Ladies and gentlemen, thank you for standing by, and welcome to the SEI Second Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer period. Instructions will be given at that time. And 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, and welcome, everyone. Good afternoon. All of our segment leaders are on the call as well as Dennis McGonigal, SEI's CFO and Kathy Eilig, SEI's Controller. I'll start by recapping the Q2 2018. I'll then 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. Then finally, Kathy Heile will provide you some important company wide statistics. As usual, we will field questions at the end of each report. So let me start with Q2 2018. 2nd quarter earnings increased by 33% from a year ago.
Diluted earnings per share for the Q2 of $0.75 represents a 32% increase from the $0.57 reported for the Q2 of 2017. We also reported a 9% increase in revenue from Q2 2017 to Q2 of 2018. Also during the Q2 of 2018, our non cash asset balances under management decreased by $2,300,000,000 At the same time, LSV's assets under management increased by I'm sorry, decreased as well by $1,700,000,000 during the 2nd quarter. These decreases in assets under management were due to the market depreciation. In addition, during the Q2 of 2018, we repurchased approximately 1,600,000 shares of SEI stock at an average price of $64 per share.
That translates to over $105,000,000 of stock repurchases during the quarter. Finally, in the Q2, as part of the investments we made to create growth, we capitalized approximately $12,000,000 of the SWP development and amortized approximately $9,900,000 of previously capitalized SWP development. 2nd quarter 2018 sales events, net of client losses, totaled approximately $24,600,000 and are expected to generate net annualized recurring revenues 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.
So this concludes my formal remarks. So I'll turn it over to Dennis to give you an update on LSD and the investment in our new business segment. I'll then turn it over to the other business segment heads. Dennis?
Thanks, Al. Good afternoon, everyone. I'll cover the 2nd quarter results for the investments in new business segment and discuss the results of LSV Asset Management. During the Q2 of 2018, the Investments in New Business segment continued its focus principally on the operational development and testing of a web based digital device offering and on the ultrahighnetworthinvestor segment through our private wealth management group. During the quarter, the investments in new business segment incurred a loss of $3,100,000 which compared to a loss of $3,400,000 during the Q2 of 2017.
One bit of news on this segment, on April 2, SEI through the SEI Private Wealth Management Business acquired a firm with very similar characteristics in the ultrahighnetworth space, Huntington Steel, based in Seattle, Washington. While not material to SEI's overall business, this acquisition added approximately $800,000,000 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 Q2. LSV contributed $41,100,000 in income to SEI during the Q2 2018.
This compares to a contribution of $36,300,000 in income during the Q2 of 2017. Assets shrank approximately $1,700,000,000 for the quarter. LSV experienced net positive cash flow during the quarter of approximately $1,100,000,000 Cash flow was offset by market depreciation. Revenue at LSV was approximately $132,100,000 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 want to provide some additional information on our overall spending in research and development investments. I'll mainly focus on overall spending. During the quarter, total company expenses increased $5,300,000 or 2% when compared to Q1 2018. This increase in spending was mainly influenced by a couple of items. First, the operating expenses related to the addition of the Huntington Steel business I spoke about earlier.
2nd, 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 $1,000,000 during the quarter. As you can imagine, this was well received by our valuable workforce to drive our success every day. Other than that, there were no other unusual items.
I will now take any questions.
And 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. Is that I think you said $1,000,000 Is that purely for the quarter? Or is there something sort of that reflects accruals or something for the Q1 of 'eighteen?
In other words, can I just assume it's going to be this number going forward?
Yes, just this number going forward. It was just for the Q2.
Okay. And then you gave us a little color on the Huntington Steel 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, but 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?
Yes, and that's something we're certainly attentive to, but we have a pretty unique practice here in our private wealth management group, and we really have kept our focus on that ultra high net worth type individual or family. So we're generally after individuals or families that have net worth in excess of $20,000,000 And we've been growing that business kind of gradually over time, particularly as we've gotten more focused on distribution and sales as we've kind of built out our solution. And we had actually some clients already on the books that were actually residents in Seattle, just by coincidence. But we wanted to see if there was an if we could 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 principles of the firm, their approach to client service and client and the solution they offer.
