SEI Investments Company (SEIC) Q4 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the SEI Fourth Quarter 2018 Earnings Call. [Operator Instructions]. As a reminder, the conference is being recorded. I'll now turn the conference over to our host, Chairman and CEO, Mr. Al West. Please go ahead, sir.

Welcome everyone. All of our segment leaders are on the call as well as Dennis McGonigle, SEI's CFO; and Kathy Heilig, SEI's Controller. I'll start by recapping the fourth quarter and full year of 2018. I'll then turn it over to Dennis to cover LSV and the investment in new business segment. After that, each of the business segment leaders will comment on the results of their segments. Then finally, Kathy Heilig will provide you with some important companywide statistics. As usual, we will field questions at the end of each report. So let me start with the fourth quarter and full year 2018. Fourth quarter earnings decreased by 5% from a year ago. Diluted earnings per share for the fourth quarter of $0.73 represents a 3% decrease from the $0.75 reported for the fourth quarter of 2017. For the year of 2018, our earnings increased by 25% over 2017 earnings. Diluted earnings per share for the full year of $3.14 is a 26% increase over the $2.49 reported in 2017. We also reported a 1% decrease in revenue from the fourth quarter of 2017 to fourth quarter 2018, and a 6% increase for the full year. Also during the fourth quarter 2018, our noncash asset balances under management decreased by $30.5 billion. SEI assets grew -- excuse me, fell by $17.3 billion and LSV's assets decreased by $13.2 billion. For the year, assets under management decreased by $29.1 billion. In addition, during the fourth quarter 2018, we repurchased approximately 2.3 million shares of SEI's stock at an average price of $49.56 per share. That translates to over $115 million of stock repurchases during the quarter. For the entire year, we repurchased approximately $6.7 million -- I'm sorry, shares at an average price of $60.02 and share representing just over $404 million of repurchases. Sorry about that. Between our stock buybacks and cash dividends during 2018, we returned approximately $502 million in capital to shareholders. During the fourth quarter, we capitalized approximately $10.9 million of the SEI Wealth Platform development and amortized approximately $11.5 million of previously capitalized development. Fourth quarter 2017 sales events, net of client losses, is approximately totaled $10.7 million and are expected to generate net annualized recurring revenues of approximately $3.7 million. For the full year 2018, sales events net of client losses totaled approximately $82 million and are expected to generate net annualized recurring revenues of approximately $57 million. The bottom line is that 2018 was a good year but ended on a negative note due to extreme volatility in the fourth quarter. These highly volatile markets are continuing through January. Also affecting us as we enter 2019 is the loss business we know about and have communicated to you, yet these clients are still operating on our systems. Our reaction to all the volatility is to maintain our strategic course. We have headwinds of compression to deal with as well as there's a client in U.S. -- corporate benefit plans. On the other side of the coins -- on the other side of the coin, there are tailwinds we need to take advantage of, mainly the intensification of financial regulations worldwide, plus growth of family offices and the widespread need of financial institutions to replace legacy systems. As we entered 2019, we are emphasizing long-term growth. At the same time, we're doing what we can to manage expenses and profits while executing our strategy. We believe that the reorganization we announced in November will help us achieve our long-term goals. The new organization we discussed also recognizes that the needs of manufacturers and distributors are converging, particularly in the large end of both markets. We have a number of case studies of a single organization using 3 to 6 of our platforms, necessitating the high level of collaboration to properly serve the client. That is why we have put IMS and banking together. Now while the road ahead in 2019 is challenging, it's also full of new opportunities. We believe we will be better suited after the new opportunities with our new strategies and organization. Now this concludes my remarks so I'll now ask Dennis to give you an update on LSV and the investment in new business segment. I'll then turn it over to the other business segments. Dennis?

