Ladies and gentlemen, thank you for standing by. Welcome to the SEI second quarter 2018 earnings conference call. At this time, all participants are on a listen-only mode. Later, we will conduct a question and answer period. Instructions will be given at that time. If you should require assistance during today's conference call, please press star followed by zero. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Chairman and CEO, Al West. Please go ahead.
Thank you. Welcome everyone. Good afternoon. 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 second quarter 2018. I'll turn it over to Dennis to cover LSV and the investments in new business segment. After that, each of the business segment leaders will comment on the results of their segments. Excuse me. Finally, Kathy Heilig will provide you some important company-wide statistics. As usual, we will field questions at the end of each report. Let me start with the second quarter 2018. Second quarter earnings increased by 33% from a year ago. Diluted earnings per share for the second quarter of $0.75 represents a 32% increase from the $0.57 reported for the second quarter of 2017.
We also reported a 9% increase in revenue from second quarter 2017 to second quarter of 2018. Also during the second quarter 2018, our non-cash asset balances under management decreased by $2.3 billion. At the same time, LSV's assets under management, I'm sorry, decreased as well by $1.7 billion during the second quarter. These decreases in assets under management were due to the market depreciation. In addition, during the second quarter 2018, we repurchased approximately 1.6 million shares of SEI stock at an average price of $64 per share. That translates to over $105 million of stock repurchases during the quarter. Finally, in the second quarter, as part of the investments we made to create growth, we capitalized approximately $12 million of the SWP development and amortized approximately $9.9 million of previously capitalized SWP development.
Second quarter 2018 sales events, net of client losses, total approximately $24.6 million and are expected to generate net annualized recurring revenues of approximately $19.1 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. This concludes my formal remarks. I'll turn it over to Dennis to give you an update on LSV and the investment in our new business segment. I'll turn it over to the other business segment heads. Dennis?
Thanks, Al. Good afternoon, everyone. I'll cover the second quarter results for the investments in new business segment and discuss the results of LSV Asset Management. During the second quarter of 2018, the investments in new business segment continued its focus principally on the operational development and testing of a web-based 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 $3.1 million, which compared to a loss of $3.4 million during the second quarter of 2017. One bit of news on this segment, on April 2nd, SEI, through the SEI Private Wealth Management business, acquired a firm with very similar characteristics in the ultra-high net worth space, Huntington Steele, based in Seattle, Washington.
While not material to SEI's overall business, this acquisition added approximately $800 million in assets to our practice. The consolidation of this business resulted in an increase in revenue during the quarter of approximately $900,000 with a corresponding increase in expense of approximately $700,000. We made this acquisition to expand our footprint and to enhance our business development and research efforts in an additional geographic region. Regarding LSV, our earnings from LSV represent our approximate 39% ownership interest during the second quarter. LSV contributed $41.1 million in income to SEI during the second quarter 2018. This compares to a contribution of $36.3 million in income during the second quarter of 2017. Assets shrank approximately $1.7 billion for the quarter. LSV experienced net positive cash flow during the quarter of approximately $1.1 billion. Cash flow was offset by market depreciation.
Revenue at LSV was approximately $132.1 million, of which approximately 2% was performance fee-related. Corporately, our effective tax rate for the quarter was 21.1%. Before we move on to the other business segments, I wanted to provide some additional information on our overall spending and research and development investments. I'll mainly focus on overall spending. During the quarter, total company expenses increased $5.3 million, or 2%, when compared to first quarter 2018. This increase in spending was mainly influenced by a couple of items. First, the operating expenses related to the addition of the Huntington Steele business I spoke about earlier. Second, we made a decision to invest a portion of the tax benefit derived from the recent tax cut in our most important asset, our people. We did this by providing a salary increase to all of our employees globally who had a salary below a fixed amount.
This resulted in an increase in spending of approximately $1 million during the quarter. As you can imagine, this was well received by our valuable workforce who drive our success every day. Other than that, there were no other unusual items. I will now take any questions.
Ladies and gentlemen, at this time, if you would like to ask a question, please press star followed by one. You will hear a tone indicating that you've been placed in queue. You may remove yourself from queue at any time by pressing the pound key. Again, if you have a question, please press star one at this time. We have a question from Chris Donat with Sandler O'Neill. Please go ahead.
Hey, Dennis. How are you doing?
Good, Chris. How about yourself?
