SEI Investments Company — 2017 Q1 Form 10-Q Summary
Business Context and Reporting Period
SEI Investments Company provides investment processing, investment management, and investment operations solutions to financial institutions, advisors, institutional investors, investment managers, and ultra-high-net-worth families. The unaudited filing covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016.
At March 31, 2017, SEI managed, advised, or administered $778.6 billion of assets, including $297.1 billion under management and $478.1 billion under administration. LSV Asset Management contributed $90.6 billion of assets under management.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $360.0 million | $334.3 million | 8% |
| Income from operations | $93.5 million | $86.8 million | 8% |
| Operating margin | 26.0% | 26.0% | Stable |
| Income before taxes | $128.7 million | $119.6 million | 8% |
| Net income | $88.7 million | $77.5 million | 15% |
| Diluted earnings per share | $0.55 | $0.47 | 17% |
| Net margin | 24.7% | 23.2% | Up |
| Operating cash flow | $73.0 million | $78.6 million | Down $5.6 million |
Asset management, administration, and distribution fees increased to $278.6 million from $251.4 million. Information processing and software servicing fees increased to $74.8 million from $73.4 million, while transaction-based and trade execution fees declined to $6.7 million from $9.4 million.
Equity in earnings from unconsolidated affiliate LSV increased 15% to $33.6 million. The effective tax rate declined to 31.0% from 35.2%, primarily because ASU 2016-09 requires excess tax benefits from stock option exercises to be recognized in income tax expense in the reporting period.
Cash and cash equivalents were $661.4 million at March 31, 2017, compared with $695.7 million at December 31, 2016. Total assets were $1.625 billion and shareholders’ equity was $1.363 billion. The company had no borrowings under its $300 million credit facility, which expires in June 2021, and reported compliance with all covenants.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by improved cash flows from new and existing clients, market appreciation, and higher average assets.
- Average assets under management increased 14% to $291.7 billion, including LSV; average client assets under administration increased 17% to $474.0 billion.
- Investment Advisors revenue increased 15% and operating profit increased 28%, with margin expanding to 46% from 42%.
- Investment Managers revenue and operating profit each increased 15%; operating margin remained 35%.
- Institutional Investors revenue increased 6%, while operating profit increased 2% and margin declined to 50% from 51%.
- Private Banks revenue declined 1%, operating profit declined 58%, and margin declined to 4% from 8%, primarily because of lower trade execution fees, foreign exchange effects, and higher Wealth Platform-related costs.
- Stock-based compensation increased to $6.2 million from $3.8 million.
- Capitalized software development costs increased to $16.9 million from $9.5 million, including $15.2 million for significant enhancements to the SEI Wealth Platform.
- The prior-year results included a $2.8 million gain from the sale of SEI Asset Korea; no comparable gain was recorded in Q1 2017.
- SEI repurchased 1.1 million shares for $55.4 million and paid $44.6 million in dividends during the quarter.
Cash Flow, Liquidity, Debt, and Capital Resources
- Operating cash flow was $73.0 million, compared with $78.6 million in Q1 2016, primarily because of unfavorable changes in working capital.
- Investing activities used $25.3 million, including $16.9 million of capitalized software costs, $3.2 million of property and equipment additions, and net purchases of marketable securities.
- Financing activities used $84.3 million, primarily for share repurchases and dividends, partly offset by $16.8 million of proceeds from stock issuance.
- Cash declined by $34.3 million during the quarter to $661.4 million.
- Management stated that operating cash flow, existing cash, and available borrowing capacity should fund operations, investments, repurchases, and future dividends. Free and immediately accessible cash was $287.8 million as of April 13, 2017.
Outlook, Commentary, Risks, and Unusual Items
The filing does not provide quantitative earnings or revenue guidance. Management expects continued investment in the SEI Wealth Platform and other products, but notes that related non-capitalized personnel, consulting, maintenance, enhancement, and support costs are increasing.
SEI was evaluating the impact and transition method for the revenue recognition standard, ASU 2014-09, effective for the company in the first quarter of 2018. Management expected limited impact on recurring monthly service revenue but noted possible effects on implementation fees, fund conversion fees, ancillary fees, principal-versus-agent presentation, and sales commission accounting. The company was also evaluating ASU 2016-02 on leases, effective in the first quarter of 2019.
- Key operating risks include capital-market volatility, product development and technology execution, cybersecurity and data security, operational or third-party service-provider failures, competitive pricing pressure, and investment performance.
- Foreign currency movements, particularly involving the British pound, Canadian dollar, and euro, may affect reported results; SEI does not hedge foreign currency exposure.
- Regulatory examinations and investigations may result in remediation, fines, sanctions, business restrictions, increased costs, or reputational damage.
- SEI and subsidiaries were defendants in seven Louisiana lawsuits related to Stanford Trust Company. The company believed it had valid defenses but could not reasonably estimate any potential loss.
- A Belgian lawsuit involving two subsidiaries sought approximately $84 million in damages; the dismissal for lack of jurisdiction had been appealed, and the company could not estimate any ultimate loss.
- SEI guaranteed up to $45.0 million of LSV Employee Group III obligations; the remaining unpaid principal balance was $1.1 million as of April 13, 2017. The company reported no current payment obligation and expected the borrower to meet future obligations.
Investor Verification Points
- Verify whether revenue and earnings growth continues to depend on market appreciation, client cash flows, and LSV’s performance.
- Monitor Private Banks profitability and the cost, capitalization, and amortization profile of the SEI Wealth Platform.
- Assess the sustainability of the 31.0% effective tax rate, which may fluctuate materially because of stock-based compensation tax effects.
- Review cash deployment among software investment, dividends, and share repurchases, as well as the level of immediately accessible cash.
- Track the implementation effects of ASU 2014-09 and ASU 2016-02.
- Follow the Stanford-related litigation, the Belgian litigation, regulatory examinations, and any potential financial or reputational consequences.
- Evaluate exposure to capital-market declines, foreign exchange movements, cybersecurity events, technology execution risks, and pricing pressure.