Thanks, Al. Good afternoon, everyone. I'll cover the fourth quarter and full year results for the investments in new business segment and discuss the results of LSV Asset Management. During the fourth quarter of 2018, the investments in new business segment continued its focus principally on our digital advice offering and on the ultra-high-net-worth investors segment through our private Wealth Management group. During the quarter, the investments in new segment incurred a loss of $3.2 million, which compared to a loss of $3.8 million during the fourth quarter of 2017. For the full year, the investments in new business segment incurred a loss of $12.4 million compared to a loss for 2017 of $13.8 million. This improvement reflects the growth of our private Wealth Management business, offset by other areas of investment. Regarding LSV, our earnings from LSV represent our approximate 39% ownership interest during the fourth quarter. LSV contributed $36.4 million in income to SEI during the fourth quarter. This compares to a contribution of $43.3 million in income during the fourth quarter of 2017. For the full year 2018, LSV contributed $159.8 million in income compared to $152.6 million in 2017. As Al mentioned, the assets during the quarter fell approximately $13.2 billion at LSV. LSV experienced net positive cash flow during the quarter of approximately $360 million, which was offset by market declines. Revenue at LSV was approximately $119.5 million and performance fees were minimal. For the company, our effective tax rate for the quarter was 19.2%. A couple of items of note for the company, during the quarter, we recorded severance expense of approximately $2.4 million. This is primarily reflected in corporate overhead. We also had a true-up of incentive compensation expense of approximately $2.8 million, primarily reflected in the investments management segment result. With that, I will now take any questions.

[Operator Instructions]. And we have a question from the line of Chris Shutler with William Blair.

So on the corporate expense, it jumps a little bit quarter-over-quarter. It sounds like some of that was severance. Was that $2.8 million in there also or was there anything else to call out?

Yes, the $2.8 million was in there also. There were the two major kind of more of the onetime-ish.

Okay. And could you state again, Dennis, what that $2.8 million was?

That was for a true-up on incentive compensation payments -- that's a manager services segment. Even there is strong performance this year.

Okay. The severance, is that related to any one individual, or is that a number of people was that target related to?

I don't know, our employees, they left us during the course of the quarter.

Okay. And then tax rate from here, how should we think about the tax rate in 2019?

Well the good news is that we are still operating the under the 21% corporate tax rate. So that's a good starting point. I'd say we're going to be in that range, 21% range. Certainly the -- we still have the option accounting benefit that could go one way or the other this year, that's one activity. So I'd say we're definitely 21% if not a little bit higher.

[Operator Instructions]. And we have no one queuing up at this time. So please continue.

Thank you, Dennis. We are now going to change things up a bit based on the new organization I'm going to turn it over to Steve Meyer to discuss both private banking and IMF segments. Steve?

Thank you, Al. Before I begin, just to outline my approach. I will first review the private banking segment's Q4, then take questions on that. After those questions I will discuss Investment Manager's Q4 and take questions on IMF. So for private banking. For the fourth quarter of 2018, revenue of $121.4 million was up slightly from the third quarter of 2018, primarily due to an increase in transaction-based revenues. Fourth quarter revenue as compared to a year ago is down $5.6 million, mainly driven by transaction-based revenues decline in our asset management revenue. For the fourth quarter 2018, operating profit was $6.9 million increased from the third quarter due to increased transactional revenue and decreased expenses. For the year, our profits grew by $6 million, mainly driven by our asset management and SWP relationships. And turning to sales activity for the quarter, we closed $7.2 million in gross profit-recurring sales events and $3.7 million in onetime events. Q4 was a decent new business quarter. As we mentioned on our third quarter call, we are working is one of our larger U.K. clients to add to our large book of global private accounts. During this process, we expect part of the turn book to deconvert all through our platform in the near term. Although the timing of the deconversion is ambiguous, we have enough certainty that will occur that we believe it's appropriate to net the expected impact against our Q4 event. If successful, we expect the potential new business from this existing client will be a significant growth opportunity for us. During the fourth quarter, we signed 2 new SWP agreement, 1 existing Trust 3000 clients with a security and Trust Company, and the other is a new client to SEI. Also during the fourth quarter, the in U.K. we extended our relationship with Fusion Wealth until 2025. Given their strategic affiliation with Schroders and Lloyd's banking group, we expect this to be meaningful business opportunity for SEI. Regarding Trust 3000, during the quarter, we recontracted two clients for a total of $10.2 million. For 2018, we've recontacted 18 Trust 3000 clients for $51.9 million of annualized revenue. Our asset management distribution business experienced approximately $283 million in negative cash flows in the quarter. During the quarter, our AMP business signed several new deals including Innovea, a large France wealth management firm, that will use SEI's goal-based solution as their exclusive approach to goals-based investing. And BMO financial group, who will offer SEI's strategic portfolio to their high-network clients in Asia. As an update on the wealth platform backlog, we converted a U.S. client to the SEI Wealth Platform during the quarter. This brings the total to 38 clients currently processing on SWP. Our total signed but not installed backlog for SWP is approximately $35.2 million in net new recurring revenue. Also to update on Wells Fargo. All of our conversion activity continues and we're working closely with Wells in this project. While we await the final implementation is scheduled from Wells, all milestones and deliverables continue to be met. We are hopeful to know more about the end of the first quarter. And turning to 2019, our focus is on growth. Our sales pipeline is strong, and we will focus on closing new business and generating new opportunities with our current solutions and by expanding our opportunities by leveraging additional platforms and solutions available at SEI. Unfortunately, while doing so we have to navigate some of the headwinds of the current market as well as the revenue losses from previously announced client the conversions. A significant one is Department of Interior federal contract we announced in Q4 2017, is expected now to move off at the end of this quarter. These events will put downward pressure on both revenue and the profit growth in the short term. We will manage through these headwinds, and we continue to sell new business, implement clients, grow the business, and we will manage expenses diligently while we focused on positioning the segment for sustainable and accelerating profitability. While mutually leading this business segment, recognizing the short-term challenges to profitability, I'm optimistic about our long-term growth opportunity available to our markets and platforms. We continue to build our pipeline and work on increasing sales and implementing new business. That concludes my prepared remarks, and I'll now turn it over for any questions you may have.

