Joe?
Great. Thank you, Al. I'll start with a financial update on the third quarter, followed by an update on new business activity. Third quarter revenue of $118.5 million was down slightly from the second quarter, primarily due to a decline in mutual fund trading revenue. For the quarter, operating profit of $2 million was also down from the second quarter due to the lower revenue and slightly higher expenses, largely tied to the SEI Wealth Platform. During the quarter, we signed one new SWP agreement, Cornerstone Advisors. It's a new client to SEI. Year to date, we have signed seven new SWP clients. In Q3, we also signed $3.5 million of professional services fees related to SWP clients and prospects. In the U.K., we continue to cross-sell and gather solid net cash flow from current SWP clients.
Net cash flow for the third quarter from U.K. SWP clients was $1.4 billion. Sales activity in the U.S. and U.K. with current clients and new prospects is strong. As we've mentioned, some of the larger decisions are very complex and frankly can be political inside of larger organizations. For example, at one U.K. client, we are negotiating a new SWP agreement to administer a large book of private client accounts. Through some organizational and strategy change of the client, we would expect to deconvert some assets from SWP while we begin to convert new books of business to the platform. We expected this to be a net positive growth event for SEI. This opportunity is still under negotiation. Regarding TRUST 3000, during the quarter, we recontracted four clients for a total of $3.8 million.
Included in the recontract numbers is a TRUST 3000 client that gave us a termination notice in Q4 2017 that they have since rescinded. They have extended their SEI relationship. Year to date, we have recontracted 16 TRUST 3000 clients for $42 million of annualized revenue. There were no TRUST 3000 client losses during the quarter. Our asset management distribution business experienced approximately $55 million in negative cash flows, mainly from non-U.S.-based distributors. Overall, net sales events for the Private Banking segment were approximately $5 million, of which $1.5 million is recurring annual revenue and $3.5 million is one-time or professional services revenue. I did want to make a quick correction. Cornerstone Advisors is actually a new client for banking. They were not a TRUST 3000 client, but they are a client of SEI's in the IMS space.
As an update on client conversions, we converted a U.K. client to the SEI Wealth Platform during the quarter. This brings the total to 37 clients currently processing on SWP. Our total signed but not installed backlog for SWP is approximately $29 million in net new recurring revenue. As I mentioned on previous calls, we are tracking a metric to illustrate our continued momentum with SWP. The total annual recurring revenue value of our SWP backlog, this number includes the recontract value of TRUST 3000 relationship, plus the net new recurring revenue is greater than $72 million. As the average contract term in our backlog is greater than six years, the uninstalled clients represent more than $450 million in contracted revenue to SEI. We continue to actively work with Wells Fargo on the conversion to SWP but have not yet set a new conversion date.
Overall conversion activity is robust, with 40% of the backlog expected to convert by the end of 2019 and the remaining to convert after that time. In conclusion, we remain focused on the following: Capitalizing on our momentum to grow the SWP business, installing the backlog to matriculate the revenue, and improving profitability of the banking segment to return the unit to its historical profit margins. Any questions, please?
Yes, if you do have questions, please press star one. We'll go to the line of Robert Lee with KBW. Please go ahead.
Great. Thanks for taking my question. Good afternoon, Joe.
Hi, Rob.
Hi. I was just curious, can you update us, as we look at the backlog and the clients you're signing up for SWP? I know the original intent with the platform was to make it much more asset-based. Obviously you get that asset growth over time, notwithstanding short-term volatility like we have now.
Right.
Can you maybe give us a sense of on these new relationships or even existing ones, how the mix is shaking out between the proportion that may be asset-based versus maybe account-based or flat fee?
Yeah. It's still largely asset-based. Although the pricing, we have evolved the pricing over the history of SWP. In the U.K., the mix of clients are generally fairly high growth wealth manager advisory clients. We're seeing not only growth from the market appreciation, but those businesses have a tendency to have been growing. Many of our clients have been growing organically and through acquisition, but also organically. That certainly helped. We've seen good revenue growth from that. In the U.S., the clients have a slightly different sort of background. Some of them have been our TRUST 3000 clients. Which again, were largely an asset-based solution, but we have added more pricing mechanisms around accounts and seats depending on the nature of the underlying functionality. Still overall, it's still very much an asset-based. A majority of the pricing is asset-based.