Doing fine. Two questions for me. First, on the higher compensation for your employees. I think you said $1 million. Is that purely for the quarter, or is there something that reflects accruals or something for the first quarter of 2018? In other words, can I just assume it's going to be this number going forward?
Yeah, just this number going forward. It was just for the second quarter.
Okay. You gave us a little color on the Huntington Steele acquisition. Just because you guys are not very acquisitive, it's always notable to me when you do something. I get expanding the geographic footprint. I sort of get the business development. Can you give us a little more color on why? It seems like there might also be a risk of some channel conflict with your advisor business.
Yeah, that's something we're certainly attentive to. We have a pretty unique practice here in our SEI Private Wealth Management group, and we really have kept our focus on that ultra-high net worth type individual or family. We're generally after individuals or families that have net worths in excess of $20 million US. We've been growing that business gradually over time, particularly as we've gotten more focused on distribution and sales as we've built out our solution. We had actually some clients already on the books that were actually residents in Seattle, just by coincidence. We wanted to see if we could, and that's where the experimentation side of this comes in.
Could we find another firm in the market that had very similar characteristics to our book of business in terms of average size of clients, net worth, focus of the principals of the firm, their approach to client service, and the solution they offer. We're a manager of managers. A similar approach to that in terms of portfolio implementation. It took us probably a year and a half of pretty detailed research in the market to find a firm that met those criteria that allow us to, A, marry up a book of business with the one we have with very similar characteristics. The ease of converting that business to our model is in place because of the approach they took.
We can see from here, can we grow that book of business in another geography in a similar way that we've grown the book of business here? I wouldn't say it's a beginning of any kind of trend. It's really an extension of the, I'll call it research, but really experimentation on how do we build a business focused around that ultra individual or family. The learning from this business has really been repurposed back into the company and a lot of the things we do in our advisor channel, in our Asset Management Distribution channel, as we leverage goals-based investing really came out of this area of research. That's how we kind of see it going forward.
Got it. That's very helpful, Dennis. Thanks.
You're welcome.
Our next question comes from Robert Lee with KBW. Please go ahead.
Hey, Rob.
Hey. I apologize, I think I missed one or two of your comments. Can you just repeat details for LSV's flows, excuse me, and revenue?
Yeah. Their overall assets shrank $1.7 billion.
They had positive flows of $1.1 billion, and their revenues were $132.1 million. About 2% was performance fees.
All right, great. Maybe if I could, just a quick tax question. I know it bounces around given new accounting rules. As we look ahead, and it was pretty close to, I think, at least what our expectations were. Is there any reason to, as we look for the second half of the year, that this isn't still a good kind of run rate for it?
Yeah, we think this is probably more the norm going forward. We'll get some variability with the option activity. I think the way we're projecting this is pretty much the norm, that a little bit over 21% range.
All right. Great. That was all I had. Thank you.
You're welcome.
Our next question comes from Andrew Nicholas with William Blair. Please go ahead.
Hey, Dennis. Good afternoon. Just two quick cleanup items. First, was the Huntington Steele acquisition, when did that close? Do we have a full quarter's worth of numbers and results this quarter?
Yes, we closed on April 2nd.
Okay. Thank you. The second item was just, was there any FX impact to call out this quarter? I know some of the currencies you guys are exposed to weakened a little bit.
Yeah. Across the company, it was pretty benign. Certain segments have a little bit different impact. I think Paul will comment a little bit on his segment. It depends on the periods you're comparing it to. If you're comparing it to first quarter of this year, it's still pretty benign. If you're comparing it to last year and full year last year or second quarter last year, there's a little bit more of an impact. It's more in the segment level rather than the company level.
All right. That's helpful. Thank you.
You're welcome.
Okay, we're ready.
If there are any additional questions, please press star one at this time.
Thank you. I am now going to turn it over to Joseph Ujobai to discuss our Private Banking segment. Joe.
Thanks, Al. I will start with a financial update on the second quarter, followed by an update on new business activity. Second quarter revenue of $121 million was down slightly from the first quarter, primarily due to a decline in mutual fund trading revenue. For the quarter, operating profit of $6.3 million was also down slightly from the first quarter due to expenses tied to the SEI Wealth Platform. As far as sales activity goes, during the quarter, we signed four new SWP agreements. We expect all of these clients to convert by the end of next year. SWP sales events will result in net new annualized recurring revenue of $6 million. We also signed $2.8 million professional services fees related to SWP clients and prospects. Three of the new SWP clients are in the U.S. and include BBVA Compass Bank, Legacy Trust, and Rockland Trust Company.
