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. The filing covers the unaudited three and six months ended June 30, 2021, compared with the corresponding 2020 periods.
As of June 30, 2021, SEI managed, advised, or administered approximately $1.3 trillion of assets, including $399.1 billion under management and $880.4 billion under administration. LSV Asset Management, in which SEI held a 38.7% interest, managed $102.4 billion.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $475.7 million, up 19% | $931.3 million, up 14% |
| Income from operations | $136.0 million, up 36% | $268.9 million, up 28% |
| Net income | $133.8 million, up 32% | $263.2 million, up 25% |
| Diluted EPS | $0.93, up 37% | $1.82, up 31% |
| Operating margin | 28.6%, versus 25.0% | 28.9%, versus 25.8% |
| Net margin | 28.1%, versus 25.2% | 28.3%, versus 25.8% |
Six-month revenue consisted primarily of asset management, administration and distribution fees of $750.2 million and information processing and software servicing fees of $181.2 million. Equity in earnings from LSV was $68.4 million, up 18% year over year. The effective tax rate was 22.3% in the second quarter and 22.5% for the first six months.
Net cash provided by operating activities was $325.0 million, compared with $264.1 million in the prior-year period. Investing activities used $56.1 million, including $15.5 million of property and equipment additions, $12.3 million of capitalized software, and an $11.0 million payment for a technology platform providing digital collaboration tools. Financing activities used $277.9 million, principally for $197.3 million of share repurchases and $105.5 million of dividends.
Cash, cash equivalents, and restricted cash totaled $781.3 million at June 30, 2021, compared with $761.4 million at June 30, 2020. Cash and cash equivalents were $780.9 million. SEI reported no outstanding borrowings under its revolving credit facility; $319.2 million was available after $5.8 million of letters of credit. Total liabilities were $334.1 million and shareholders’ equity was $1.806 billion.
Material Changes Versus the Prior Comparable Period
- Revenue growth benefited from market appreciation, positive client cash flows, new and existing client activity, and higher assets under management and administration.
- Average assets under management increased 23% to $387.4 billion, while average client assets under administration increased 24% to $839.9 billion.
- Investment Managers revenue increased 18% for the six-month period, with operating margin expanding to 40% from 37%, driven by higher valuations and positive flows into alternative, traditional, and separately managed account offerings.
- Investment Advisors revenue increased 19% for the six-month period and operating margin increased to 51% from 48%, primarily due to growth in separately managed account fees and market appreciation.
- Private Banks revenue increased 9% for the six-month period and operating margin increased to 5% from 1%, reflecting higher SWP processing fees and lower certain non-capitalized costs.
- Institutional Investors revenue increased 9%, while the six-month operating margin remained 52%. Recent defined benefit plan client losses are expected to negatively affect third-quarter 2021 revenue.
- Operating expenses increased 10% for the six-month period, reflecting direct costs associated with revenue growth, personnel costs, stock-based compensation, and third-party vendor costs.
- SEI repurchased 3.238 million shares for $196.2 million during the first six months and increased its repurchase authorization by $250.0 million. Approximately $246.7 million remained available at June 30, 2021.
- The quarterly dividend increased to $0.37 per share from $0.35 per share in the prior-year quarter.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide formal revenue or earnings guidance. Management expects continued investment in the One SEI strategy during 2021 and believes operating cash flow, available borrowing capacity, and cash balances are sufficient to fund operations, technology and product investments, repurchases, and dividends.
- Results remain sensitive to capital-market conditions because a substantial portion of revenue is based on assets under management, administration, or advisement. A prolonged market downturn or client migration to lower-margin products could reduce revenue and earnings.
- COVID-19-related disruptions, variants, vaccination effectiveness, remote-work conditions, and changes in investor behavior remain sources of uncertainty. SEI reported that its remote capabilities continued to operate effectively.
- A ransomware incident at third-party developer M.J. Brunner resulted in unauthorized access to certain client data. SEI stated that its network and operations were not compromised, but regulatory bodies including the SEC and FFIEC requested information. The company does not expect related costs to be material.
- SEI is litigating the SS&C Advent matter involving software access and contractual rights. A preliminary injunction requiring continued access and support was affirmed on June 15, 2021. SEI expects the financial impact of litigation to be immaterial and believes alternative providers are available if necessary.
- SEI remains involved in Stanford-related litigation. The filing states that losses cannot reasonably be estimated, although SEI believes it has valid defenses. The Fifth Circuit affirmed summary judgment for SEI in the Lillie matter in May 2021.
- Unrecognized tax benefits and related interest totaled $19.1 million at June 30, 2021. The timing and ultimate resolution of tax examinations remain uncertain.
- Stock-based compensation expense was $19.9 million for the first six months, including a $0.8 million increase from a revised estimate of vesting targets. Management expects approximately $25.7 million of additional stock-based compensation expense during the remainder of 2021.
- The company’s principal risks include market volatility, cybersecurity and technology failures, third-party service-provider dependence, regulatory scrutiny, litigation, pricing pressure, client losses, foreign exchange and interest-rate fluctuations, and execution of acquisitions and strategic initiatives.
Important Facts for Investors to Verify
- Whether capital-market appreciation and asset flows continue to support asset-based fee revenue and LSV earnings.
- The effect of defined benefit plan client losses on Institutional Investors revenue beginning in the third quarter of 2021.
- Progress and costs associated with the One SEI strategy, SEI Wealth Platform enhancements, and the digital collaboration technology investment.
- Future stock repurchases, dividend payments, and remaining authorization under the repurchase program.
- Any developments in the Brunner cybersecurity investigation, SS&C Advent litigation, Stanford-related lawsuits, or regulatory examinations.
- Changes in cash generation, available credit capacity, contingent consideration obligations, and the company’s ability to maintain liquidity without drawing on its revolving facility.