SEI Investments Company — Form 10-Q Summary
Business Context and Reporting Period
SEI Investments Company provides technology-enabled investment processing, investment operations, and investment management platforms to wealth managers, financial advisers, investment managers, family offices, institutional investors, and private investors. The filing covers the unaudited three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
As of June 30, 2022, SEI managed, advised, or administered approximately $1.3 trillion of assets, including $403.6 billion under management and $889.0 billion under administration. LSV Asset Management, in which SEI held a 38.6% interest, managed $81.9 billion.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2022 | Year-over-Year Change | Six Months Ended June 30, 2022 | Year-over-Year Change |
|---|---|---|---|---|
| Total revenue | $481.7 million | +1% | $1.063 billion | +14% |
| Income from operations | $115.9 million | -15% | $330.7 million | +23% |
| Operating margin | 24.1% | 28.6% in 2021 | 31.1% | 28.9% in 2021 |
| Net income | $111.3 million | -17% | $301.6 million | +15% |
| Diluted EPS | $0.81 | -13% | $2.17 | +19% |
| Net cash from operating activities | Not separately reported | — | $330.6 million | +$5.6 million |
Asset management, administration, and distribution fees were $382.6 million in the second quarter and $776.7 million year to date. Information processing and software servicing fees were $99.1 million in the second quarter and $286.4 million year to date.
Net income benefited from a $62.3 million equity-method contribution from LSV during the first six months, down 9% from the prior-year period. Net investment losses were $3.1 million year to date, compared with a $0.7 million gain in 2021. The effective tax rate was 23.1% for both the quarter and six-month period, versus 22.3% and 22.5%, respectively, in the comparable 2021 periods.
Liquidity, Cash Flow, Debt, and Capital Allocation
- Cash, cash equivalents, and restricted cash were $772.0 million at June 30, 2022, down $59.7 million from December 31, 2021.
- Operating cash flow was $330.6 million; investing activities used $42.5 million; and financing activities used $332.2 million.
- SEI repaid the entire $40.0 million revolving-credit borrowing during the first six months. The credit facility has total capacity of $325.0 million and expires in April 2026.
- As of July 15, 2022, $319.0 million was available for general corporate purposes after $6.0 million of outstanding letters of credit. The company was in compliance with its debt covenants.
- SEI repurchased 3.683 million shares for $209.4 million during the first six months and declared dividends of $0.40 per share. Approximately $221.9 million remained authorized for repurchases at June 30, 2022.
- Management stated that operating cash flow, available borrowing capacity, and cash balances should fund operating needs and the stock-repurchase program for at least the next 12 months and the foreseeable future.
Material Changes Versus the Prior Comparable Period
- Six-month revenue increased 14%, principally because of an $88.0 million one-time early termination fee from a significant Private Banks investment-processing client. The fee was recognized in the first quarter and materially increased Private Banks revenue and operating profit.
- Second-quarter operating performance weakened: revenue rose only 1%, while expenses increased 8%, reducing operating income 15% and net income 17%.
- Operating expenses increased primarily from higher personnel, consulting, professional, data-processing, and amortization costs, reflecting business growth, competitive labor markets, and the 2021 acquisitions of SEI Novus and Atlas Master Trust.
- Average assets under administration increased 7% to $895.4 billion for the first six months, while average assets under management increased 3% to $400.0 billion. Ending equity and fixed-income assets declined 18% year over year, partly offset by growth in collective trust and liquidity-fund assets.
- LSV earnings declined because of negative client cash flows, market depreciation, and client losses. Foreign-currency movements and lower-fee product mix also pressured revenue.
- SEI repurchased more shares and paid higher dividends than in the prior-year period, while shares used for diluted EPS declined to 138.8 million from 144.8 million.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- SEI initiated a voluntary separation program for eligible long-tenured U.S. employees. Management expects a one-time personnel-cost increase of $54 million to $58 million in the third quarter of 2022, with most departures expected by year-end.
- Amortization of certain older SEI Wealth Platform software was expected to decline beginning in the third quarter because the initial 2007 development-cost amortization period ended in the second quarter.
- Management identified capital-market declines, fee pressure, investment performance, client losses or nonrenewals, competition, technology and cybersecurity failures, third-party service-provider risks, regulatory change, foreign exchange, employee retention, litigation, and acquisition execution as material risks.
- The SS&C Advent litigation remains ongoing. SEI’s federal antitrust appeal was denied on June 30, 2022, but a New York state court previously granted SEI summary judgment on key contract issues. Management expects the litigation process may continue for multiple years and currently expects its financial impact to be immaterial.
- The company has other ordinary-course legal, regulatory, and tax matters. It reported $18.5 million of gross uncertain tax positions, including interest and penalties, but could not estimate the timing or total potential changes from tax examinations.
- Available-for-sale debt securities had $6.8 million of net unrealized losses at June 30, 2022, primarily from interest-rate increases. The securities were primarily GNMA obligations, and management did not expect settlement below amortized cost.
- No material changes to previously disclosed risk factors or market-risk disclosures were reported. Management concluded that disclosure controls were effective and that no material change occurred in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Separate recurring revenue and earnings from the $88.0 million one-time client termination fee when evaluating ongoing growth and margins.
- Assess the expected third-quarter $54 million to $58 million voluntary-separation charge and any related equity-compensation modifications.
- Monitor market-sensitive assets under management, client assets under administration, fee mix, client flows, and the performance of LSV.
- Verify the sustainability of substantial share repurchases and dividends relative to operating cash flow and available liquidity.
- Track operating-expense growth, particularly personnel and consulting costs, and the effect of acquisitions on margins.
- Follow the SS&C Advent litigation, regulatory examinations, uncertain tax positions, and other contingencies for potential changes in financial exposure.