[Operator Instructions]. We will go to Chris Donat with Sandler O'Neill.

With the Department of Interior contract, so we know the revenue's still weighted. Are there any expenses associated with that, that we would expect to also shrink, or any restructuring cost that we should be thinking about in future quarters?

Well, what I'd say is, it was one of our more profitable pieces of business and while there are some expenses that we will reallocate within the unit, any takedown of expense won't be really matched with the release of the revenue. So I would expect to see kind of a match-up on that side. And I think we are going to use some of that expense, although, we are managing it diligently to also kind of support new business coming on.

Okay. All right. And then with Wells Fargo, just in terms of what we can expect in terms of news flow, you said expect more clarity by the end of the quarter. Is that something we should expect to hear about on the first quarter earnings call? Or would you expect to put out a press release? I'm just trying to...

I would suggest you'll probably not hear that until the first quarter earnings call.

And we have a question from Chris Shutler with William Blair.

So the quarter-over-quarter step up in revenue in the business. Obviously, there was a negative market impact. Can you just break it down for us a little bit? Like how much of a step up was there quarter-over-quarter and professional services or onetimes of revenue, and then how much of a step up was there in transactional revenue?

Well, we certainly -- step up from revenue was about $2.9 million Q3 over Q4. And the majority of that I believe was in our transactional revenue. It was both between brokerage and our mutual fund servicing fees, which were actually down last quarter. They're actually up this quarter. We did have onetime revenue booked in Q4 about $4.9 million.

And that $4.9 million, how does that compare to prior quarters?

Well I don't think, it's kind of a -- I don't think there's kind of a standard flow. It's up or down depending on the exact signings we've had. But I think it's somewhat a little bit consistent with what we're seeing in previous quarters.

Okay. And then just to reiterate, can you go through your comments really quickly on the sales again. You said $7.4 million of growth and half of that was onetime. Can you reiterate that again?

Yes, so it was $7.2 million in gross and $3.7 million in onetime events sold in the quarter. And of that, $3.7 million, about $1.8 million has been recognized in the Q4.

We have a question from Robert Lee with KBW.

Just kind of curious, if you go back and look over time the onetime fees you guys may have earned over the past couple of years related to potential implementation of SWP. Is it -- just trying to get a sense of when someone hires you and is paying you some upfront fee, kind of exploring the platform. Do you have enough of a tracker that it's 100% conversion to a full client who wants to give us a fee? Or its 75 or 50 and if we think of those kind of potential fees who paid you this fees over time is -- are there still potential customers out there who pay you the fees, haven't made the commitment to get a full platform so you haven't seen them flow through net new business?

I'll just let Steve off because he is really new to, and I think we only had one instance where we had a client pay a significant or any implementation fees frankly, that didn't wind up signing a contract, over the past -- I guess, probably five years ago. So every client is paying us has converted to a contract except one.

And are there still maybe some out there that have paid you the fee, and you expect they're going to sign up but they just haven't gotten there yet so there's kind of a little bit of a -- pipeline?