So we're a manager of managers, so 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. And 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. So 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. And then 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, And 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. And I apologize, I think I missed one or 2 of your comments. Can you just repeat details for LLC's flows, excuse me, and revenue?
Yeah, their overall assets ranked 1,700,000,000. They had positive flows of 1,100,000,000 and their revenues were 132,100,000, about 2% was performance fees.
All right, great. And then maybe if I could, just a quick tax question. I know it was relatively I know it bounces around given new accounting rules. But as we kind of look ahead, and it was pretty close to, I think, at least what our expectations were, but 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? Yes, we think this is probably more than norm going forward. We'll get some variability with the option activity, But I think the way we're projecting this is pretty much the norm, that 21% a little bit over 21% range.
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 Steel acquisition, when did that close? Do we have a full quarter's worth of numbers in results this quarter?
Yes, we closed on April 2.
Okay. Thank you. And then 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.
Yes. I mean 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. Then it depends on the periods you're comparing it to.
If you're comparing it to Q1 of this year, it's still pretty benign. If you're comparing it to kind of last year and full year last year or Q2 last year, there's a little bit more of an impact, and it's more in the segment level rather than the company level.
All right. That's helpful. Thank you.
Thank you. I'm now going
to turn it over to Joe Euseby to discuss our Private Banking segment.
Thanks, Al. I'll start with the financial update on the 2nd quarter followed by an update on new business activity. 2nd quarter revenue of $121,000,000 was down slightly from the Q1 primarily due to a decline in mutual fund trading revenue. For the quarter, operating profit of $6,300,000 was also down slightly from the Q1 due to expenses tied to the SEI Wealth Platform. As far as sales activity goes, during the quarter we signed 4 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 $6,000,000 We also signed $2,800,000 professional services fees related to SWP clients and prospects. 3 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 UK where we signed the UK business of a U. S. Headquartered leading global investment manager. In the UK, we also continue to cross sell and gather solid net cash flow from current SWP clients. Net cash flow for the Q2 from UK SWP clients was $2,400,000,000 Regarding Trust 3000, during the quarter, we re contracted 6 clients for a total of $21,500,000 We experienced a 5% recontract net down rate.
There were no Trust 3,000 client losses during the quarter. Our asset management distribution experienced approximately $300,000,000 in net negative cash flows mainly from 1 U. S. Based distributor. Overall, incorporating Trust 3,000 re contracts and negative AMD cash flows, net sales events for the Private Banking segment were approximately $6,000,000 of which $3,100,000 is recurring annual revenue and $2,800,000 is one time for professional services revenue.
As an update on client conversions, we converted 4 clients to the SI Wealth platform during the quarter. In April, we converted a new name client, Washington Trust Company based in Rhode Island. At the end of the quarter, we installed 3 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 $30,000,000 in net new recurring revenue.
As mentioned on the April call, we are tracking a new metric continued momentum with SWP, the total annual recurring revenue value of our SWP backlog. This includes the re contracted value of the Trust 3,000 relationships, plus the net new recurring revenue and is approximately $72,000,000 As the average contract term in our backlog is greater than 6 years, these uninstalled clients represent more than $450,000,000 in total contracted revenue to SEI. In conclusion, we remain focused on the following areas: 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 historical profit margins. Regarding the profitability of the Banking segment, we have both headwinds and tailwinds. In 2019, we will work through previously announced client losses, most notably the Trust 3000 relationship of the Department of the Interior.
On the positive side, as we continue to convert both Trust 3000 and new clients to SWP, we are working hard to improve SWP production efficiency to drive scale and contribute profit improvements to the banking segment. I'd like to ask for any questions now. Well, but I think first I'd like to pose the first question to myself because I know that all of you want to ask that. And 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 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 conversations continue at other large clients and prospects sorry, active conversations continue at other large clients and prospects that would likely consume SWP in the software as a service model. We've made significant progress on our software as a service capabilities and we'll 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. Hi, sorry about that. Okay. Hey, Joe, how are
you? Good.
