SEI Investments Company — Form 10-Q Summary
Business context and reporting period
SEI Investments Company provides technology-enabled investment processing, investment operations, investment management and wealth-management platforms to wealth managers, financial advisors, investment managers, family offices, institutional investors and private investors. This unaudited report covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020.
As of March 31, 2021, SEI managed, advised or administered approximately $1.2 trillion of assets, including $383.7 billion under management and $836.2 billion under administration. LSV Asset Management, in which SEI held a 38.8% interest, managed $101.6 billion.
Financial results and key metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $455.7 million | $414.8 million | 10% |
| Income from operations | $132.8 million | $110.2 million | 21% |
| Net income | $129.5 million | $109.2 million | 19% |
| Diluted EPS | $0.89 | $0.72 | 24% |
| Operating margin | 29.1% | 26.6% | Up 2.5 points |
| Net margin | 28.4% | 26.3% | Up 2.1 points |
| Net cash from operations | $136.6 million | $99.0 million | 38% |
Asset management, administration and distribution fees increased to $367.6 million from $331.9 million. Information processing and software servicing fees increased to $88.0 million from $82.9 million. Equity in earnings from LSV rose 12% to $33.4 million. Net gain from investments was $0.3 million, compared with a $4.0 million loss in the prior-year quarter.
The effective tax rate increased to 22.6% from 21.5%, primarily because of lower tax benefits from stock-option exercises. Interest and dividend income declined to $0.9 million from $3.2 million because of lower interest rates.
Average assets under management increased 16% to $377.9 billion, while average client assets under administration increased 21% to $821.6 billion. Total average assets under management, advisement and administration rose 19% to approximately $1.205 trillion.
Liquidity, capital resources and balance sheet
- Cash, cash equivalents and restricted cash were $785.7 million at March 31, 2021, compared with $750.0 million at March 31, 2020 and $787.7 million at December 31, 2020.
- Total assets were $2.151 billion and total liabilities were $321.8 million at March 31, 2021.
- SEI had no borrowings under its credit facility. On April 23, 2021, it entered into a new five-year, $325 million revolving credit facility, replacing the facility scheduled to expire in June 2021. Availability was $320.4 million after $4.6 million of outstanding letters of credit.
- Cash used in investing activities was $30.7 million, including $6.4 million of capitalized software costs and an $11.0 million payment for a technology platform providing digital collaboration tools.
- Cash used in financing activities was $109.5 million, including $71.2 million for share repurchases and $53.1 million of dividends, partially offset by $15.5 million of common-stock issuance proceeds.
- SEI repurchased 1.152 million shares for $66.9 million during the quarter. Approximately $125.9 million remained available under the repurchase authorization at March 31, 2021.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by market appreciation, positive client cash flows and higher assets under administration, particularly in the Investment Managers segment.
- Investment Managers revenue increased 17%, with operating margin improving to 39% from 36%. Investment Advisors revenue increased 11%, with margin improving to 51% from 49%. Institutional Investors revenue increased 7%, with margin improving to 54% from 52%.
- Private Banks revenue increased 4% and operating margin improved to 6% from 2%, reflecting higher processing revenue and lower travel, promotional and certain migration-related costs.
- Investments in New Businesses generated an operating loss of $9.5 million, compared with a $7.5 million loss, as SEI continued investment in its One SEI strategy.
- Operating cash flow increased $37.6 million, helped by higher net income and increased repayments from LSV relating to working-capital accounts.
- Capital expenditures declined materially from the prior-year period because the 2020 comparison included corporate-headquarters expansion spending.
Guidance, outlook, commentary and risks
The filing does not provide formal numerical earnings or revenue guidance. Management expects operating cash flow, cash on hand and available borrowing capacity to fund operations, product and equipment investment, share repurchases and dividends.
Management expects continued investment in the One SEI strategy during 2021. It also expects further investments in technology infrastructure and system resiliency following a 2020 storage-array outage, although the total additional cost could not be estimated.
- COVID-19-related market recovery benefited asset-based fees, but future market declines, changes in client portfolio strategies or movement into lower-margin products could reduce revenue and earnings.
- SEI continues to face cybersecurity, third-party service-provider, systems availability and operational risks. A 2020 ransomware incident at a third-party developer exposed certain client data; regulatory bodies, including the SEC and FFIEC, requested information. The company does not expect the costs to be material, but investigations remain ongoing.
- SEI is engaged in litigation involving Stanford Trust Company and SS&C Advent. The company cannot estimate potential losses in the Stanford matters. In the Advent matter, a preliminary injunction preserved access to critical software, and SEI expects the financial impact of litigation to be immaterial.
- Regulatory examinations and investigations, changing financial-services regulation, market volatility, LSV performance, pricing pressure, technology failures and litigation could materially affect results.
- Stock-based compensation expense is subject to management estimates concerning performance-based vesting and may create future earnings volatility.
- Unrecognized tax benefits, including interest and penalties, totaled $19.0 million at March 31, 2021; the timing and ultimate resolution remain uncertain.
Important facts for investors to verify
- Whether asset growth from market appreciation and client flows persists, particularly in Investment Managers and other asset-based businesses.
- The sustainability of improved operating margins after COVID-19-related travel and promotional savings normalize.
- Progress and spending associated with the One SEI strategy and technology-resiliency initiatives.
- The outcome and potential exposure from the Stanford Trust Company litigation, SS&C Advent litigation and related regulatory inquiries.
- Whether the new $325 million credit facility remains undrawn and whether SEI continues to meet its covenants.
- The effect of future capital-market movements, interest rates, client losses, pricing pressure and LSV performance on revenue and earnings.
- Future share repurchases, dividends and dilution from stock-option exercises.