I think they are paying us a fee is an inclination as they sign the contract.

And we have a question from Glenn Greene with Oppenheimer.

So the big picture question, sort of not running private banking along with Investment Managers. And I just want to get a sense how you sort of view the pipeline and what you think you can do or what could be changed sort of move some of these fields in the pipeline over the goal line and really get the sales to get sales moving?

Well Glenn, all eyes in the room are on me now. So listen, its two months in so its probably a little early for any broad strategic discussion. But what I'd say to you is -- is I do, my assessment is we have a lot of opportunity. We have a strong pipeline both here in the U.S. and the U.K. and I think there's a lot of people who work very hard and are moving these deals along. Not to use the same phrase you heard but the process is a long one. I do think there's opportunity for us to look and leverage is one of the reasons we did the reorganization of the platform and solutions we have across SEI that might help us expand the offering we have for this client base as well as maybe have some other shorter-term sales agendas, while we are working on longer-term platform agendas. But with that, I think I'm walking to an opportunity where we great people that work really hard. We have a very strong pipeline and I think it's just a matter moving them through the pipeline at this point.

Is there anything more specifically, tactically that you're thinking about, whether it's pricing or may be going more modular in terms of the product, or maybe something in terms of distribution on the sales side that you're rethinking?

What I'd say, Glenn, and I'll have more color for you as we go along. But right now, I'd it is safe to say my #1 focus is on growth and growth of top line and bottom line. And I'm considering everything and looking at everything we do from pricing to how we platform to our other platforms and solutions on how we can speed up the growth across this position.

[Operator Instructions]. We will go to Sam Hoffman with Lincoln Square.

Steve, can you give a bit more color on what you're working on, just to follow up on the previous question in terms of developing products to cross sell the Investment Managers platforms through the private banking clients? And then specifically, do you have needs within your budget? Currently you are the run rate of $114 million to $115 million of expense per quarter. Is that going to be enough to kind of accomplish what you're looking for over the next year or 2?

Okay. Great, thanks. So two questions. One, what we're looking as far as maybe leveraging some of the solutions, primarily in IMS but maybe just not limited to IMS. When we first made this announcement, we used the example of a client we recently signed Cornerstone, which is a large RA, which is absolutely using 3 of the platforms we have. If you want to look more granularly to banking, many of the large banks we deal with are also manufacturers. So many of the solutions and platforms we've built, we are either already have them as a client, such as Wells Fargo, who is a client of IMS as well as banking. Or we have the opportunity to locate and support their manufacturing businesses. So that's really kind of the main focus I have initially on looking how we can expand that. As far as the budget what I would say is we're going into this year, we are to have to manage managing expenses. So I feel the expenses we have are more than enough for us to accomplish what we have to do, and we will be looking at absolutely manage them pretty tightly.

Okay. So you're going to be saving money on merging some of the organizations and that will offset any expenses that you need to make to develop products for growth?

Not sure -- I'm not sure exactly classify it that way but I would say, I think, we are spending a decent amount and -- amount we are spending on development and implementing clients. I think there's ways we might be able to do things may be little bit more efficient that can result in us saving some money.

And we will go back to Chris Shutler with William Blair.

Can we just get the net cash flow in going to the U.K. for SWP?

Net flow to U.K. I know we the total net we are negative, I don't know if I have the U.K. handy for us. We will try to get that through the end of the call, and I'll come back to you.

Okay. And then any update, Steve, on just the outlook for -- I know you didn't have any Trust 3000 attrition in the quarter. How do you feel about the next handful of quarters?

I feel good. We've had a pretty good year recontracting, more importantly, if you look at our average concession, we had 0% concession in recontracting crease with the clients we did in Q4 and just shy of 2% on average for the year 2018. So we are active, we are engaged with them and obviously, our main goal is to convert them to SWP or for the ones that are not ready to recontract in advance of new SWP. So we feel pretty confident, we are honest, we obviously have some clients that we will certainly look in the market and competitive conversation but that's the nature of the business.

And we have no additional questions. So please continue.

