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SEI Investments Co
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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. [Operator Instructions] 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, Anna. Welcome everyone, good afternoon. All of our segment leaders are on the call as well as Dennis McGonigle, SEI's CFO; and Kathy Heilig, SEI's Controller.
I'll start by recapping the second quarter 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 Heilig will provide you with some important company-wide statistics. As usual, we will field questions at the end of each report.
So let me start with second quarter 2018. Second quarter earnings increased by 33% from a year ago. Diluted earnings per share for the second quarter of $0.75 represent 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 of 2017 to second quarter of 2018. Also during the second quarter of 2018, our noncash asset balances under management decreased by $2.3 billion. At the same time, LSV assets under management increased by – 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, totaled 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.
So this concludes my formal remarks, so I'll turn it over to Dennis to give you an update on LSV and the investment in our new business segment. I'll then turn it over to the other business 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 2, 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, a corresponding increase in expense of approximately $700,000. We've 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 with 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 at 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 the 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 provide 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 everyday. Other than that, there were no other unusual items.
I will now take any questions.
[Operator Instructions] And we have a question from Chris Donat with Sandler O'Neill. Please go ahead.
Hi Dennis, how are you doing?
Good Chris and yourself?
Doing fine, two questions for me. First on the higher compensation for your employees, is that I think you said $1 million, is that purely for the quarter or is there something sort of 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?
Yes, just this number going forward, it was just for the second quarter.
Okay. And then 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 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 are 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 US$20 million.
And we've been growing that business kind of gradually over time. Particularly as we’ve got more focus on distribution in sales as we’ve kind of build out our solution. And we had actually some clients already on the books that were actually residents in Seattle just by coincidence. So we wanted to see if there is an – and that's where the experimentation side that 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 are a manager or managers, so a similar approach to that in terms of portfolio implementation, it took us probably year and a half of pretty detailed research in the market to find a firm that met those criteria.
That allow us to 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, I'll it research, but really experimentation on how do we built 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.
Hi, Robert.
Hey, I apologize I think I missed one or two of your comments, can you just repeat the details for LSV’s flows excuse me and revenue?
Yes, their overall assets shrank $1.7 billion, they have positive flows of $1.1 billion, their revenues were $132.1 million; about 2% was performance fees.
Great. And then maybe if I could just a quick tax question, I know is 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 with our expectations, 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 us?
Yes, we think this is probably more the 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%.
All right, great. That was all I have. 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 clean up items. First, was the Huntington Steele acquisition when did that close? Do we have full quarter’s worth of numbers in results of this quarter?
Yes, we closed on April 2.
Okay, thank you. And 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. And then it depends on the period 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 kind of last year and full year last year or second quarter of last year, there’s a little bit more of an impact. And it's more in a segment level rather than a company level.
All right, that’s helpful. Thank you.
You’re welcome.
Okay, we are ready.
[Operator Instructions]
Thank you. Now I'm going to turn it over to Joe Ujobai to discuss our Private Banking segment. Joe?
Thanks Al. I'll 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 the 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 includes BBVA Compass Bank, Legacy Trust and Northern 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 second quarter from UK 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 to 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, 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.
As the average contract term of our backlog is greater than six years, these uninstalled clients represent more than $450 million 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 built headwinds and tailwinds. In 2019, we will work through previously announced client losses, most notably the Trust 3000 relationships of the Department of the Interior.
On a positive side, as we continue to convert those Trust 3000 and new clients to SWP, they are working hard to improve SWP reduction efficiency to drive scale and contribute profit improvements to the banking segment. I'd like to ask for any questions now.
But I think first I'd like to post 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're 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 plan. But at this point, we are not announcing new dates. In the meantime, active conversions continue at other large clients and prospects, sorry active conversations continued with other large clients and prospects that would likely consume SWP in the Software-as-a-Service model. We make 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 [Oppenheimer], please go ahead.
Thanks. You anticipated my question, Joe. So thank you.
Okay.
Robert Lee, please go ahead.
Hi, sorry about that. Hey Joe, how are you?
Good.
I mean, I'm just curious, I guess you're suggesting that Software-as-a-Service, if you signed another large client. You would be able to install it possibly before Wells. Given kind of the historical long lead times for large clients, I mean, maybe I'm reading too much into this, but would this suggest that you're really – even though you haven’t set a date, you are currently thinking that Wells could be two to three years down the road type of thing or?