The other new signing is in the U.K., where we signed the U.K. business of a U.S.-headquartered leading global investment manager. In the U.K., we also continue to cross-sell and gather solid net cash flow from current SWP clients. Net cash flow for the second quarter from U.K. SWP clients was $2.4 billion. Regarding TRUST 3000, during the quarter, we recontracted six clients for a total of $21.5 million. We experienced a 5% recontract net down rate. There were no TRUST 3000 client losses during the quarter. Our Asset Management Distribution experienced approximately $300 million in net negative cash flows, mainly from one U.S.-based distributor. Overall, incorporating TRUST 3000 recontracts and negative AMD cash flows, net sales events for the Private Banking segment were approximately $6 million, of which $3.1 million is recurring annual revenue and $2.8 million is one-time for professional services revenue.
As an update on client conversions, we converted four clients to the SEI Wealth Platform during the quarter. In April, we converted a new name client, The Washington Trust Company, based in Rhode Island. At the end of the quarter, we installed three clients, including First Hawaiian Bank and Moody National Bank, both TRUST 3000 clients, and Trustmark, a new client to SEI. This brings the total to 36 clients currently processing on SWP. Our total signed but not installed backlog for SWP is approximately $30 million in net new recurring revenue. As mentioned on the April call, we are tracking a new metric to illustrate our continued momentum with SWP. The total annual recurring revenue value of our SWP backlog. This includes the recontracted value of the TRUST 3000 relationships, plus the net new recurring revenue, and is approximately $72 million.
I think first I'd like to pose the first question to myself because I know that all of you want to ask that. That question is: Is there any update to the Wells Fargo conversion date? All of our conversion activity continues with Wells Fargo, and we are meeting all of the milestones. We are working together to reset the conversion dates. All parties are eager to finalize the date, complete the conversion, and realize the benefits of the SEI Wealth Platform. We have identified possible target dates, and we are working to finalize the new plans, but at this point, we are not announcing new dates. In the meantime, active conversions continue at other large clients and prospects. Active conversations continue at other large clients and prospects that would likely consume SWP in the Software as a Service model.
We have made significant progress on our Software as a Service capabilities and will now be able to convert other clients before the Wells Fargo conversion. At this point, I will take any other questions.
We have made significant progress on our software as a service capabilities and will now be able to convert other clients before the Wells Fargo conversion. At this point, I will take any other questions.
Glenn Greene, please go ahead.
Thanks. You anticipated my question, Joe, so thank you.
Okay.
Robert Lee, please go ahead.
Hi, sorry about that. Okay. Hey, Joe, how are you?
Good.
I'm just curious to know, I guess you're suggesting that Software as a Service, if you signed another large client, you'd be able to install it possibly before Wells. Given the historical long lead times for large clients, maybe I'm reading too much into this, but would this suggest that even though you haven't set a date, you're currently thinking that Wells could be 2-3 years down the road type of thing?
This is suggesting that I think the market had a mindset of, well, Wells is going to go be the first ASP or Software as a Service client, and that everybody was thinking they would be the first. When the Wells push occurred, the mindset changed. Other banks that would consume us in that business model are now saying there's no reason really to wait around for that. The conversation that other institutions have, the nature of the conversations has changed and nobody's viewing that as sort of a point that prevents them from going ahead of time. There are other firms, most of them probably smaller than Wells, but certainly of significant size, that no longer use that as a milestone that we have to get past.
Okay, fair enough. If I could, maybe if you could indulge me a little bit, can you refresh us on how we should think about the new metric you did introduce last quarter? I just want to make sure I'm understanding kind of exactly what's embedded within that number.
The point is that a significant amount of our revenue and our business is shifting to the SEI Wealth Platform. If it's a TRUST 3000 client, in almost all cases, we are recontracting certainly the TRUST 3000 revenue with additional revenue based on the additional services as well as sort of a lift in the revenue based on SWP. Historically, net sales events just calculate whatever the additional revenue is above and beyond what the client is currently paying us for TRUST 3000. What we're doing is actually going out there, and as I mentioned, average client or average term of these new contracts are somewhere between five and 10 years. The client may pay us $1 million today on TRUST 3000, and maybe they're paying us $1.3 million. We would only be talking about a $300,000 sales event.
The reality is we're signing a $1.3 million contract for 5 to 10 years. We're recontracting clients for long periods of time, and we're moving a large amount of our revenue into SWP. We wanted to start talking more about how we're shoring up and growing this SWP business.