Sure and just to follow up, Chris, the flows in the U.K. were $440,000 positive. So with that, turning to Investment Managers. For the fourth quarter of 2018, revenues for the segment totaled $102.4 million, which was $8.1 million or 8.5% higher as compared to our revenue in the fourth quarter of 2017. This year-over-year revenue increase was due primarily to net new client fundings and existing client expansion. For the full year 2018, our revenue was $398.1 million, which was $48.6 million or 13.9% higher than the full year of 2017. Our quarterly profit for the segment of $34.6 million was $1.1 million or 3.2% higher as compared to the fourth quarter of 2017. Our full year profit for the segment of $138.4 million was approximately $15.4 million or 12.6% higher than the annual profit of 2017. Third-party asset balances at the end of the fourth quarter of 2018 were $552.3 billion, essentially, flat as compared to the asset balances at the end of the third quarter of 2018. Although the assets were flat quarter-over-quarter, we did have an increase in assets due to net new client fundings of $19.4 billion, net against market depreciation of $19.5 billion. And turning to market activity, during the fourth quarter of 2018, we had a very strong sales quarter, with net new business events totaling $12.9 million in recurring revenues as well as recontracts of $13.9 million in recurring revenues. Most importantly, these sales were diverse and spanned our entire business and included both new-name business and expansion of existing wallet share with current clients. These events included the following highlights: a $17 billion alternative manager decided to outsource for the first time, along with 2 new start-up alternative managers; continued growth with new business wins in cross-sales after the market segment; multiple new family office Mangan expanding solution footprint at several existing clients. Events in our traditional market unit across all product lines including 2 middle office service mandate, multiple collective Trust and an expansion of solutions with several clients. Our total net business sales events for 2018 were just over $50 million, which was a record and our largest sales year-to-date. And approximately $10 million higher than our total events in 2017. We feel this continues to validate the market acceptance and strength of our strategy and solutions. As we entered 2019, our focus will be on: one, continued execution of our sales and growth opportunity; two, continued expansion of our platform into the front office supporting our clients and investors; three, continued expansion of our emerging solutions and platforms including data analytics and global origatory compliance; four, leveraging our platform and solutions to support growth opportunities in other market segments. We will continue to invest in our platforms and key solutions to support our growth momentum, while also managing overall expenses diligently. We are focused on driving sound efficiency as we grow. Our pipeline remains strong and I'm optimistic of the continued growth opportunities. That concludes my prepared remarks and I will turn it over for any questions you may have.

[Operator Instructions]. We will go to Robert Lee with KBW.

Steve, could you just maybe just repeat the net new business in the quarter that you mentioned? I think I kind of miss some of it.

Sure. Net new business in the quarter was $12.9 million in recurring revenues. So we contracts existing clients of $13.9 million.

Okay, great. And then can you may be talk a little about kind of the competitive environment? I mean some of the -- and clearly you are not in the custody business, thank God. But some of the large custody banks have talked about the pricing, push back they're getting from a lot of their clients as their clients clearly struggle on the revenue front. Can you may be talk about what you're seeing there kind of how you are reacting to it? And I mean clearly it's not keeping you from generating new sales. But just kind of recontracting, but may be just give us a sense of how you are positioning yourself for that kind of environment?

Yes, well, I mean it's certainly out there and competitive market. There's a lot of other competitors out there. We typically don't compete on price. That's not to say that we don't have clientss with prospects that come to us and when you get into the competitive bid. We are typically not the low-cost provider. We are usually not the highest but we do require premium. And I think that's justified with the platform and solutions rebuild. Quite frankly, with the fee compression that's coming from the managers, that's now working its way down to their partners including us, I still view that as an opportunity. Because it's requiring managers and I've said this before to rethink their business model. As they have to rescale and relook at their business, there's other areas of their business, whether these are middle office, they're front office, they're support groups around their trading, there are support groups around the middle office that they now have to look at different way of doing less of doing it inside their firm. And I think it provides plenty of opportunity for us to add more solutions and to add to our platform and to expand our wallet share of the client. Certainly, I would view it as silver lining and then adds opportunity for us.

[Operator Instructions]. We will go back to Chris Shutler with William Blair.

Steve, just get the backlog numbers. And then at the time line?

Sure. Backlog is about $43.4 million right now. And I'd say expect that to fund within the next 12 -- majority of the 12 to 14 months.

[Operator Instructions]. We have no one queuing up. So please continue.

Thank you, Steve. Our next segment is Investment advisors. Wayne Withrow will cover this segment. Wayne?