Okay. Then maybe just a quick update on the TRUST 3000 that you did re-sign. Can you maybe just update us on what type of, if any, pricing concessions you're seeing? Then maybe any sense of if we look forward over the coming quarters, are you pretty much through a kind of repricing or re-signing?
Yeah. I have a couple of comments. One is, there are some net downs, but they're single-digit net downs. In some cases, it's been where a bank may not have as many accounts on the platform on TRUST 3000 as they would have had in the past. We've had a pretty solid year on recontracting, and most of our important clients are either recontracted or well on their way to recontract. Also, we're engaging those clients with their eventual move to SWP. We typically have a pretty long-term strategic conversation with them. Some will choose to recontract for two to three or so more years on TRUST. In all those conversations, we're talking about the eventual move to SWP.
Great. Thank you for taking my questions.
Thanks.
Next we'll go to the line of Chris. Is it Donat with Sandler O'Neill? Please go ahead.
Great. Thanks for taking my question, Joe. Wanted to ask one question about something you've been disclosing in the press releases when you announce SWP wins, which is the number of clients and implementation, it's been sort of around the eight, nine number. Does that represent something of your maximum implementation number, or is that really a function of things, not just number of clients, but really accounts or assets or something else?
No, that's not a maximum for us. We think we can handle considerably more than that. That's more of a reflection as we have not selling this thing fast enough. We could certainly have more than eight or nine clients in the backlog.
Okay. Just on the $3.5 million of professional services signed this quarter, is that something we should expect in the next couple quarters as it flows in?
Yeah, some of that has already flowed in. In some cases, usually it matriculates more quickly. Some of that is tied to the conversions that we're doing, and some of that is tied to projects that are more in, we call the discovery or the sales phase. Yes, we recognize that revenue generally fairly quickly.
Okay. To confirm, some is in the sales phase or the discovery?
That's correct.
Got it. Okay. Thanks, Joe.
Thanks.
Then we'll go to Chris Shutler with William Blair. Please go ahead.
Hey, Joe.
Hi. Good afternoon, Chris.
I just wanted to dig into the couple of examples that you gave. The U.K. client, just if you could reiterate what you said there, maybe talk about that a little bit more. Then, I think you said that one client that originally gave a termination notice in last year is now on board. Just what kind of change there?
I'll take that one first. It was a client that was a long-term TRUST 3000 client. It was smaller, more of a community bank type client. They were acquired by another bank that was on another system. The plan was to move off of TRUST onto the competitive system that the acquirer had. After reconsideration and moving towards conversion, they came back to us and said that they did not want to move on to the other system, and that they wanted to recontract on TRUST 3000 for a couple of years, and they wanted to consider SWP for the larger merged entity. That I think is what we've seen.
I think we've talked about on some other calls where there have been firms that have been interested in some of our competitive systems, whether it be for price or maybe for convenience, in this case, with a merger. Ultimately, come back to us. We're happy about that, and we'd like to see more of that with some of the losses we've experienced over really last year. Most of those losses happened last year in 2017 or sooner than that. In the U.K., I just want to sort of give an example that we're having good conversations with large firms, both prospects and clients. We have a situation with a client there, and we believe that we have an opportunity to grow our business there. The mix of the underlying accounts might change.
Because of some changes inside of that firm and the strategy inside of that firm. I think the point there I wanted to make is that these are complex, but we're working with these large firms to identify what's our best opportunity and where SWP fits and making some good progress there. In the meantime, they may change around the mix of underlying accounts.
Okay. I think also, Joe, you mentioned that the main reason for the decline in revenue quarter-over-quarter was mutual fund trading revenue. Can you just give us a little bit more detail there?
Yeah. We have an outdoor service where we execute mutual fund trades for our clients, and we are paid usually basis points to do that as an administration fee. We're finding that some clients are no longer participating. We're still doing the trading, but the fees are coming down. They're deciding not to take administration fees from the funds, essentially. I think that's sort of an industry pattern. It's still a big business for us, and we still have significant revenue associated with that. Some of those volumes have declined. Either the clients are trading less in funds, or they might be going directly to the funds and not participating in the service anymore.
Is this just 12b-1s?
Yeah. It's 12b-1s or other administration fees that they would share with us or give to us for the services that we provide.
Okay. Thank you.
Some banks are just deciding not to invest in funds with those kinds of shareholder servicing fees.