This is suggesting that I think the market had a mindset. Well, Wells is going to be the first ASP or Software-as-a-Service client and that everybody was thinking they would be the first, and when the Wells push occurred, that really – the mindset changed. So other banks that were consumers in that business model are now saying there's no reason to really wait around for that. And so the conversation that other institutions has – 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. So there are other firms and 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 if you can indulge me a little bit. Could you refresh us on how we should think about the new metric you did introduced the last quarter? But I just want to make sure I’m understanding kind of exactly what's embedded within that number?
I mean, the point is that a significant amount of our revenue and our business is shifting to the SEI Wealth Platform. And so if the Trust 3000 clients 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. As I mentioned, the average client, or the average term of these new contracts are somewhere between five and 10 years. And so the client may pay us $1 million today on Trust 3000, maybe they're paying us $1.3 million. And we would only be talking about a $300,000 sales event. But the reality is we are signing $1.3 million contract for five to 10 years.
So a big portion of our – we are recontracting clients for long periods of time. And we are moving a large amount of our revenue into SWP. So we wanted to start talking more about how we are showing 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 UK remain pretty robust. I mean, in the distant past, you had talked about kind of a – 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 an update on if that still exist or how bigger maybe and how maybe we should think about that?
That net cash flows, I mean is coming from two places. Some of those clients have converted all that and this is really, and they're growing their business. So if you look at the characteristics of those UK clients. And we've really enabled a substantial amount of growth at those firms. And many of them are growing organically and so it generally represents organic growth at the clients on SWP.
Okay, great. Thank you.
Sure, thanks.
Andrew Nicholas, please go ahead.
Hey Joe. Just want to talk about pricing strategy, particularly as it relates to clients that are transitioning, or you like to transition from Trust 3000 SWP. Are you still expecting and requiring 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 – I mean, there are a variety of different levels for us to drive more revenue from our current clients. So the core Trust 3000 SWP system, there's generally an uptick in revenue for us, because where SWP is a more straight through and more efficient solution for the clients. So there is usually a premium core-to-core.
We have additional services that we can sell that we 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.
And other big opportunity set for us is to go beyond just principal income accounting for the banks 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 have 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 suspect there is lots of business in a number of these firms that historically hadn't been processed on SWP. And so there are opportunities inside of many of our clients that will allow us to get additional revenue. In many cases, we are 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 levels for us, day one and then I think more importantly over time for us to drive additional revenue with the SEI Wealth Platform.
All right, thank you. And then I think you said the AMD business had about $300 million of outflows in the quarter. I think you alluded it to being one – one concentrated outflow, but I was just hoping you can 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 are in Europe and Asia. They had sort of a situation in the second quarter 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.
That’s all I had.
And we are 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.
So a couple of questions, first, the four clients wins in the quarter on SWP, could you just give us a relative mix for the new clients upgrades from Trust 3000, what was the relative proportion?
There are four clients, one was as I mentioned was in the UK and that was exciting for us. It's actually a large U.S. investment manager with a private client business. And that client had struggled with their current vendor on MiFID 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 gives us access to potentially their U.S. business so that was an interesting one for us.
And then the three clients in the U.S. are all running on Trust 3000 but one of them is 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 SEI and we took it as a sales event net down in the second quarter of 2016. It was very to 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 so that we took it as a sales event net down, which we usually do when a client notifies as 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 will convert next year.
So that's all the Trust 3000 clients, 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, the client are very happy and it was a good win back for us. And again the case where the competitors have gotten in there and have used a pricing strategy that isn't necessarily – didn't necessarily had 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 was a great move for us in the market.
Congratulations on the win back. So you had also mentioned, I think, that you had three conversions right at the end of the second quarter?
Yes.
And I got a 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 revenues lift, yes. So the – we converted some things and then we placed 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 talked in 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've 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 are focused on some of the largest 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.
Tom McCrohan [Mizuho], please go ahead.
Hey, Joe. Can you – and apology 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 have been live on the platform for probably a little more than half a year?
There's lots of interesting learning. Regions is a terrific client, they're a great organization and the one of the terrific things about Regions is that they really, 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 Wealth 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 seven 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 are the first consumers of some of our integrated front ends. They're a terrific team of people. They're a growing private client and institutional book, but it's a – I think our solution is incredibly powerful when someone consumes everything and in a BSP or in a 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 3000 clients, we've got some good meeting scheduled there. So it's good to have them as clients and I think we're – we continue to make great process with them every month.
Excellent. And any update on TIAA-CREF? I thought that was going to be this year. I just want to confirm if 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 on – is that a 2018 or a 2019 go-live date?
Yes, I think it's complex and so the date isn't exact at this point yet, but it's – but we're making good progress with them.