Thanks, Al. 2018 was really a tale of two cities, with the IWA segment achieving good growth during the year until the market turned down in the fourth quarter. However, despite the challenges of the fourth quarter, we still achieved record revenues and profits for the year. More importantly, we are closing in on completion of our migration to the SEI Wealth Platform. For the quarter revenues, totaled over $97 million. These revenues were down only slightly from our revenues in the fourth quarter of last year. The impact of positive net cash flow was more than offset by negative capital markets. Expenses were down in the fourth quarter versus last year's fourth quarter. As compared to the third quarter, expenses were up only slightly as increases in some expense categories were offset by decline in variable sales competition. Our profits were flat compared to last year's fourth quarter, but were down $5 million in the third quarter, primarily due to capital market declines. Assets under management were $61.3 billion at December 31, a decrease of $3 billion from December 31, 2017. The decrease was driven by negative capital markets, only partially offset by net positive cash flow. While the net cash flow is positive for the year, we did experience $650 million in net negative cash flow in the fourth quarter SEI market volatility impacted investor behaviors. We also saw a shift from riskier assets to cash during the quarter. During the quarter, we recruited 87 new advisers bringing our total for the year to 417. Our pipeline of new advisers remains active. For 2019, we will concentrate on three main areas: first, we are focused on completion of the wallout of the SEI Wealth Platform. In 2018, we converted 3,500 firms and over $27North million in assets. We now have over 90% of our 80 migrated onto the platform and should have all of our clients in the platform by the end of the first quarter. Second, as we completed technical migration, we will be focusing more on having advisers adapt all of the functionality of the SEI Wealth Platform, allowing them to capitalize on its capabilities and strengthening our relationship with them. Third, we will re-examine our go-to-market strategy as we shift the focus of our sales force away from migration and back to pure growth. In summary, 2018 was negatively influenced by the market volatility of the fourth quarter but on a positive note, we continue due to solid progress in our migration to the SEI Wealth Platform. We look forward to completion of our migration and remain confident in the long-term opportunity in front of us. I welcome any questions you may have.

[Operator Instructions]. We'll go to Chris Donat with Sandler O'Neill.

I was just wondering with the -- you talked about the movement from risky assets to take cash and it does look like as we calculate your fee rate that it ticked down a basis point or so. Just wondering if you expect any implications for first quarter of 2019 about end investors having more cash our you've seen the cash kind of revert back into the market as conditions have improved in January?

I think basically, the more volatility move people out of the riskier asset classes was actually most investors still have a hangover from the fourth quarter, and its probably a little bit earlier to predict what will happen. But -- and while I can't say the first quarter, second quarter whatever, I would say that the good news is the balances in the liquidity will eventually return, hopefully, to higher fee asset class.

Okay, but we might see a little -- I'm putting words in your mouth, I recognize. But we might see a little pressure on fees in coming quarters, if you do have people sitting in cash for a while?

I guess it's kind of hard to say really. It depends on what the mix is.

We have a question from Robert Lee with KBW.

Just with getting closer to a point where one will be on SWP. I guess 2 questions in this. First, are or there any kind of decommissioning savings or something that you kind of realize from being completely of kind of the legacy platform in your channel that you no longer have to bear? and I guess and then you kind of suggested that you're going to kind of shift back towards kind of a growth putting. But may be it's early days, but given the increased functionality of the platform and therefore, increased sources of revenue, any sense a little bit you're trying to see at least some advisors start to use the functionality? Starting to see some uptick of kind of ancillary fees from the platform?

Yes, well, Rob really two questions. I think as we shifted the platform, as we lose some of the migration expenses associated with the platform, I think we will save in that area how we choose to redeploy that whether we try to reinvest that to growth or not is a decision we continually make. In terms of cross-selling other asset classes for that, I think as we shifted the sales force away from what I would call basically no handholding and helping the clients through the migration process, we can focus more on going out and getting better growth SEI assets and non-SEI assets.

[Operator Instructions]. We have no additional questions. So please continue.

Thank you, Wayne. Our next segment is the Institutional Investors segment. Paul Klauder will report on this segment.