I mean, I'm just curious, I guess, you're suggesting that software to service, if you signed another large client, you'd be able to install it possibly before Wells. Given kind of the historical long lead times for large clients, I mean, I may have been reading too much into this, but would this suggest that you're really even though you haven't set a date, you're currently thinking that wells could be 2 to 3 years down the road type of thing or
Yes, this is suggesting that I think the market had a mindset of where Wells is going to go be the 1st ASP or Software as a Service client and that everybody was thinking they would be the 1st. And when the Wells push occurred, that really the mindset changed. And so other banks that would consume us in that business model announcing there's no reason really to wait around for that. And so the conversations that other institutions have the nature of the conversations has changed and nobody is viewing that as sort of a point that prevents them from going ahead of time. So there are other firms, some of them, most of them probably smaller than Wells, but certainly have significant size that no longer sort of use that as a milestone that we have to get past.
Okay, fair enough. And if I could maybe well, maybe if you can indulge me a little bit, can you refresh us on how we think about the new metric you did introduce last quarter? But 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 in our business is shifting to the SI Look platform. And so if it's a Trust 3000 client, in almost all cases, we are recontracting certainly the Trust 3000 revenue with an additional revenue based on the additional services as well as sort of a lift in the revenue based on SWP. And so historically, sales events just net sales events just calculate whatever the additional revenue is above and beyond what the client is currently paying us for Trust 3000. But 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 5 10 years. And so the client may pay us $1,000,000 today on Trust three thousand, maybe they're paying us $1,300,000 and we would only be talking about a $300,000 sales event, but the reality is we're signing a $1,300,000 contract for 5 to 10 years.
So a big portion of our we're contracting clients for long periods of time and we're moving a large amount of our revenue into SWP. So we wanted to start talking more about how we're shoring up and growing this SWP business.
All right, great. And then maybe if I could just one last question. I mean, 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 almost it was almost like an unconverted book of assets that different UK 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?
So those net cash flows, I mean, is coming from 2 places. Some of those clients have converted all that and this is really as they're growing their business. So if you look at the characteristics of those U. K. Clients, we've really enabled a substantial amount of growth at those Okay
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 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?
So there are a variety of different levers for us to drive more revenue from our current clients. So the core Trust 3000 FWP system, there's generally an uptick in revenue for us because SWP is a more straight through, more efficient solution for the clients. So 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. So 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. And so 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. And so that was new business for us and that was part of a net up in that relationship.
And we And so there are opportunities inside of many of our clients, And so 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. But there are a number of wet levers for us, day 1 and then I think more importantly over time for us to drive additional revenue with the SIo platform.
All right. Thank you. And then I think you said the AMD business had about $300,000,000 of outflows in the quarter. I think you alluded to it being 1 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
Q2. A lot of our distributors not in the U. S. They're Europe and Asia. We had sort of a situation in the Q2 where we have a large U.
S. Distributor that replaced an investment product. And so we had a substantial outflow from that one distributor and that harmed some of our net flows.
All right. That's all I had.
And we're seeing some good distribution from some of our key players.
Okay. Thank you.
Glenn Greene, please go ahead.
Hey, Joe. Yes, I think I got cut off before. Okay. But, so a couple of questions. First, the 4 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 4 clients. 1 was, as I mentioned, was in the UK and that was exciting for us. It was actually a large U. S. Investment manager with a private client business and that client had struggles with their current vendor on MiSTIT II and got through that in a pretty tough situation and then looking for an alternative.
So we think that was a great opportunity and it gives us access to potentially the U. S. Business. So that was an interesting one for us. And then the 3 clients in the U.
S. Are all running on Trust 3000, but 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. And one of those clients decided to leave SCI and we took it as a sales event net down in the Q2 of 2016, which is very disappointing for us because at the last minute we lost that deal largely I think due to pricing. And about a year later they never deconverted from us, although we took it as a sales of that net down, which we usually do when the client notifies us that they're going to be leaving. And about a year after or so after that, they came back to us and said that they had decided not to leave, that they had made a mistake.