Okay. Thanks, Joe.
Thanks.
Thank you. Next we'll go to the line of Glenn Greene with Oppenheimer. Please go ahead.
Thanks. Hey, good afternoon, Joe.
Hi, Glenn.
Just a couple sort of just data points. Where are you in terms of how many TRUST 3000 clients you have left? As you're recontracting them, you mentioned a few recontracting this quarter, what's the average duration of these recontracts?
I think the average duration's about three years or so, three or four years. There's still a lot to recontract. There's obviously some of the very large ones. We had about 90 or so clients, we still have a decent amount of those to, I'm sorry, not to recontract, but to move to SWP.
What I'm trying to get at is, are you anywhere close to or where do you get to a tipping point where you get more aggressive with the existing TRUST 3000, where you sort of disincent them to stay on TRUST 3000, if you know what I mean? Incent them to move to SWP.
Yeah, I think we're getting close to that. The platform has very robust functionality for US Trust type of U.S.-based trust departments. We have strong functionality there. We have more maturity in the platform. I think in almost every case where there is a contract, we lead with a move to SWP, sometimes that depends on what else the client is trying to accomplish from a technology standpoint outside of our area. We're, I'd say, increasingly more aggressive about that.
Okay. Just the final question, I don't know how you want to answer this, given the Wells Fargo conversion delay, you obviously, or presumably, have a hole in your sort of conversion backlog. What are you doing to sort of address that, if I'm correct on that basis?
Well, we're still working, we're still getting paid by Wells Fargo to implement the conversion. The conversion's taking longer than we would have expected. There are still significant amount of people working on that, we're getting paid for that. In the meantime, we're trying to sell to fill the rest of the pipeline. There are, I guess as I said, eight or nine accounts. One of those accounts is Wells. The goal is to continue to sell more to utilize the resource that we have. People are not sitting around waiting for work. Some of these conversions are more complex than some of the original conversions, we're working to get those done as fast as possible.
For example, we announced, I believe, in the first quarter, a U.K. client for the platform, we converted them fairly quickly in the third quarter. Part of this is also trying to use the resource and experience we have to get things converted more quickly.
Okay. Thanks, Joe.
Matriculate the revenue more faster.
Faster. Okay, thanks.
Thank you. Our next question comes from the line of Robert Lee with KBW. Please go ahead.
Great. Thanks. Thanks for taking the follow-up. Joe, I guess I had a question on really the asset management programs. I know a couple of years ago that was pretty quickly growing kind of segment within your overall segment. Notwithstanding some outflows, modest outflows this quarter, can you maybe update us on kind of what's going on with that part of the business?
Yeah. As we've talked before, it's about 30% of our business. We have some really solid distributors that have been good this year. The business is a little bit more non-U.S. than U.S. We have strong teams now on the ground in the U.S., in Canada, and in the U.K. We have a good solid pipeline there. We're looking for big deals that will drive assets. We've signed some deals this year. It does usually take a little bit of time for those assets to matriculate. We signed sort of a deal at a headquarters level, and then we've got to go in and train and get the sales force there promoting the solution. I'd say the pipeline is solid.
We've got some deals signed that we would expect funding to start to flow in. We would calculate those as events as the assets actually matriculate into our funds.
Maybe just one more follow-up, if I could. This goes back to, I guess I'll call it decommissioning TRUST 3000 to an earlier question. Assuming at some point you're going to have to announce that you're not going to support it past a certain date, and then assuming, unfortunately, not everyone's going to go to SWP, how much lead time do you think you need to give clients when you kind of make that decision? Is it three years, two years? How do you kind of think of that and weigh that in the-
It's not like some big event. We're talking to all of our clients about the eventual takedown of TRUST 3000. They are all aware of what our plans are. Certain clients would need more time than others based on the complexity of their business. I think we've said on multiple calls, though, the firms that are interested to have a growth strategy are very interested in eventually moving to SWP. There are some smaller clients or older clients that TRUST and the services that we've provided are now more of an accommodation to their client base as they've evolved their strategy over the years. Some of those clients we suspect might leave. We might want them to leave. Those are generally smaller ones that wouldn't take a long time to convert.
We're having these conversations with every client, understanding their situation and ultimately talking about the benefits to move to SWP, and we expect that most will move. Most will want to move.
Thank you.