All right, great. Maybe if I could, just one last question. As you pointed out, the net cash flows into SWP in the U.K. remain pretty robust. In the distant past, you had talked about kind of a, it was almost like an unconverted book of assets that different U.K. clients had that either they were contractually obligated to convert or potentially could convert. Do you have any kind of update on if that still exists or how big it may be and how maybe we should think about that?
That net cash flows is coming from two places. Some of those clients have converted all that, and this is really as they're growing their business. If you look at the characteristics of those U.K. clients, we've really enabled a substantial amount of growth at those firms, and many of them are growing organically. It generally represents organic growth at the clients on SWP.
Okay, great. Thank you.
Sure. Thanks.
Drew Nicholas, please go ahead.
Hey, Joe. Just wanted to talk about pricing strategy, particularly as it relates to clients that are transitioning, or you'd like to transition from TRUST 3000 to SWP. Are you still expecting and requiring a pretty material pricing increase, or are you more flexible on that front today versus how you might have approached it a few years ago?
There are a variety of different levers for us to drive more revenue from our current clients. The core TRUST 3000 SWP system, there's generally an uptick in revenue for us because SWP is a more straightforward, more efficient solution for the client. There's usually a premium core to core. We have additional services that we can sell that we've built with SWP. Those things include particularly around the front end of SWP. There are tools around client acquisition, proposal generation, things around portfolio management tools. We have additional solutions that are generally heavily integrated to the platform that we can sell to the clients. Another big opportunity set for us is to go beyond just principal income accounting for the bank's typical trust departments, which have been typically our clients.
We've been able, in some cases, for example, recently, First Hawaiian that we converted this past quarter, we were able to secure some additional business there that had been run on a brokerage platform. That was new business for us, and that was part of a net up in that relationship. We expect there's lots of business in a number of these firms that historically hadn't been processed on SWP. There are opportunities inside of many of our clients that will allow us to get additional revenue. In many cases, we're getting the traditional book of business that we had processed and the additional books are future opportunities for us. There are a number of levers for us day one, and then I think more importantly over time for us to drive additional revenue with the SEI platform.
All right. Thank you. I think you said the AMD business had about $300 million of outflows in the quarter. I think you alluded to it being one concentrated outflow, but I was just hoping you could provide an update on the AMD business as a whole. It seems like flows there have been a little weaker than I would have expected given the tone around the opportunity a year or two ago.
The market was a little more sensitive in the second quarter. A lot of our distributors are not in the U.S. They're Europe and Asia. We had sort of a situation in the second quarter where we have a large U.S. distributor that replaced an investment product. We had a substantial outflow from that one distributor, and that harmed some of our net flows.
All righty. That's all I had.
We're seeing some good distribution from some of our key players.
Okay. Thank you.
Glenn Greene, please go ahead.
Hey, Joe. Yeah, I think I got cut off before.
Okay.
A couple questions. First, the four client wins in the quarter on SWP. Could you just give us a relative mix? Were they new clients, upgrades from TRUST 3000? What was the relative proportion?
There were four clients. One was, as I mentioned, was in the U.K., and that was exciting for us. It was actually a large U.S. investment manager with a private client business. That client had struggled with their current vendor on Mystic II and got through that in a pretty tough situation and then looking for an alternative. We think that was a great opportunity, and it gives us access to potentially their U.S. business. That was an interesting one for us. Then the three clients in the U.S. are all running on TRUST 3000. One of them is a very interesting one in that, as you know, in the last couple of years, we saw some aggressive pricing from some of our competitors.
One of those clients decided to leave SEI, and we took it as a sales event net down in the second quarter of 2016. That was very disappointing for us because, at the last minute, we lost that deal, largely, I think, due to pricing. About a year later, they never deconverted from us, although we took it as a sales event net down, which we usually do when the client notifies us that they're going to be leaving. About a year or so after that, they came back to us and said that they had decided not to leave, that they had made a mistake. Then we spent some time negotiating with them, and they decided to join us, but on SWP, and we expect that they'll convert next year.
That's, although a TRUST 3000 client, we look at that as a new business win, and it's very exciting. Not only are we happy, but many of the people at the client are very happy, and it was a good win-back for us. Again, a case where the competitors have gotten in there and have used a pricing strategy that doesn't necessarily have the goods to deliver. As the bank got in and saw what the competitor had to offer, it just didn't compare at all to what we had to offer, particularly with TRUST 3000, let alone with SWP. That's a great move for us in the market.