Okay, great. All right, thank you, Joe.
Thanks.
Patrick O'Shaughnessy [Raymond James], please go ahead.
Hey Joe. So you spoke to recontracting six Trust 3000 clients during the quarter and then a 5% recontraction that's 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. So 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 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 a relatively shorter-term recontract 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 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?
I think 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 is – 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. If we are going to an important 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.
Got it, that’s helpful. Thank you.
Any other questions?
Robert Lee, please go head.
Actually, my question was asked. Thanks.
Okay, all right. Everyone have 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 cost 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 30, an increase of $5.5 billion from June 30, 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 advisers. Our pipeline of new advisers remains strong. With respect to the SEI Wealth Platform, we continued to work on the migration of our advisers. 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 31, 2019. As we complete these migrations, we will be simultaneously helping all of our advisers 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.
[Operator Instructions] And our first question comes from Robert Lee with KBW. Please go ahead.
Thanks. Hi Wayne, how are you?
Good, Robert.
Great. Just curious, in terms of client activity, understanding that net cash flows were a little lighter than they've been running, considering that – which makes sense considering the environment, but are you seeing any other kind of change in underlying investor behavior, kind of more risk often in general or anything like that, that's maybe taking place?
I don't see any big trend that they – the one small thing I would see is people tend to maybe favor a cash product a little more than fixed income given the rising rate environment, but that was the only thing I 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 advisers and maybe capture some incremental revenue this – down the road, I mean, is there any sign that the – some of the advisers that have already migrated over to the platform are – you're starting – 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 this still kind of down the road?
Yes, 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.
Hi Wayne. Good afternoon.
Hi Glenn.
Just – maybe you just got to 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? If anything's 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.
Hi Wayne, how are you doing?
Good, Chris.
Just want 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 road map for once you get through the conversion process? Are you starting to look at pushing more sales or signing on more advisers? Or just any sort of change in the business, once the long conversion process is finally over?
Yes, 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. So I think we definitely have plans, but nothing is cast in concrete at this point.
Okay. So it's more planning stage than action stage on this?
I wouldn't say that. I mean, I think what – we're absolutely taking some action right now, but it's not – I haven't told the sales force, it's 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.
Now I think my last comment, the last fee reduction was February of this year, not last year.
[Operator Instructions] And there are no questions. Thank you.
Thank you, Wayne. Our next segment is the Institutional Investors 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 revenue is 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 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 pursuits of new business.
Thank you very much, and I'm happy to entertain any questions you may have.
[Operator Instructions] And we have a question from Robert Lee with KBW. Please go ahead.
Hey 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 details on the pricing environment. I mean, if you think of the $500-odd million of – I think it was the same end of quarter? I mean, is there a way to characterize how you would think of the pricing in 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 a change in – if I compared it five to seven years ago. But the benefit of the U.S. endowments and foundations – as of it, 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 we bring a new account and we're probably not going to get the same yield as that account from 10 years ago but the further diversification and 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&I magazine, I forget what – 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 as it full fiduciary and full accountability for the implementations. Others don't use that same definition, so the growth that P&I's 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 as 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 partial because markets are up, participant balances are knocked 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 the 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 that the market run has probably hampered DC sales a little bit.
Okay, great. 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 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 appreciation of $15.2 billion. Of note, this the first time we're including the assets under administration for our Archway client in our segment asset totals.
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 are diverse and expand our entire business and include both new-name business, an expansion of existing wallet share with current clients. This quarter 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 relationship with current clients by adding our 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; 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 have.
[Operator Instructions] And we have a question from Andrew Nicholas from William Blair. Please go ahead.
Hi 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 had. 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 probably was 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 balanced well.
No, I think – Rob, as you know, we've talked up before. It is competitive. There will always be 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. But we relatively were 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 the clients, but I think truly, we are 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 – any kind of color you have on the $44 million or so of backlog, kind of the time frame for conversion of that? Is that – do you kind of think of that as that's what should kind of flow in over kind of one and a half, two 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 this. So if you do the math, the backlog I announced at the end of last quarter was $38.6 million. Over $5.6 million 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 quarters, a decent amount of our current sales of $14.1 million 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 $44.7 million, it's a mix between alternative and traditional, it's a mix between larger and smaller clients that will, on average, I think takes over the next 12 to 14 months to fully get in, but we – some that go a little sooner, some were kind of in a longer kind of pace 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. 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, was $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 a 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 and are based upon assumptions that involve risk 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've 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.
[Operator Instructions] 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 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.
And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.