And 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. So that's although a Trust 3000 client, we look at that as a new business win and it's very exciting and 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. And again, a case where the competitors have gotten in there and have used a pricing strategy that isn't necessarily have the goods to deliver. And 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. So that's a great move for us in the market.
Congratulations on that win back. So you had also mentioned, I think, that you had 3 conversions right at the end of the second quarter.
Yes.
And I got to check, but it looked like your backlog was relatively static. I guess what I'm trying to get is, could we expect a meaningful revenue lift going into 3Q given the conversions happened at the end of the second quarter?
Yes, there will be some revenue lift, yes. So we converted some things and then we replaced those things in the backlog with the new wins.
Okay. And then finally, maybe just a broader update on the UK pipeline and sales activity.
So we're happy to have a win in the UK. As you know, I've talked on recent calls that we have been disappointed that there haven't been more wins in the UK. We have competed there and in some cases there have been no decisions. We are 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. And so but it's important for us to get more wins there.
And so 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. And a win certainly, one win does not mean momentum, but it's a good opportunity for us. And we will we're working really hard to try to win some more this year.
Okay.
Thanks, Joe. Thanks.
McCrone, please go ahead.
Hey, Joe. Can you and apologies if I missed this, 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. And are there any interesting learnings or data points you can share with us regarding Regions and 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. And one of the terrific things about Regions is they really they're using the entire platform from front to back. They really consuming the integrated nature of the sort of the enterprise nature of the SCI Look platform.
And they will, I think, enjoy the full benefit of that. And so it's still obviously early days. It's, I think, probably 7 months or so now since they've been up and running. And they have a pretty robust book of business across private client and an institutional trust business. But they're the 1st consumers of some of our innovative front ends.
They're a terrific team of people.
They're a
growing private client and institutional book. But it's I think our solution is incredibly powerful when someone consumes everything and in a BSP or business processing solution. So it's very helpful for us to have that as a case study. And they've been incredibly generous as far as meeting with prospects and other Trust 3,000 clients. We've got some good meetings scheduled there.
So it's
good to
have them as clients. And I think we're we continue to make great progress for them every month.
Excellent. And 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.
Yes, 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?
It's complex and so the date isn't exact at this point yet, but it's we're making good progress with them.
Patrick O'Shaughnessy. Please go ahead.
Hey, Joe. So you spoke to recontracting 6 Trust 3,000 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 re contracts. So they're going to stay on Trust 3000 for a few more years, 2, 3, 4 more years. Some clients aren't ready to move yet. And so but all of our clients know that they will eventually move to SWP, but from a timing standpoint, some clients aren't ready to do that yet. And so but their current contracts are up or about to be up.
So we have relatively shorter term re contract strategies with some of our clients. So that's what that represents.
Got it. Thank you for clarifying that. And then my other question, it looks like that the Department of Interior awarded their contract to replace Trust 2000 with a company called Innovest, which to me is a new name. Is Innovest something 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 and it's hard for me to comment because it's a process that doesn't have a ton of transparency to it. So it's hard for me to say why they selected them. But typically we don't see them competing with in our very strategic area, we are going to an important SWP prospect. We wouldn't see them at Regions or at Wells Fargo or someone that we would be aggressively selling in the wealth management space.
That's 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 Q2 of 2018, we continued to grow our revenues and profits, while simultaneously making big strides in our migration to the SEI Wealth platform. 2nd quarter revenues totaled almost $100,000,000 These revenues were $7,000,000 better than the Q2 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 Q2 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 Q2 and our margins remained relatively unchanged. Assets under management were $65,300,000,000 at June 30, an increase of $5,500,000,000 from June 30, 2017. The increase was driven by both positive net cash flow and market appreciation. During the Q2, our net cash flow was $345,000,000 While this cash flow was 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 SIR Well platform, we continue to work on the migration of our advisors. At the end of March, we migrated roughly 86,000 accounts and over $11,000,000,000 in assets. We expect to migrate another 100,000 accounts and $12,000,000,000 in SEI assets at the end of September.