Thanks, Al. Good afternoon, everyone. I'm good to discuss the financial results of the fourth quarter of 2018 as well as the entire year. Fourth quarter of 2018 revenues of $81 million were 7% lower than the fourth quarter of 2017 revenues. This was due to lower capital markets and the inclusion of a onetime performance-related fee of $3.4 million in 2017. Market appreciation and net client fundings positively impacted revenue on a year-over-year basis. Full year revenues of $333 million increased 3% compared to 2017. Operating profits for the fourth quarter of 2018 were $40 million, 7% lower than the fourth quarter of 2017 due to the previously mentioned items offset slightly by lower operating expenses. 2018 full year profits were $169.8 million and increased 6% compared to 2017. Net client fundings, higher capital markets and lower operating expenses contributed to this increase. Operating margins for the full year 2018 were 51%. Net asset event for the quarter were a negative $950 million. Growth sales were $1.05 billion, but client losses totaled $2 million. New client were across multiple markets including U.S. and [indiscernible] foundations, U.K. Fiduciary Management and U.S. hospitals. Total new client signings for 2018 was $3.6 billion, that represents $11.9 million of revenue. The client-loss number for the quarter was driven by a U.S. corporate relationship that got merged into a larger organization, continued corporate DB containments and investors that decided to offer a complete passive management implementation. The unfunded client backlog at year-end was $750 million. Quarter-end asset balances of $84.4 billion, reflected a $10.1 billion decrease versus the fourth quarter of 2017. This is primarily due to fourth quarter's negative capital market performance. Our focus in 2019 will be to continue to diversify new business growth out of the U.S. defined-benefit market and into adamason [ph] foundations, healthcare, non-U.S. DB treasury management, government reunions, defined contribution and entering new global markets. We continue to believe that market volatility will be a positive catalyst for Institutional Investors to reconsider their investment management process. Thank you very much, and I'm happy to answer any questions that you may have.

[Operator Instructions]. We will go back to Robert Lee with KBW.

Just kind of curious. I mean given some of the net new business challenges. Certainly most recently, I mean how you kind of think about maintaining the existing kind of profitability in the segment? And I did some biopsy, so to speak, pressure on top of that. Segments have been pretty steady around 50% give or take quarter-over-quarter for a while now. Is there anything you kind of see in terms of how the new investments you have to make? And distribution or infrastructure, coupled with kind of shifting fees that -- makes you think that it's not sustainable, or should be sustainable? How should we view that going forward?

Well, we think we have made all the investment in infrastructure and description, whether that's in the U.S. or our EMEA or Asia business. So we think we are good there. Your point is dead on in the fact that what might roll off might be a little bit more profitable than what rolls in but we saw that phenomena actually switch a little bit this year because of the fact that we did really well in foundations and endowments. Those assets are growing, people are donating to foundations and endowments and their consumption investments is much higher than the defined-benefit plans, and we have a much higher yield on alternative investments that we do on public markets. So while I can't sit here and say this business will always be a 51% profit margin business, I think we're going to see some downward pressure just on some realities. And we saw a split down the 49.4% in the fourth quarter. I am confident that that as a high-40% profit margin business and again, we will make the right investments and if we have to go a little bit low, below that to get into accretive markets, we'll make those decisions so we can strategically position the business.

[Operator Instructions]. And we have no questions. So please continue.

Thank you. I'd like to now have Kathy Heilig to give you a few companywide statistics. Kathy?

Thanks, Al. Good afternoon, everyone. I have some additional corporate information regarding this quarter. Our fourth quarter 2018 cash flow from operations was $170.5 million or $1.07 per share. Year-to-date cash flows from operations to $588.4 million or $3.65 per share. Fourth quarter free cash flow of $152.2 million bringing year-to-date free cash flow to $485.1 million. In the fourth quarter we had capital expenditures, excluding capitalized software of $7.4 million, that did include $4.9 billion for facility expansion. Our year-to-date capital expenditures excluding capitalized software were $29.1 million, which included $9.8 million for facility. In 2019, we expect capital expenditures to be approximately $55 million, which would include about $33 million related to our facility expansion. We already mentioned that the tax rate was 19.2% for the quarter and the annual tax rate was 17.6%. We also would like to remind you that many of our comments are forward-looking statements and are based upon assumptions that involve risks and that financial information presented in are release and on this call is unaudited. In some cases, you can identify forward-looking information statements by terminology such as may, will, expect, believe, continue, or appear. Our forward-looking statements include our expectations as to revenue that we believe will be generated by sales events that occurred during the quarter, the timing and scope of the conversion events, our ability to capitalize on new business opportunities and the timing of these events. Our strategies for the execution of our business and existing markets and the degree to which market conditions create opportunity for us. Those market conditions that will create opportunities for us to grow our business, the strength of our pipeline and our ability to execute on and the success of the 2019 strategic objectives articulated on this call. You should not place undue reliance on our forward-looking statements as they are based on current beliefs and expectations of our management and subject to significant risks and uncertainties, many of which are beyond our control or subject to change. Although, we believe these functions upon which we base our forward-looking statements are reasonable, they could be inaccurate. Some of the risks and important factors that could cause actual results to differ from those described in our forward-looking statements can be found in are risk factors section of our annual report on Form 10-K for the year ended December 31, 2017, that was filed with the Securities and Exchange Commission. And now, please feel free to ask any other questions that you may have.

