SEIC

SEI Investments Company - 10-Q Summary (Period Ended September 30, 2005)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2005, and the nine-month period ended on the same date. SEI Investments Company is a global provider of investment processing, fund processing, and investment management business outsourcing solutions. The company operates through five segments: Private Banking and Trust, Investment Advisors, Enterprises, Money Managers, and Investments in New Businesses. As of September 30, 2005, the company administered $321.7 billion in mutual fund and pooled assets and managed $138.5 billion in assets.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 12% year-over-year for both the three-month and nine-month periods, driven by capital market appreciation increasing asset-based fees and new sales in the Investment Advisors, Enterprises, and Investments in New Businesses segments.
• Profitability: Net income increased 8% for the quarter and 9% for the nine-month period. However, operating income declined slightly (2% for the quarter, 1% for the nine months) due to increased operating costs and a $1.7 million net charge from a software write-off.
• Segment Performance:
  • Investment Advisors: Revenue up 16% (quarter) and 14% (nine months); Operating income up 16% and 12% respectively.
  • Private Banking and Trust: Revenue declined 2% (quarter) and 3% (nine months) due to the loss of fund processing clients, though offset by non-recurring project fees.
  • Investments in New Businesses: Revenue surged 49% (quarter) and 53% (nine months), though the segment remained unprofitable.
• Unconsolidated Affiliate: Equity in earnings from LSV Asset Management (43% ownership) grew significantly, contributing $20.9 million in the quarter and $53.8 million in the nine-month period, a 77% and 71% increase respectively.

Guidance, Outlook, and Risks

• Software Development: The company continues significant investment in its "Global Wealth Platform." Capitalized software costs were $49.9 million for the nine months ended September 30, 2005, compared to $24.0 million in the prior year. A $1.7 million net charge was recorded in Q1 2005 for a third-party software write-off.
• Capital Allocation: The company actively repurchased common stock, buying 3.5 million shares for $129 million in the first nine months of 2005. Approximately $37.1 million of the $1.0 billion authorization remained as of October 31, 2005.
• Liquidity: The company maintains a $200 million credit facility with no borrowings outstanding as of September 30, 2005. Cash and cash equivalents totaled $133.7 million.
• Risks and Contingencies:
  • Legal Proceedings: The company is a defendant in a class action regarding market timing practices (PBHG Complaint) and a contract dispute with Vermeg Services S.A.R.L. No provision has been made for these contingencies.
  • Market Risk: Revenues are sensitive to capital market performance. The company holds derivative instruments to hedge price risk on seed investments, which can cause earnings volatility.
  • Regulatory: Extensive government regulation affects operations, with recent compliance costs impacting general and administrative expenses.

Investor Verification Checklist

• Verify the sustainability of revenue growth in the "Investments in New Businesses" segment, which remains unprofitable despite high revenue growth.
• Monitor the impact of the "Global Wealth Platform" development costs on future operating margins and the timeline for full deployment.
• Assess the potential financial impact of the pending litigation (PBHG and Vermeg complaints) and any regulatory fines or settlements.
• Review the concentration of earnings from the unconsolidated affiliate (LSV Asset Management), which contributed significantly to net income growth.
• Confirm the status of the stock repurchase program and its effect on diluted earnings per share versus organic earnings growth.