SEI Investments Company — Q1 2012 Form 10-Q Summary
Business context and reporting period
SEI provides investment processing, investment management, and investment operations solutions to corporations, financial institutions, financial advisors, and ultra-high-net-worth families globally. The filing covers the unaudited three months ended March 31, 2012, compared with the three months ended March 31, 2011. Unless otherwise indicated, amounts are in thousands.
As of March 31, 2012, SEI and its significant partnerships managed or administered $427.9 billion, including $188.6 billion of assets under management and $239.2 billion of client assets under administration. LSV Asset Management, an unconsolidated affiliate, managed $60.6 billion.
Financial performance and key metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenues | $237,898 | $232,493 | 2% |
| Income from operations | $48,089 | $54,597 | (12%) |
| Net income | $50,235 | $58,040 | (13%) |
| Net income attributable to SEI | $49,965 | $57,728 | (13%) |
| Diluted EPS | $0.28 | $0.31 | (10%) |
| Net cash from operations | $39,224 | $58,336 | (33%) |
Revenue composition was $172,954 from asset management, administration and distribution fees, $56,200 from information processing and software servicing fees, and $8,744 from transaction-based and trade execution fees.
Operating expenses increased 7% to $189,809, exceeding revenue growth. The consolidated operating margin was approximately 20.2%, down from approximately 23.5%. Net income attributable to SEI represented approximately 21.0% of revenue, compared with approximately 24.8% in the prior-year quarter.
Other significant items included $27,330 of equity earnings from LSV, $3,205 of net investment gains, and income taxes of $29,715. The effective tax rate was 37.2%, compared with 37.1%.
Financial position, liquidity and capital allocation
- Cash and cash equivalents were $388,127 at March 31, 2012, down from $420,986 at December 31, 2011. Restricted cash was $6,000.
- Total assets were $1.294 billion; total liabilities were $222,186; and total equity was $1.071 billion.
- SEI had no borrowings under its new five-year, $300 million revolving credit facility, which expires in February 2017. The facility may be increased by an additional $100 million subject to conditions. SEI was in compliance with its covenants.
- Cash used in investing activities was $19,855, including $12,116 of property and equipment additions and $9,277 of capitalized software development costs.
- Cash used in financing activities was $52,228, including $36,463 for share repurchases and $26,518 of dividend payments, partially offset by $12,362 of stock issuance proceeds.
- SEI repurchased 1.848 million shares for $37,714 during the quarter at an average price of $20.40. Repurchase authorization remaining at March 31 was approximately $58.6 million.
- Management stated that operating cash flow, available borrowing capacity, and cash balances should fund ongoing operations, investment, repurchases, and future dividends. As of April 30, 2012, free and immediately accessible cash for general corporate purposes was $262.9 million.
Material changes versus the prior comparable period
- Revenue increased modestly, primarily from higher average assets under management, improved market values, positive cash flows, new hedge fund and separately managed account business, and increased Global Wealth Services activity.
- Profitability declined because compensation, personnel, development, servicing, sales compensation, and amortization costs increased. Certain one-time termination costs also affected results.
- Private Banks operating profit fell 89% to $471, with margin declining to 1% from 5%, primarily because of Global Wealth Platform costs and higher servicing and distribution expenses.
- Investment Advisors operating profit decreased 4% to $20,167, and margin declined to 41% from 44%.
- Institutional Investors operating profit decreased 4% to $25,217, and margin declined to 47% from 49%.
- Investment Managers revenue increased 6% to $46,211 and operating profit increased 2% to $15,785, while margin declined to 34% from 36% due to higher client-servicing costs.
- LSV equity earnings declined 6% to $27,330, reflecting lower average assets under management of $59.2 billion versus $62.2 billion. In April 2012, SEI’s LSV ownership was reduced from approximately 41% to slightly below 40% due to employee interests issued by LSV’s contributing partners.
- Net gains from SIV securities fell to $2,882 from $6,864. Approximately $2,111 of the 2012 gain represented cash payments from previously written-down SIV securities, while approximately $771 resulted from an increase in fair value.
Guidance, outlook, risks and unusual items
The filing does not provide quantitative earnings or revenue guidance. Management expects continued investment in the Global Wealth Platform and related functionality, infrastructure, and client servicing capabilities. These investments may continue to pressure operating margins, particularly in Private Banks and Investment Advisors.
SEI’s principal risks include capital-market movements affecting assets and fee revenue, investment-product performance, product-development execution, technology and data-security failures, third-party service-provider failures, operational transaction-processing risks, regulatory and compliance changes, foreign-currency fluctuations, client and market consolidation, and retention of senior management.
SEI carries significant exposure to valuation uncertainty in structured investment vehicle securities. SIV securities had a fair value of $51,023 at March 31, 2012, compared with a cost amount of $143,096, and were primarily valued using Level 3 assumptions and models.
The company disclosed ongoing litigation involving SIDCO concerning leveraged ETFs advised by ProShares and six Louisiana lawsuits involving SEI and certain subsidiaries related to Stanford Trust Company. The outcomes are uncertain, damages are unspecified, and the company stated that it cannot reasonably estimate a potential loss. A Fifth Circuit panel reversed a prior dismissal in two Louisiana cases in March 2012; a petition for rehearing en banc was denied in April 2012.
SEI also guaranteed the obligations of an LSV employee group term loan. The remaining principal was $2,978 at March 31, 2012 and $2,729 at April 30, 2012. SEI reported no current payment obligation and expects the borrower to meet its obligations.
Important facts for investors to verify
- Whether revenue growth can accelerate while Global Wealth Platform development and client-servicing costs moderate.
- The sustainability and valuation sensitivity of SIV-related gains, including the $51.0 million Level 3 SIV position.
- The effect of SEI’s reduced LSV ownership on future equity earnings and distributions.
- Progress and costs associated with Global Wealth Platform implementation and capitalization of software development expenditures.
- Cash conversion, including the decline in operating cash flow to $39.2 million and the impact of receivables and accrued liabilities.
- Remaining share-repurchase authorization, future dividends, and the effect of capital returns on liquidity.
- Developments, potential damages, and any reserves related to the ProShares ETF and Louisiana litigation.
- Compliance with the $300 million revolving credit facility covenants and availability of subsidiary cash for general corporate use.