Thank you. Our next question comes from the line of Thomas McCrohan with Mizuho. Please go ahead.
Hey, Joe. On the mutual fund trading revenue, can you quantify the impact this quarter, and what kind of margins are you getting on that business? It sounds like that was a low margin business, I just want to confirm.
It is a lower margin business. We were probably down about 15%.
Okay. Any thoughts on the trajectory of margins from here?
Obviously, we'd like to see sequentially better margins every quarter. A quarter is a short period of time and different things happened in the quarter. Again, we're working hard to convert this backlog and to sell more and continue to build out the backlog. The margins will improve as we get this backlog converted.
Okay. Thank you.
Thank you. Our next question comes from the line of Patrick O'Shaughnessy with Raymond James. Please go ahead.
Hey, Patrick. We're about a year into the Regions Bank install. Any key takeaways that you would say that you've learned over that year and maybe anything that surprised you or it's been different than what you had expected?
It's been a year, you're right. We've just sort of been talking about the year, not celebration, but the year anniversary. We think that someone that buys the platform from front to back is going to get the greatest benefit and value out of their relationship with SEI. We were able to provide a really solid solution there on the private client side. They are our largest institutional trust user, so we had to build out some more services for them on the institutional trust side. That includes some calculations and reporting and those kinds of things. I think we're very proud of our progress in the first year. They are a referenceable client. In fact, we just had a prospect and a very important prospect on the ground in Birmingham a week or so ago. We're excited about how they're using the platform.
We're excited about the progress we've made. We're excited about how they've evolved their business. They are referenceable and should be a help to us as we grow the business.
Great. Thank you.
Thanks.
Just a reminder, if you have any further questions, please press star then one. There are no further questions in queue. Please continue.
Thank you, Jill. Our next segment is investment advisors. Wayne Withrow will cover this segment. Wayne?
Thanks, Al. In the third quarter of 2018, we continued to grow our revenues and profits while simultaneously making big strides in our migration to the SEI Wealth Platform. Third quarter revenues totaled almost $103 million. These revenues were $8 million better than the third quarter of last year. This increase was driven by market appreciation and positive net cash flow, offset in part by previously announced fee reductions in some of our investment products. Expenses were up in the third quarter versus last year. The year-over-year increase was due to increased direct costs and personnel expense tied to our growth. As compared to the second quarter, expenses were relatively flat. The Q3 versus Q2 comparison benefited from there being some one-time expense items in the second quarter that did not repeat in the third quarter.
Our profits grew $12.6 million from last year's third quarter, and our margins improved 1.6%. Assets under management was $67.1 billion at September 30th, an increase of $1.8 billion from June 30th. The increase was driven by both market appreciation and positive net cash flow. During the third quarter, our net cash flow was $324 million. During the quarter, we recruited 81 new advisors. Our pipeline of new advisors remains active. With respect to the SEI Wealth Platform, we continued to work on the migration of our advisors. At the end of September, we migrated over 100,000 accounts and over $12 billion in assets. We now have 47,000 accounts and $4.7 billion in assets remaining on TRUST 3000 and continue on target to migrate these remaining assets on March 31st of next year.
While the completion of the migration is targeted for March 31st, we will continue throughout 2019 to help our advisors benefit from the new features on the platform, especially its straight-through processing capabilities. In summary, the third quarter reflected our continued financial growth and solid progress in our migration to the SEI Wealth Platform. These items give us confidence in the long-term opportunity in front of us. I now welcome any questions you have.
Once again, ladies and gentlemen, you can press star then one for any questions. Our first question comes from the line of Chris Donat with Sandler O'Neill. Please go ahead.
Hey, Wayne.
How are you doing?
Good. One thing that surprised me a little bit this quarter is we saw your fee rate, as we calculate it, tick up to 62 basis points from 61 in the second quarter, and that's not something we see in a lot of places these days. Just wondering, is there something in your mix shift or as you migrate clients to SWP that causes a little higher fee or something else going on? Just happy to see it, I want to make sure I understand why it's going on.
Yeah, I can't tell you I have a really good explanation. We're starting to get little platform fees. It's just a lot of little things. I can't tell you there's one factor driving it.
Okay. No changes in your fees on the positive side, but more small things.
No. No, I wish it were.
Okay. That helps. Thanks.
Thank you. Our next question comes from the line of Robert Lee with KBW.
Good afternoon, Wayne. How are you?