Congratulations on that win-back.
Thank you.
You had also mentioned, I think, that you had three conversions right at the end of the second quarter.
Yes.
I got to check, but it looked like your backlog was relatively static. I guess so what I'm trying to get is, could we expect a meaningful revenue lift going into 3Q given the conversions happening at the end of the second quarter?
Yeah. There'll be some revenue lift. Yes. We converted some things, then we replaced those things in the backlog with the new wins.
Okay. Finally, maybe just a broader update on the U.K. pipeline and sales activity.
We're happy to have a win in the U.K. As you know, I've talked on recent calls that we have been disappointed that there haven't been more wins in the U.K. We have competed there, and in some cases, there have been no decisions. We're excited about the business model there and that the clients that we have won and we've installed continue to grow at a very nice clip. It's important for us to get more wins there. We are actively in the market selling. We're focused on some of the larger opportunities there. We're focused on some of the private client investment managers. Certainly one win does not mean momentum, but it's a good opportunity for us, and we're working really hard to try to win some more this year.
Okay. Thanks, Joe.
Thanks.
McGratty, please go ahead.
Hey, Joe. Apologies if I missed this. Can you remind us when the BMO client will actually convert to SWP?
Yes. It's next year, sometime around the middle of the year, next year.
Great. Are there any interesting learnings or data points you can share with us regarding Regions now that they've been live on the platform for probably a little more than half a year?
There's lots of interesting learnings. Regions is a terrific client. They're a great organization. One of the terrific things about Regions is they're using the entire platform from front to back. They really are consuming the integrated nature of the sort of the enterprise nature of the SEI platform. They will, I think, enjoy the full benefit of that. So it's still obviously early days. It's, I think, probably seven months or so now since they've been up and running. They have a pretty robust book of business across private client an institutional trust business. They're the first consumers of some of our integrated front end. They're a terrific team of people. They're a growing private client an institutional book. I think our solution is incredibly powerful when someone consumes everything in a BSP or business processing solution.
It's very helpful for us to have that as a case study. They've been incredibly generous as far as meeting with prospects and other TRUST 3000 clients. We've got some good meetings scheduled there. It's good to have them as a client, and I think we continue to make great progress with them every month.
Excellent. Any update on TIAA-CREF? I thought that was going to be this year. I just want to confirm that that's also in progress.
Yeah. We're working closely with them. They're a large and incredibly fast-growing organization, and we're working really hard with them on the conversion.
Okay. Is that a 2018 or 2019 go live date?
Yeah. It's complex, the date isn't exact at this point yet, but-
Okay
we're making good progress with them.
Okay, great. All right. Thank you, Joe.
Thanks.
Patrick O'Shaughnessy, please go ahead.
Hey, Joe. You spoke to recontracting six TRUST 3000 clients during the quarter and then a 5% recontraction net down rate. Were those clients who are sticking on TRUST 3000, or are those some of the clients that are moving to SWP?
Those are all TRUST 3000 recontracts. They're going to stay on TRUST 3000 for a few more years, two, three, four more years. Some clients aren't ready to move yet. All of our clients know that they will eventually move to SWP. From a timing standpoint, some clients aren't ready to do that yet. Their current contracts are up or about to be up. We have relatively shorter term recontract strategies with some of our clients. That's what that represents.
Got it. Thank you for clarifying that. My other question, it looks like that the Department of the Interior awarded their contract to replace TRUST 3000 with a company called Innovest, which to me is a new name. Is Innovest somebody that you're coming up against more often when you're competing for RFPs, or do you think that they have a unique solution for the DOI, but maybe something that's not relevant for your core customer base?
They've been around for a little while. We historically have seen them at smaller firms. It's hard for me to comment because it's a process that doesn't have a ton of transparency to it. It's hard for me to say why they selected them. Typically, we don't see them competing with.
SWP prospect, we wouldn't see them at a Regions or at a Wells Fargo or someone that we would be aggressively selling in the wealth management space.
That was helpful. Thank you.
Any other questions?
Robert Lee, please go ahead.
Actually, my question was asked. Thanks.
Okay. All right. Well, I hope everyone has a great afternoon.
Thank you, Joe. Our next segment is investment advisors. Wayne Withrow will cover this segment.
