SEI Investments Company 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 high-net-worth families. The filing covers the unaudited three and six months ended June 30, 2015, compared with the same periods in 2014. At June 30, 2015, SEI and its affiliates managed or administered $661.4 billion, including $262.0 billion under management and $399.4 billion under administration.
Key financial metrics
| Metric | Three months ended June 30, 2015 | Year-over-year change | Six months ended June 30, 2015 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $337.7 million | 6% | $663.2 million | 7% |
| Income from operations | $95.9 million | 2% | $189.0 million | 10% |
| Net income | $86.2 million | 4% | $170.9 million | 8% |
| Diluted EPS | $0.51 | 6% | $1.00 | 10% |
| Operating margin | 28.4% | Down from 29.4% | 28.5% | Up from 27.7% |
| Net margin | 25.5% | Down from 26.0% | 25.8% | Up from 25.4% |
Revenue growth was led by asset management, administration and distribution fees, which increased 9% in the second quarter and 9% in the first six months. Information processing and software servicing fees declined 3% in the second quarter and 0.5% for the six-month period, partly because the 2014 second quarter included $6.0 million of non-recurring professional services revenue. Transaction-based and trade execution fees increased 7% in the second quarter and 3% for the six-month period.
Equity in earnings of unconsolidated affiliates, primarily SEI's approximately 39.2% interest in LSV Asset Management, was $37.3 million in the second quarter and $71.3 million for the six months, increases of 9% and 8%, respectively. LSV's earnings benefited from higher assets under management and performance fees.
Operating expenses increased 7% in the second quarter and 6% for the six months. Drivers included higher subadvisory costs, personnel costs, consulting and outsourcing costs, technology expenses and amortization. Six-month amortization increased to $21.0 million from $18.8 million, while capitalized software additions declined to $16.1 million from $18.3 million.
Cash flow from operations was $156.8 million for the six months, compared with $141.8 million in 2014. Investing activities used $34.1 million, including $15.7 million of property and equipment additions and $16.1 million of capitalized software costs. Financing activities used $162.6 million, including $133.4 million for share repurchases and $80.0 million for dividends. Cash and cash equivalents were $624.8 million at June 30, 2015, versus $667.4 million at December 31, 2014.
SEI had no borrowings under its $300.0 million credit facility at June 30, 2015 and was in compliance with all covenants. Management reported $412.3 million of cash and cash equivalents that was free and immediately accessible for general corporate purposes as of July 17, 2015.
Material changes versus the prior comparable period
- Six-month revenue increased 7%, while income from operations increased 10% and diluted EPS increased 10%.
- Average assets under management increased 9% to $174.8 billion, excluding LSV, and average assets under administration increased 14% to $390.4 billion.
- Ending assets under management and administration increased 10% to $661.4 billion.
- Investment Advisors revenue increased 11% and Institutional Investors revenue increased 7% for both the quarter and six-month period. Investment Managers revenue increased 8% in the quarter and 7% year to date.
- Private Banks second-quarter operating profit declined 30% because of higher costs, the absence of the prior-year $6.0 million non-recurring project fee and higher Wealth Platform-related costs; six-month operating profit nevertheless increased 12%.
- The company recorded a $2.8 million gain from the sale of SEI Asset Korea in the first half of 2015, compared with $5.6 million in the prior-year period.
- SEI wrote off the remaining carrying value of its investment in Gao Fu Limited during the second quarter; the filing does not provide a separate dollar amount for the write-off.
- SEI repurchased 2.8 million shares for $133.4 million during the first six months and 1.27 million shares for $61.0 million during the second quarter. The remaining repurchase authorization was $176.4 million as of July 17, 2015.
- The quarterly dividend increased to $0.24 per share from $0.22 per share.
Guidance, outlook, risks and unusual items
The filing does not provide formal quantitative earnings or revenue guidance. Management stated that operating cash flow, available borrowing capacity and existing cash should fund operations, product and equipment investment, share repurchases and future dividends. The London operations relocation was expected to be completed in the fourth quarter of 2015; total facility improvements were estimated at at least $13.7 million, with $3.2 million expended as of June 30.
Key operating risks include capital-market declines, poor investment performance, dependence on LSV, client losses and fee compression, technology and cybersecurity failures, third-party service-provider failures, operational processing risks, foreign-currency movements, interest-rate changes, regulatory requirements and retention of key personnel.
Material legal matters include multiple Louisiana lawsuits concerning alleged involvement in Stanford Trust Company and Stanford International Bank certificate-of-deposit activities, a shareholder derivative action alleging excessive investment advisory fees, and a Belgian claim seeking approximately $84 million against multiple defendants, including two SEI subsidiaries. SEI states that it believes it has valid defenses, but cannot reasonably estimate potential losses for the Louisiana and derivative litigation. The filing also notes that regulatory examinations, investigations, remediation or enforcement proceedings could result in material financial, operational or reputational effects.
The company guaranteed up to $45.0 million of LSV Employee Group III's obligations; the remaining unpaid principal balance of the guaranteed term loan was $29.2 million as of July 17, 2015. No payment obligation had arisen, and management expected the borrower to meet future obligations.
Management concluded that disclosure controls and procedures were effective as of June 30, 2015, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether growth in assets under management and administration persists if market appreciation slows or reverses.
- The sustainability of LSV's contribution to earnings, including the effect of performance fees and distributions.
- Whether Wealth Platform development, maintenance, amortization and personnel costs pressure Private Banks and Investment Advisors margins.
- The status and potential exposure from the Louisiana, Curd and Belgian legal proceedings, for which the filing does not provide a clear estimated loss.
- The availability and covenant terms of the $300.0 million credit facility, which expires in February 2017.
- Progress and final cost of the London facility relocation.
- Future share repurchases, dividend payments and the remaining $176.4 million authorization.
- Potential effects of regulatory examinations, new financial-services regulations and accounting changes, including the revenue-recognition and consolidation standards scheduled for future adoption.