[Operator Instructions]. We have a question from the line of Sam Hoffman with Lincoln Square.

My question is, what are your objectives for the expense budget growth rate for 2019? Given that revenue growth is probably going to be challenging this year, and whether the main areas that you feel you need to invest in, in terms of expense and other areas where you're going to be focused on cost control?

Sam, this is Dennis. And probably from listening to prior calls, you know we're not all that thrilled -- happy about predicting the future from an expense standpoint. I would just say, to echo what Steve talked about, particularly in his segments. We are looking at '19 as a really tight year to manage expenses. I'll use Steve's words, diligently. So that's when you can expect it. I think you saw kind of third to fourth if you take out those two unusual items, we are pretty -- it was kind of an indication of how we're going about that and the tightness with which we're managing expenses. So the areas that we're going to continue to invest in certainly meet the commitments we've made to our clients. And to fulfill what we believe are the opportunities in the market strategically. So technology expenditures will continue, Lukes running that -- those organizations, I work closely with the business units to make sure there's clear priorities. We are only spending on things that are absolute priorities, that are going to help us in the future. And around that, just managing everything else around the company pretty tightly,

We'll go next to Chris Donat with Sandler O'Neill.

Yes, I'm going to just twist the prior question a little bit. I saw on the press release that you're guiding to stock-based comp of $22.6 million, I guess on that line specifically, are there really any puts and takes that -- or what are the factors that would cause that stock-based comp to be higher or lower meaningfully in '19?

As you know, our -- the vesting of our options is driven by us hitting certain pretax earnings targets. Particularly the options that were granted in the past two years, and prior to that, it's an aftertax earnings target. So how we amortize the cost associated to those options is based on our estimates of what we think will hit those targets. So the only real variable that will change those expensing is a change in that timing expectation. And we had that occur last year, if you remember fourth quarter, we had a little bit of that third, fourth quarter in '18. But that's the only real variable relative to options.

Okay. And then just thinking about compensation more broadly, its still the case that if you had large contract wins often you'll see salespeople get -- you'd accrue some compensation for things like that. Just trying to think what factors you might see in compensation?

The only change there, as you remember last year the new accounting rule that was in place, in terms of that -- some of that was getting deferred. And that expensed in over the life of the contract, or the life of the relationship you've measured that and that estimated life. So you wouldn't see us as much in that, like you would have, say, in 2016, 2017.

And a question from the line of Chris Shutler with William Blair.

Let's say, the $3.7 million recurring revenue from sales events that occurred in the quarter, can you break that down by segment? I think you said $3.5 million in private banks, $12.9 million in IMS. What were advisors and institutional?

They were negative because their cash flows were negative.

The first two numbers were correct, right?

Banking was essentially flat in terms of net recurring because of a lot of those fact that we -- I'd say being a little conservative by including in our net number that one client that's in transition. And we have upside opportunity but in the meantime they're going to -- there is a good chance they're going to transition business away from us. And then the other 2 adviser and institutional, they were negative cash flow. So the total number is really kind of to make it simple, IMS less kind of the adviser and institutional cash flow, because banking was relatively flat.

[Operator Instructions]. We have no questions coming. So please continue.

So ladies and gentlemen, these are difficult times with the sight to volatility, I am encouraged by the direction each of our business lines has taken and the progress they are making. I believe that the investments we are making that will help us benefit from all the changes taking place in our industry. Have a good day, and thank you for attending our call.

Thank you. And ladies and gentlemen, this concludes our teleconference for today. We thank you for using AT&T Executive TeleConference service and you may now disconnect.