SEI Investments Company — Q1 2016 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 globally. This unaudited Form 10-Q covers the three months ended March 31, 2016, compared with the three months ended March 31, 2015.
At March 31, 2016, SEI managed or administered $683.6 billion, comprising $264.7 billion of assets under management and $418.9 billion of client assets under administration. LSV Asset Management, an unconsolidated affiliate, managed $78.4 billion.
Financial performance and key metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $334.3 million | $325.4 million | Up 3% |
| Income from operations | $86.8 million | $93.1 million | Down 7% |
| Operating margin | 26.0% | 28.6% | Down 2.6 percentage points |
| Income before taxes | $119.6 million | $131.0 million | Down 9% |
| Net income | $77.5 million | $84.6 million | Down 8% |
| Net margin | 23.2% | 26.0% | Down 2.8 percentage points |
| Diluted EPS | $0.47 | $0.50 | Down 6% |
| Operating cash flow | $78.0 million | $77.9 million | Approximately flat |
Asset management, administration and distribution fees were $251.4 million, information processing and software servicing fees were $73.4 million, and transaction-based and trade execution fees were $9.4 million. Revenue growth was supported by new and existing client cash flows, while weaker capital markets partially offset asset-based fee growth.
Expenses increased 6% to $247.5 million. Higher personnel, consulting, technology, brokerage, amortization, and data-processing costs reflected client servicing, sales activity, and continued development and maintenance of the SEI Wealth Platform. Equity in earnings of LSV declined 14% to $29.2 million, primarily because of lower assets and reduced performance fees.
Financial position, cash flow, debt, and liquidity
- Cash and cash equivalents were $638.3 million at March 31, 2016, down from $679.7 million at December 31, 2015.
- Total assets were $1.55 billion and total liabilities were $250.4 million; shareholders’ equity was $1.30 billion.
- Operating cash flow was $78.0 million. Investing activities used $7.5 million, including $9.5 million of capitalized software costs and $4.6 million of property and equipment additions.
- Financing activities used $113.9 million, including $78.4 million for share repurchases and $42.7 million for dividends.
- Free and immediately accessible cash for general corporate purposes was $386.6 million as of April 19, 2016, according to management. Some subsidiary and foreign cash may be restricted or less readily available.
- SEI had no borrowings under its $300 million credit facility at March 31, 2016 and was in compliance with its covenants. The facility was scheduled to expire in February 2017.
- SEI repurchased 2.073 million shares for $80.6 million during the quarter. On April 19, 2016, the board authorized an additional $200 million, leaving approximately $232.5 million of available authorization.
Material changes versus the prior comparable period
- Revenue increased 3%, but operating expenses grew twice as fast, reducing operating income and operating margin.
- Private Banks revenue rose 2%, while operating profit fell 20% and margin declined to 8% from 11%, primarily due to Wealth Platform costs, amortization, trading-related costs, and sales compensation.
- Investment Advisors revenue increased 4%, but operating profit decreased 9%; margin fell to 42% from 47%.
- Institutional Investors revenue declined 1% and operating profit declined 2%; margin decreased to 51% from 52%.
- Investment Managers revenue increased 7%, but operating profit was approximately flat and margin declined to 35% from 38%.
- Average assets under management were approximately flat at $255.4 billion, while average client assets under administration increased 5% to $404.7 billion.
- LSV’s average assets under management declined 10% to $74.7 billion. In April 2016, SEI’s LSV ownership interest declined from approximately 39.2% to 38.9%, which management expected to reduce SEI’s proportionate LSV earnings beginning in the second quarter.
- SEI recorded a final $2.8 million pre-tax gain from the sale of SEI Asset Korea, equal to approximately $0.01 of diluted EPS in both periods.
Outlook, commentary, risks, contingencies, and unusual items
Management stated that operating cash flow, existing cash, and available borrowing capacity should fund ongoing operations, product and equipment investment, share repurchases, and future dividends. No formal earnings or revenue guidance was provided in the filing.
Management identified continued capital-market volatility, asset levels and investment performance, LSV performance, foreign-exchange movements, technology and cybersecurity risks, third-party service-provider failures, regulatory changes, and client and market consolidation as significant risks. Increased regulatory examinations and compliance requirements could raise costs or result in sanctions, fines, business limitations, or reputational harm.
Material legal matters include Louisiana litigation related to alleged Stanford Trust and Stanford International Bank activities, a shareholder derivative action alleging excessive mutual-fund fees, and Belgian litigation seeking approximately $84 million from multiple defendants. SEI and its subsidiaries state that they have valid defenses, but the filing does not provide a reliable estimate of potential losses for these matters.
SEI maintained expense-limitation agreements for certain sponsored money-market funds and waived $12.5 million of fees in Q1 2016, compared with $10.7 million in Q1 2015. The company also had approximately $16.5 million of gross uncertain tax positions, including interest and penalties.
The company adopted new consolidation and fair-value disclosure guidance in Q1 2016. It was evaluating the future effects of revenue-recognition, financial-instrument, lease, and share-based-payment accounting standards.
Important facts for investors to verify
- Whether higher recurring revenue and client flows can offset continued Wealth Platform investment, personnel, consulting, and amortization costs.
- The sustainability of LSV earnings, performance fees, assets under management, and the effect of SEI’s reduced ownership percentage.
- The February 2017 expiration and renewal terms of the $300 million credit facility.
- The pace and valuation of ongoing share repurchases relative to dividends and operating cash generation.
- The potential financial and reputational impact of the Louisiana, shareholder derivative, and Belgian litigation, for which no reliable loss estimate was provided.
- The impact of capital-market, foreign-exchange, interest-rate, regulatory, cybersecurity, and third-party operational risks on future results.
- The timing and effect of pending accounting standards, particularly revenue recognition and leases.