SEI Investments Company: Q3 2023 Form 10-Q Summary
Business Context and Reporting Period
SEI provides technology, investment processing, investment operations, asset management and related infrastructure services to wealth managers, financial institutions, investment managers, institutional investors and ultra-high-net-worth families. The filing covers the unaudited three and nine months ended September 30, 2023, compared with the corresponding 2022 periods.
As of September 30, 2023, SEI managed, advised or administered approximately $1.3 trillion of assets through its subsidiaries and significant partnerships. Total assets were $2.397 billion, and 131.6 million common shares were outstanding.
Financial Performance and Key Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total revenue | $476.8 million | $471.3 million | $1.435 billion | $1.534 billion |
| Income from operations | $108.5 million | $51.0 million | $322.8 million | $381.7 million |
| Net income | $115.7 million | $61.7 million | $341.5 million | $363.2 million |
| Diluted EPS | $0.87 | $0.45 | $2.54 | $2.63 |
| Operating margin | 22.8% | 10.8% | 22.5% | 24.9% |
| Net margin | 24.3% | 13.1% | 23.8% | 23.7% |
- Q3 revenue increased 1%, while nine-month revenue declined 6%. Asset management, administration and distribution fees increased 2% in Q3 but declined 2% for the first nine months. Information processing and software servicing fees declined 3% in Q3 and 21% for the first nine months.
- Q3 operating income increased 112% and net income increased 88%, primarily reflecting the absence of $57.0 million of 2022 voluntary separation program costs. Nine-month operating income declined 15% and net income declined 6%.
- Interest and dividend income increased to $11.1 million in Q3 and $29.5 million for the first nine months, compared with $4.0 million and $6.7 million, respectively, due primarily to higher interest rates.
- Equity in earnings from the 38.6%-owned LSV Asset Management affiliate was $29.9 million in Q3 and $91.5 million for the first nine months, up 12% and 3%, respectively.
- Average client assets under administration increased 14% in Q3 to $893.7 billion. Total ending assets managed, advised or administered increased 12% year over year to $1.319 trillion.
- Nine-month operating cash flow was $346.0 million, down from $428.5 million. Investing cash use was $48.2 million, and financing cash use was $294.9 million. Cash, cash equivalents and restricted cash totaled $854.7 million at September 30, 2023.
- SEI had no borrowings under its revolving credit facility. The $325.0 million facility expires in April 2026; $320.1 million was available for general corporate purposes as of October 12, 2023, after $4.9 million of letters of credit.
- SEI repurchased 4.05 million shares for $241.8 million during the first nine months and paid $114.8 million of dividends. Approximately $101.0 million remained available under the repurchase authorization at September 30, 2023.
Material Changes Versus the Prior Comparable Period
- The nine-month comparison was materially affected by an $88.0 million one-time early termination fee recorded in Q1 2022. A $10.5 million one-time early contractual buyout fee recorded in Q2 2023 partially offset the comparison.
- Private Banks revenue declined 18% for the first nine months, primarily because of the 2022 termination fee, lower processing revenue and foreign exchange effects. Its nine-month operating margin fell to 9% from 22%.
- Investment Advisors revenue declined 5% for the first nine months, reflecting lower SEI fund-program fees, partly offset by growth in separately managed accounts. Its nine-month margin declined to 41% from 45%.
- Institutional Investors revenue declined 12% and operating profit declined 20% for the first nine months, reflecting client losses and market depreciation, as well as a $4.5 million one-time client reimbursement charge.
- Investment Managers revenue increased 6% and operating profit increased 3% for the first nine months, driven by new products, additional alternative-fund services and positive client cash flows.
- Corporate overhead declined principally because the 2022 voluntary separation program costs did not recur. Personnel, compliance and strategic-development costs continued to pressure expenses.
- Capitalized software costs were $26.6 million for the first nine months, including $13.7 million for SEI Wealth Platform enhancements and $12.9 million for a new Investment Managers platform.
Guidance, Outlook, Risks and Unusual Items
- The filing does not provide formal earnings or revenue guidance. Management expects available cash, operating cash flow and borrowing capacity to fund operations, obligations and the stock repurchase program for at least the next 12 months and the foreseeable future.
- SEI expected to invest approximately $25.0 million in launching a new SEI-sponsored investment product during Q4 2023.
- SEI entered into an option agreement to acquire XPS Pensions (Nexus) Limited for up to £42.5 million, including £35.0 million of initial consideration and up to £7.5 million of deferred performance-based consideration. Closing was expected before year-end, subject to regulatory approval and other conditions.
- The company completed final contingent-consideration payments related to the Huntington Steele acquisition and had no remaining obligation for future payments.
- Key risks include capital-market and interest-rate fluctuations, client losses and fee pressure, investment performance, dependence on LSV, competition, technology or cybersecurity failures, data privacy, third-party service providers, regulatory examinations and enforcement, litigation, foreign exchange, employee retention and acquisition execution.
- Available-for-sale debt securities had $14.4 million of gross unrealized losses at September 30, 2023, principally from interest-rate increases. Management stated that the securities were government-agency-backed, were not intended to be sold and were not expected to require sale before recovery.
- SEI reported no material changes to previously disclosed risk factors, no material legal proceedings, effective disclosure controls and no material change in internal control over financial reporting.
Investor Verification Priorities
- Assess the sustainability of revenue growth after excluding the $88.0 million 2022 termination fee and the $10.5 million 2023 buyout fee.
- Monitor client flows, market levels and fee rates in Private Banks, Investment Advisors and Institutional Investors.
- Evaluate whether Investment Managers’ alternative-investment growth and higher assets under administration continue.
- Verify cash conversion, working-capital movements and the effect of continued share repurchases and dividends on liquidity.
- Track the timing, regulatory approval, consideration and performance conditions for the proposed Nexus acquisition.
- Review regulatory, cybersecurity, technology-development and third-party service-provider exposures, including costs related to compliance infrastructure.
- Monitor LSV earnings, distributions and assets under management because the affiliate contributed $91.5 million of pre-tax earnings during the first nine months.