Our final migration continues to be planned for March 31, 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 Q2 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.
And our first question comes from Robert Lee with KBW. Please go ahead.
Thanks. Hi, Wayne. How are you?
Good, Rob.
Great. Just curious, in terms of client activity, understanding the net cash flows were a little lighter than they've been running considering 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 that's maybe taking place?
I don't see any big trends. The one small thing I would see is people tend to maybe favor of cat product a little more than fixed income given the rising rate environment, but that was the only thing I'd really point out. And you see that reflected in our liquidity balances.
All right, great. And then maybe as a follow-up, I mean, you've been at the conversions now for a while and finally kind of getting towards the tail end of it. But 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. I mean, is there any sign that some of the advisers that have already migrated over to the platform or you're starting that you are in fact going 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?
Yes, I think trickle is probably a good word. I think that we're starting to have those conversations now, but that's really a 2019 agenda for us.
Our next question comes from Glenn Greene with Oppenheimer. Please go ahead.
Hey, Wayne. Good afternoon.
Hi, Glenn.
Yes, just maybe you just update us in terms of whatever fee pressure, if there's been any change or just certain specific products that you sort of called out in the past. Has anything really changed?
There were no fee reductions this quarter. I mean, our last fee reduction was in February this year.
Okay. That's all I had. Thanks.
And 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 is 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 change their approach because it would be a different sale for them. So I think we definitely have plans, but nothing is cast in concrete at this point.
Okay. So more planning stage than action stage on this?
I wouldn't say that. I mean, I think we're absolutely taking some action right now, but it's not I haven't told the sales force this is the one thing I want you to focus on. So they're out there opportunistically going after that right now, but it's not part of the core sales strategy.
Okay, understood. Thank you.
And now I think my last comment, the last fee reduction was February of this year, not last year.
And there are no questions. Thank you.
Thank you, Wayne. Our next segment is the Institutional Investor segment. Paul Carter will report on this segment. Paul?
Thanks, Al. Good afternoon, everyone. I'm going to discuss the financial results for the Q2 of 2018. 2nd quarter revenues of $83,400,000 increased 7% compared to the Q2 of 2017. 2nd quarter operating profit of $42,600,000 increased 8% compared to the Q2 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 $90,900,000,000 reflect a $2,400,000,000 increase compared to the Q2 of 2017. This increase is driven by higher capital markets and positive currency translations. Net fundings were $130,000,000 negative for the quarter. This included approximately $1,100,000,000 and 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 $235,000,000 New client signings for the quarter were $530,000,000 This is 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 we'll continue to be aggressive in our pursuit of new business. Thank you very much and I'm happy to entertain any questions you may have.
And 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, I mean, and you hinted at it, but maybe a little bit more color or detail on the pricing environment. I mean, if you think of the $500 odd million, I think it was within the quarter. I mean, 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 2, 3, 4 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 2 or 3 years. It's more change if I compared it 5 to 7 years ago. But the benefit of the U. S. Endowments and foundations as I have explained in past calls is the consumption of alternative investments.
So while the price point for the public markets might be a bit lower, their consumption rate of alternatives, which might be anywhere from 20% to 30%, is going to yield a nice net up for us. So we haven't seen any further erosion in pricing pressure. Clearly, if we lose an account that's 10 years old and and we bring a new account in, we're probably not going to get the same yield as that account from 10 years ago. But the further diversification in F and E specifically is helping us control our margins and bringing on good business into the book.
Okay, great. And maybe a follow-up on the DC business. I mean, I know that's been a strategic focus for you. And I guess there was something in P and I Magazine, I forget it was a couple of weeks ago, maybe talking about kind of the growth of that part of the OCIO business. So 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?
Yes, I would say maybe about 15% of the pipeline is DC. So with respect to that specific article, one of the issues in the marketplace is what people define OCIO to be. So we would define it as full fiduciary and full accountability for the implementations. Others don't use that same definition. So the growth that P and 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.