Thanks, Al. In the second quarter of 2018, we continued to grow our revenues and profits while simultaneously making big strides in our migration to the SEI Wealth Platform. Second quarter revenues totaled almost $100 million. These revenues were $7 million better than the second quarter of last year. This increase was driven by positive net cash flow and market appreciation, offset in part by fee reductions in some of our fee products. Expenses were up in the second quarter versus last year due to increased direct costs and personnel expense tied to our growth. SEI Wealth Platform migration expenses, together with increased development expense, net of capitalization, also contributed to the increase. Our profits grew 8% from last year's second quarter, and our margins remained relatively unchanged. Assets under management were $65.3 billion at June 30th, an increase of $5.5 billion from June 30th, 2017.
The increase was driven by both positive net cash flow and market appreciation. During the second quarter, our net cash flow was $345 million. While this cash flow is lower than some other recent quarters, market activity remains robust. During the quarter, we recruited 119 new advisors. Our pipeline of new advisors remains strong. With respect to the SEI Wealth Platform, we continue to work on the migration of our advisors. At the end of March, we migrated roughly 86,000 accounts and over $11 billion in assets. We expect to migrate another 100,000 accounts and $12 billion in SEI assets at the end of September. Our final migration continues to be planned for March 31st, 2019. As we complete these migrations, we will be simultaneously helping all of our advisors adopt the new features of the platform, especially its straight-through processing capabilities.
In summary, the second 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 may have.
Again, if you do have a question, please press star one. Our first question comes from Robert Lee with KBW. Please go ahead.
Thanks. Hi, Wayne. How are you?
Good, Rob.
Great. I'm just curious in terms of client activity, understanding the net cash flows were a little lighter than they've been running, which makes sense considering the environment, but are you seeing any other kind of change in underlying investor behavior, kind of more risk off in general or anything like that's maybe taking place?
I don't see any big trends. I think the one small thing I would see is people tend to maybe favor cash products a little more than fixed income given the rising rate environment. That was the only thing I'd really point out. You see that reflected in our liquidity balances.
All right, great. Then maybe as a follow-up, you've been at the conversions now for a while and finally kind of getting towards the tail end of it. Since one of the attributes of the SWP platform in your segment is that you can service a broader array of assets for your advisors and maybe capture some incremental revenues down the road. Is there any sign that some of the advisors that have already migrated over to the platform that you are in fact starting to service more larger pieces of their books of business and maybe there's a trickle of incremental revenue that's starting to come from that or is it still kind of down the road?
Yeah, I think trickle's probably a good word. I think that we're starting to have those conversations now, but that's really a 2019 agenda for us.
Okay, great. That was it. Thank you.
Our next question comes from Glenn Greene with Oppenheimer. Please go ahead.
Hey, Wayne. Good afternoon.
Hi, Glenn Greene.
Yeah, just maybe you update us in terms of whatever fee pressure, if there's been any change or just certain specific products that you've sort of called out in the past. Has anything really changed?
There were no fee reductions this quarter. Our last fee reduction was in February of this year.
Okay. That's all I had. Thanks.
Our next question comes from Chris Donat with Sandler O'Neill. Please go ahead.
Hey, Wayne. How are you doing?
Good, Chris.
Just wanted to kind of follow up on Rob's question. You mentioned that moving on to other types of assets as more of a 2019 event, do you have sort of a roadmap for once you get through the conversion process? Are you starting to look at either pushing more sales or signing on more advisors or just any sort of change in the business once the long conversion process is finally over?
Yeah. I think that we're working through that right now, especially in terms of ramping up the sales force to change their approach because it would be a different sale for them. I think we definitely have plans, but nothing is cast in concrete at this point.
Okay. More planning stage than action stage on this.
I wouldn't say that. I think we're absolutely taking some action right now, but I haven't told the sales force this is the one thing I want you to focus on. They're out there opportunistically going after that right now, but it's not part of the core sales strategy.
Okay. Understood. Thank you.
I think my last comment, the last fee reduction was February of this year, not last year.
If there are any further questions, please press star one. There are no questions. Thank you.
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 second quarter of 2018. Second quarter revenues of $83.4 million increased 7% compared to the second quarter of 2017. Second quarter operating profit of $42.6 million increased 8% compared to the second quarter of 2017. Both revenues and operating profits were positively impacted by market appreciation, positive currency translation, and changes in asset class diversification by our client base. Quarter end asset balances of $90.9 billion reflect a $2.4 billion increase compared to the second quarter of 2017. This increase is driven by higher capital markets and positive currency translations. Net fundings were $130 million negative for the quarter. This included approximately $1.1 billion in a partial loss of a fixed income portfolio for a large non-U.S. defined benefit client. The unfunded new client backlog at quarter end was $235 million.