Good, Rob.
First question's really just on the maybe investor behavior and environment. Usually when you start getting to these kinds of environments, you
start to see the risk-off trade, so to speak, advisors, clients kind of try to take down their risk levels. Are you starting to see some of that? Are you kind of expecting as we look ahead a little bit to start to see some of that kind of filters through and if this environment stays in place for a little longer?
Yeah, I don't know if we're seeing a lot of risk-off. I think if you look year-over-year, I think our liquidity balances are a higher % of our overall asset balances, and I think there's a small migration to that as you would call risk-off status. I think there's just maybe a little more apathy out there now because people don't know what direction to go. I haven't seen a major change yet.
Okay. Without maybe reading too much into any one quarter's flows, but does last quarter, this quarter, you have seen some slowdown in inflows and kind of number of advisors while still obviously growing, maybe a little slower pace than it's been in a while. Is there anything maybe around that related to just client preferences or just one of those quarters was slow? I am just seeing if there is anything we should be thinking about kind of trend-wise.
Yeah, I guess what I would say is I think at the end of March and at the end of September, we had the two biggest migrations to date. When I look at the field force and the service folks, we are focused on getting these clients migrated, and it is a little bit of a distraction.
Great. Thank you.
Thank you. Our next question comes from the line of Chris Schaeffler with William Blair. Please go ahead. Chris, your line is open.
Oh, hey Wayne.
Hey Chris.
Hey, my questions were already answered. Thanks.
Thank you. Currently there are no further questions in queue.
Thank you, Wayne. Our next segment is the institutional investor segment. Paul Klauder will report on this segment. Paul?
Thanks, Al. Good afternoon, everyone. I'm going to discuss the financial results for the third quarter of 2018. Third quarter revenues of $83.5 million increased 4% compared to the third quarter of 2017. Third quarter operating profits of $43 million increased 6% compared to the third quarter of 2017. Both revenues and operating profits for the quarter were positively impacted by market appreciation, positive net client fundings, and changes in asset class diversification by our client base. Quarter end asset balances of $92 billion reflect a $1.2 billion decrease compared to the third quarter of 2017. This decrease is driven by lower low-fee liquidity balances, net client losses, offset by positive market appreciation. Net fundings for the quarter were a positive $450 million. The unfunded new client backlog at quarter end was $450 million. New client signings for the quarter were $1 billion.
This is primarily new clients in U.S. endowment and foundations, U.S. hospitals, and U.K. fiduciary management. Client events in revenue terms were strong due to the consumption of higher earning asset classes. Our sales pipeline is solid and growing, we continue to be aggressive in our pursuit of new business. We continue to believe that volatility in the financial markets would be a tailwind for new business, as it would be a catalyst for investors to evaluate their current investment program. Thank you very much, and I'm happy to entertain any questions you may have.
Please press star then one. Currently there are no questions in queue. Please continue.
Thank you, Paul. Our final segment today is Investment Managers. I'm going to turn it over to Stephen Meyer to discuss this segment. Steve?
Thanks, Al. Good afternoon, everyone. For the third quarter of 2018, revenues for the segment totaled $101.3 million, which was $10.3 million, or 11.3% higher as compared to our revenue in the third quarter of 2017. This year-over-year revenue increase was due to net new client fundings and market appreciation. Our quarterly profit for the segment of $36 million was $4.8 million or 15.4% higher as compared to the third quarter of 2017. Third-party asset balances at the end of the third quarter of 2018 were $552.4 billion, approximately $29.7 billion or 5.7% higher as compared to the asset balances at the end of the second quarter of 2018. This increase in assets was primarily due to net new client fundings of $22.7 billion and market appreciation of $7 billion.
Turning to market activity, during the third quarter of 2018, we had our strongest sales quarter this year with net new business events totaling $15 million in recurring revenues, as well as recontracts of $8.5 million in recurring revenues. Most importantly, these sales were diverse and spanned our entire business and included both new name business and increased wallet share with current clients. These events included expansion of our business with several large enterprise clients, the win of a traditional manager in the servicing of a mutual fund family, which was won in a competitive process, and the win of a large new family office servicing mandate. From a market standpoint, we continue to see the dynamics of the industry changing. From the demands of investors, the fee compression in the industry, the new evolving needs of Investment Managers globally, all create some level of disruption.