And 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. So 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 right opportunity to talk to them, and really talk about a better platform long term. But 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. And that market the market run has probably hampered DC sales a little bit.
Okay, great. I appreciate the additional color. Thank you.
No problem.
And 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 Steve Meyer to discuss this segment. Steve?
Thanks, Al. Good afternoon, everyone. For the Q2 of 2018, revenues from the segment totaled $97,600,000 which was $13,900,000 or 16.7% higher as compared to our revenue in the Q2 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 $34,300,000 was $4,600,000 or 15.3% higher as compared to the Q2 of 2017.
3rd party asset balances at the end of the Q2 of 2018 $522,700,000,000 Approximately $46,200,000,000 or 10% higher as compared to the asset balances at the end of the Q2 of 2017. This increase in assets was primarily due to new client fundings of $47,200,000,000 assets from the acquisition of Archway of $14,200,000,000 offset by market depreciation of $15,200,000,000 Of note, this is the first time we are including the assets under administration for our Archway clients in our segment asset totals. And turning to market activity, during the Q2 of 2018, we had a strong sales quarter with net new business events totaling $14,100,000 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 sales included the following: 1st, new business wins in our alternative market with the addition of new private equity mandates, 1 in a competitive process 2nd, expansion of our existing relationship with current clients by adding their middle office outsourcing to our services.
3rd, growth in Archway with several new family office mandates as well as expansion with some of our existing clients with our Archway solutions 4th, growth in our global unit representing several non U. S. New name clients and 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, and I'll now turn it over for any questions you may
And we have a question from Andrew Nicholas from William Blair. Please go ahead.
Steve, just one quick one. Could you provide the updated backlog?
Sure. Backlog at the end of the quarter was $44,700,000
That's all I have. Thank you.
And 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 kind of curious any kind of update on the it's always a competitive pricing environment, but I'm just curious if kind of how you're seeing it right now, any kind of change? I mean, I know it's always tough, but just kind of get a sense if it's
I think, Rob, as you know, and we've talked about before, it is competitive. There is fee compression out there and the pressure. This is a crowded space. There's a number of acquisitions going on, which I think is also driving some pricing behavior. But 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.
And I think we have a value add proposition that helps us support kind of 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. And at the end of the day, it supports kind of a premium pricing.
Great. And then maybe just a follow-up to the backlog question and I can't let a call go without one. But the
any kind of color you have on
the $44,000,000 or so of backlog kind of the timeframe for conversion of that? Is that you kind of think of that as that should kind of flow in over kind of 1.5, 2 year kind of time frame? I don't know if there's any kind of lumpiness to that given specific mandates?
No. But I'd say that, so if
you do the math,
the backlog I announced at the end of last quarter was 38.6 percent. Over 5.6 percent of that funded and then we had our new events this year, which actually in this quarter, actually for the first time in a couple of quarters, a decent amount of our current sales of 14.1% has already funded in this quarter, in the quarter we signed it. So I think that was a nice little uptick. I'd say for the rest of the $44,700,000 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 to 14 months to fully get in.
There'll be some that go a little sooner, some are kind of on a longer kind of phased in approach period.
Great. That's helpful. Thanks, Steve.
Sure.
And there are no further questions in queue.
Thank you, Steve. I'd now 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. 2nd quarter cash flow from operations was $158,700,000 or $0.98 per share, bringing year to date cash flow from operations to $262,900,000 or $1.61 per share. 2nd quarter free cash flow was $139,900,000 dollars and year to date free cash flow 225,600,000 excluding capitalized software, was $7,100,000 Projected remaining and year to date capital expenditures have been $12,700,000 Remaining capital expenditures excluding capitalized software will be about $25,000,000 which includes an estimate of around $10,000,000 related to facility expansion.
As noted in our earnings release, the tax rate for the Q2 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 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. And now please feel free to ask any additional questions that you may have.
And there are no questions in queue.
Thank you. So ladies and gentlemen, I am encouraged by the direction of our businesses by the direction our businesses are taking and the progress we are making. While we face short term headwinds, including the loss of 2 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.
And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.