SEI Investments Company 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 high-net-worth families. This unaudited Form 10-Q covers the three and six months ended June 30, 2016, compared with the corresponding 2015 periods.
- Assets under management and administration at June 30, 2016 were $707.0 billion, up 7% year over year, comprising $269.3 billion under management and $437.7 billion under administration.
- Average assets under management and administration for the first six months increased 5% to $681.3 billion.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $343.8 million, up 2% | $678.1 million, up 2% |
| Income from operations | $93.5 million, down 2% | $180.3 million, down 5% |
| Operating margin | 27.2%, versus 28.4% | 26.6%, versus 28.5% |
| Net income | $81.0 million, down 6% | $158.5 million, down 7% |
| Diluted EPS | $0.49, down 4% | $0.96, down 4% |
| Operating cash flow | Not separately provided | $159.5 million, up from $156.8 million |
- Six-month revenue growth was led by asset management, administration and distribution fees of $513.7 million, up 2%, and information processing and software servicing fees of $148.4 million, up 3%.
- Six-month expenses increased 5% to $497.8 million, exceeding revenue growth. Personnel, consulting, data processing and amortization costs were among the principal increases.
- Equity in earnings of unconsolidated affiliates, primarily LSV Asset Management, declined 17% to $59.5 million for the six months. LSV earnings were affected by lower assets under management and reduced performance fees.
- The effective tax rate was 35.2% for the six months, compared with 35.5% in the prior-year period.
- Cash and cash equivalents were $594.8 million at June 30, 2016, compared with $679.7 million at December 31, 2015. Free and immediately accessible cash was $290.3 million as of July 21, 2016.
- The company had no borrowings under its credit facility and reported no financial liabilities under its fair-value disclosures.
- Net cash used in investing activities was $32.0 million, including $19.6 million of capitalized software and $9.0 million of property and equipment additions.
- Net cash used in financing activities was $210.0 million, including $155.7 million for share repurchases and $84.6 million for dividends.
Material Changes Versus the Prior Comparable Period
- Revenue increased modestly, but operating income and net income declined because expenses grew faster than revenue and LSV earnings decreased.
- Investment Advisors revenue increased 4% for the six months, while its operating margin declined to 44% from 47% due to higher personnel, servicing, platform and amortization costs.
- Investment Managers revenue increased 6%, but operating margin declined to 35% from 38% as personnel, technology, operational and consulting costs increased.
- Institutional Investors revenue declined 1% and operating margin declined to 51% from 52%, reflecting market volatility, client losses and foreign-exchange effects.
- Private Banks revenue increased 1%, while operating margin declined to 9% from 10% for the six months. The quarter showed improved margin, but year-to-date results were pressured by platform costs and currency effects.
- LSV’s average assets under management declined 10% to $77.2 billion for the six months; SEI’s ownership interest was reduced from approximately 39.2% to 38.9% following an employee partnership-interest issuance.
- SEI repurchased 3.6 million shares for $154.1 million during the six months. Approximately $159.0 million remained available under the repurchase authorization at June 30, 2016. The quarterly dividend increased to $0.26 per share from $0.24.
- The company adopted new consolidation and fair-value disclosure guidance during the first quarter; management concluded that the adoption did not require consolidation of the pooled investment vehicles for which SEI provides services.
Outlook, Commentary, Risks and Unusual Items
- Management expects costs related to maintenance, enhancements and support for the SEI Wealth Platform to continue increasing through the remainder of 2016 and into 2017. These costs are primarily expensed rather than capitalized.
- SEI capitalized $16.1 million for Wealth Platform enhancements and $3.5 million for a new Investment Managers application during the first six months.
- Market volatility, lower asset valuations, foreign-exchange movements and a stronger U.S. dollar negatively affected asset-based fees and international results. The company does not currently hedge foreign-currency exposure.
- The United Kingdom’s EU referendum increased market and currency volatility. The U.K. operation represented approximately 7% of six-month consolidated revenue.
- The company entered into a new five-year, $300 million senior unsecured revolving credit facility expiring in June 2021, with a potential $100 million expansion subject to conditions. SEI was in compliance with its covenants and had no borrowings at quarter-end.
- SEI recognized a final $2.8 million pretax contingent payment gain from the sale of SEI Asset Korea in the six-month period. No further such payments are indicated.
- Material legal proceedings include Louisiana litigation related to Stanford Trust Company and a shareholder derivative action alleging excessive investment-advisory fees. A separate Belgium matter seeks approximately $84 million from multiple defendants. The company states that it cannot reasonably estimate potential losses and intends to defend the matters vigorously.
- Management identified regulatory examinations, cybersecurity, operational and technology risks, capital-market conditions, LSV performance, litigation, foreign exchange and changing financial-services regulation as significant risks. No material changes to previously disclosed risk factors were reported.
Most Important Facts to Verify
- Whether revenue growth and higher client assets can offset continued platform investment, personnel and consulting-cost increases.
- The sustainability of LSV earnings and the effect of lower LSV assets, performance fees and SEI’s reduced ownership percentage.
- The pace and magnitude of share repurchases, dividend payments and their effect on cash balances and share count.
- The amount of cash that is operationally or regulatorily restricted versus freely available, including foreign-subsidiary cash.
- Potential financial and reputational exposure from the Louisiana, shareholder derivative and Belgium legal proceedings.
- The effect of Brexit-related currency volatility and the company’s unhedged foreign-currency exposure.
- Future accounting effects from the pending revenue-recognition, lease, financial-instrument and share-based-payment standards.