We feel strongly that this disruption presents an opportunity for continued growth for us. Strategically, we continue to feel well-positioned. That concludes my prepared remarks, and I'll now turn it over for any questions you may have.
We have a question from the line of Robert Lee with KBW.
Hey. Good afternoon, Steve.
Good afternoon, Rob.
I'm just curious. In the past, when there's been an M&A and transactions in the industry, you've generally viewed that as an opportunity to get some new clients. State Street obviously just did a large acquisition, I guess, of Charles River. Does that create any kind of potential disruption that you could benefit from, or is it too early to tell? How do you think of that?
I think that specific transaction, and there was another purchase of a front-office system. I think it's too early to say. What I'd say, any type of M&A activity, especially in regards to does it change the focus of the acquirer, presents some disruption in the market, and that obviously presents opportunity for us.
Okay. Since I have to ask my typical question every quarter, can you maybe just update us on your backlog and how you think of that funding over the coming year or so?
Sure. Our backlog going into the quarter was $44.7 million. Our backlog coming out was $44.9. What we should take from that is if we sold 15, at the end of the day, we matriculated in around 15. We had decent fundings this quarter from the backlog. When I look at the backlog, it's very diverse from our alternative business, traditional. I might have a slight edge more on the alternative side, and I believe the majority of that will fund over the next 12 to 14 months.
Great. Thank you.
Sure.
Thank you. Our next question comes from the line of Joshua with CGE Investments. Please go ahead.
Oh, hi. I'm looking at the more rapid growth of the segment, and I'm just wondering, is this a market share win for the company, or is the industry growing quicker?
Well, I think the industry is growing, Josh. Certainly, I think we're winning a good bit of the market right now, and we've been doing that for a decent period of time. The industry is expanding. There are new managers starting, even though you see shrinking in some segments. I think clearly from our standpoint, we're moving more upstream. We've started to do that two years or so ago, and we continue to do that.
Okay. What are the fee basis points looking like in this segment? Is there compression or is it stabilizing?
If you look at the pressures, which I mentioned in my write-up, there's pressure at the manager level in their products, that certainly works their way down to their partners, including the areas we service. I think, though, we pride ourselves on having not a commoditized offering, but a premium offering. I think we've been able to battle that fee compression with increased service and a premium service level. It is something out there. There will be continued pressure. Again, I view it a little bit as a tailwind for us because I think the more pressure on the managers in this segment, the investment managers, it's requiring them to relook at their business models and looking how they scale their internal business and operations, that presents an opportunity for them to outsource more.
Okay, great. Thank you.
Sure.
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Thank you, Steve. I would now like to turn it over to Kathy Heilig to give you a few company-wide statistics. Kathy?
Thanks, Al. Good afternoon, everyone. I have some additional corporate information about this quarter. Third quarter 2018 cash flow from operations was $155 million, or $0.96 per share, bringing year-to-date cash flow from operations to $417.9 million, or $2.58 per share. Our third quarter free cash flow was $137.3 million, and year-to-date free cash flow was $362.9 million. The capital expenditures for the third quarter, excluding capitalized software, were $9 million, and that did include about $3 million of facility expansion. Year-to-date capital expenditures, again, excluding capitalized software, were $21.7 million, with about $5 million of facility expansion costs in there. We project the capital expenditures for the fourth quarter, excluding capitalized software, to be $15 million, and about $10 million of that does relate to the facility. As we noted in the earnings release, the tax rate was 18.6%.
That's due to a combination of the Tax Act and tax benefit option exercises. Our effective tax rate could fluctuate as a result. We also would like to remind you that many of our comments are forward-looking statements and are based upon assumptions that involve risk. That the financial information presented in our release and on this call is unaudited. 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 client implementations, and our ability to capitalize on our strategies. Also market conditions that will create opportunities for us to grow our business. 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 the Risk Factors section of our annual report, Form 10-K, for the year ended December 31st, 2017, which we have filed with the Securities and Exchange Commission. Now, please feel free to ask any further questions.
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Thank you, Kathy. Ladies and gentlemen, I am encouraged by the direction our businesses are taking and the progress we're making. While we face short-term headwinds, we believe that the investments we are making will help us identify a benefit from all the changes taking place in our industry. Have a good day, and thank you for attending our call.
Thank you, ladies and gentlemen. That does conclude your conference for today. Thank you very much for your participation.