New client signings for the quarter were $530 million. This was primarily new clients in U.S. endowments and foundations. Our sales pipeline is strong and growing, and we have a continued focus on larger OCIO and fiduciary management prospects. The marketplace for new wins is competitive as the number of firms offering OCIO or fiduciary management continues to increase. However, we have a strong value proposition and will continue to be aggressive in our pursuits of new business. Thank you very much, and I'm happy to entertain any questions you may have.
Again, if you have questions, please press star followed by one. We have a question from Robert Lee with KBW. Please go ahead.
Hi, Paul. How are you?
Good, Robert.
Can you maybe just update us, you hinted at it, but maybe a little bit more color or detail on the pricing environment? If you think of the $500 odd million of, I think it was, earnings in the quarter, is there a way to characterize how you would think of the pricing on that relative to what those similar size or types of transactions may have been two, three, four years ago? Just trying to get a sense of, kind of magnitude of change.
I don't think we've seen much change in pricing in two or three years. It's more change if I compared it five to seven years ago. The benefit of the U.S. endowments and foundations, as I have explained in past calls, is the consumption of alternative investments. While the price point for the public markets might be a bit lower, their consumption rate of alternatives, which might be anywhere from 20%-30%, is going to yield a nice net up for us. We haven't seen any further erosion in pricing pressure. Clearly, if we lose an account that's 10 years old and we bring a new account in, we're probably not going to get the same yield as that account from 10 years ago. The further diversification in F&E specifically is helping us control our margins and bringing on good business into the book.
Okay, great. Maybe to follow up on the DC business. I know that's been a strategic focus for you, and I guess there was something in P&I Magazine, I forget when it was, a couple of weeks ago maybe talking about kind of the growth of that part of the OCIO business. Can you maybe update us on, it feels like it's been maybe a little slow of late, but if you think of your backlog or pipeline of potential clients, any way of characterizing that? How much of that is kind of more DC oriented versus your traditional kind of DB or foundation hospital?
Yeah, I would say maybe about 15% of the pipeline is DC. With respect to that specific article, one of the issues in the marketplace is what people define OCIO to be. We would define it as full fiduciary and full accountability for the implementations. Others don't use that same definition. The growth that P&I is reporting, in my opinion, is a lot of consulting assignments that they're reclassifying as delegation and outsourcing. Just fundamentally different than our business proposition. When you're a consultant that's in both space, you might have the luxury of defining something that may not actually seem like outsourcing as outsourcing. I think that's happened there. DC for all of us with regard to discretion has slowed down a little bit, part and parcel because markets are up, participant balances are not down.
There's not as much pain in the DC lineup. Consequently, HR directors are probably a little bit less reluctant to propose a change when things are going good. Now, we think that's a ripe opportunity to talk to them, and really talk about a better platform long term. The reality in changing DC is not only does the sponsor have to make a decision, they have to sell it to their 3,000 participants or 5,000 participants or 10,000 participants. The market run has probably hampered DC sales a little bit.
Okay, great. I appreciate the additional color. Thank you.
No problem.
There are no further questions. Thank you.
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 second quarter of 2018, revenues for the segment totaled $97.6 million, which was $13.9 million or 16.7% higher as compared to our revenue in the second quarter of 2017. This year-over-year revenue increase was due to net new client fundings, market appreciation, and the acquisition of Archway. Our quarterly profit for this segment of $34.3 million was $4.6 million or 15.3% higher as compared to the second quarter of 2017. Third-party asset balances at the end of the second quarter of 2018 were $522.7 billion, approximately $46.2 billion or 10% higher as compared to the asset balances at the end of the second quarter of 2017. This increase in assets was primarily due to new client fundings of $47.2 billion, assets from the acquisition of Archway of $14.2 billion, offset by market depreciation of $15.2 billion.
Of note, this is the first time we are including the assets under administration for our Archway clients in our segment asset totals. In turning to market activity, during the second quarter of 2018, we had a strong sales quarter with net new business events totaling $14.1 million in recurring revenues. Importantly, these sales were diverse and spanned our entire business and include both new name business and expansion of existing wallet share with current clients. This quarter's sales included the following. First, new business wins in our alternative market with the addition of new private equity mandates won in a competitive process. Second, expansion of our existing relationships with current clients by adding their middle office outsourcing to our services. Third, growth in Archway with several new family office mandates as well as expansion with some of our existing clients with our Archway solutions.
Fourth, growth in our global unit representing several non-U.S. new name clients. Finally, the addition of a new global regulatory platform client. We continue to see opportunity for continued growth driven by new business wins, expansion with current clients, new markets, and new services and solutions. Strategically, we feel well-positioned. That concludes my prepared remarks, I'll now turn it over for any questions you may have.
If you do have a question at this time, please press star followed by one. We have a question from Andrew Nicholas from William Blair. Please go ahead.
Hey, Steve. Just one quick one. Could you provide the updated backlog?
Sure. Backlog at the end of the quarter was $44.7 million.
That's all I have. Thank you.
Sure.
We have a question from Robert Lee with KBW. Please go ahead.
Great, thanks. Good afternoon, Steve.
Good afternoon, Rob. How are you doing?
Great, thanks. Just curious, any update on the It's always a competitive pricing environment, but I'm just curious if how you're seeing it right now, any change? I know it's always tough, but just to get a sense if it's status quo.
No, I think, Rob, as you know, we've talked about before, it is competitive. There is fee compression out there and fee pressure. This is a crowded space. There's a number of acquisitions going on, which I think is also driving some pricing behavior. We've relatively been able to stick to what we feel is a little bit more of a premium service offering, focusing on the needs and emerging needs of our clients. I think we have a value-add proposition that helps us support a premium price. That's not to say we don't get into pricing conversations and discussions with clients, but I think truly, we're blessed to have a good, diverse base of clients that understand the value we deliver. At the end of the day, it supports a premium pricing.
Great. Maybe just a follow-up to the backlog question, I can't let a call go without one, but any kind of color you have on the $44 million or so of backlog, the timeframe for conversion of that. Do you think of that as that's what should flow in over a one and a half, two-year timeframe? I don't know if there's any lumpiness to that given specific mandates.
No, I'd say this, if you do the math, the backlog I announced at the end of last quarter was $38.6. Over $5.6 of that funded, we had our new events this year, which actually in this quarter, actually for the first time in a couple quarters, a decent amount of our current sales of $14.1 has already funded in this quarter, in the quarter we signed it. I think that was a nice little uptick. I'd say for the rest of the $44.7, it's a mix between alternative and traditional. It's a mix between larger and smaller clients that will, on average, I think, take over the next 12-14 months before we get in. There'll be some that go a little sooner, some are on a longer, phased-in approach period.
Great. That's helpful. Thanks, Steve.
Sure.
There are no further questions in queue.
Thank you, Steve. I'd like Kathy Heilig to give you a few company-wide statistics.
Thanks, Al. Good afternoon, everyone. I have some additional corporate information regarding this quarter. Second quarter cash flow from operations was $158.7 million or $0.98 per share, bringing year-to-date cash flow from operations to $262.9 million or $1.61 per share. Second quarter free cash flow was $139.9 million, and year-to-date free cash flow, $225.6 million. Second quarter capital expenditures, excluding capitalized software, were $7.1 million. Projected remaining and year-to-date capital expenditures have been $12.7 million. Remaining capital expenditures, excluding capitalized software, will be about $25 million, which includes an estimate of around $10 million related to facility expansion. As noted in our earnings release, the tax rate for the second quarter was 21.1%. The change in the tax rate is due to a combination of the new tax act and the benefit of stock option exercises.
Our effective tax rate could fluctuate as a result of the stock option exercises. We also would like to remind you that many of our comments are forward-looking statements that are based upon assumptions that involve risks, and that the financial information presented in our release and on this call is unaudited. Our forward-looking statements include discussions about future operations, strategies, and financial results, including our expectations as to the revenue that we believe will be generated by sales events that occurred during the quarter. Future revenues and income could differ from expected results. We have no obligation to publicly update or correct any statements herein as a result of future developments. You should refer to our periodic SEC filings for descriptions of various risks and uncertainties that could affect our future financial results. Now, please feel free to ask any additional questions that you may have.
If there are any questions, please press star 1. There are no questions. Thank you.
Thank you. Ladies and gentlemen, I am encouraged by the direction our businesses are taking and the progress we are making. While we face short-term headwinds, including the loss of two large clients in banking, we believe that the investments we are making will help us benefit from all the changes taking place in our industry. Have a great day, and thank you for attending our call. Good afternoon.
Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.