SEI Investments Company — Q3 2021 Form 10-Q Summary
Business context and reporting period
SEI provides technology-driven investment processing, investment operations, investment management, and wealth-management platforms to wealth managers, financial advisors, investment managers, family offices, institutional investors, and private investors. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
As of September 30, 2021, SEI managed, advised, or administered approximately $1.3 trillion of assets, including $391.5 billion under management and $866.3 billion under administration. LSV Asset Management, in which SEI held a 38.7% interest, managed $97.6 billion included in SEI’s assets under management.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | Change |
|---|---|---|---|
| Total revenue | $485.3 million | $424.9 million | +14% |
| Income from operations | $141.1 million | $111.3 million | +27% |
| Operating margin | 29.1% | 26.2% | +2.9 percentage points |
| Net income | $138.0 million | $111.1 million | +24% |
| Diluted EPS | $0.97 | $0.75 | +29% |
| Effective tax rate | 21.7% | 21.4% | +0.3 percentage points |
| Metric | Nine months 2021 | Nine months 2020 | Change |
|---|---|---|---|
| Total revenue | $1.417 billion | $1.240 billion | +14% |
| Income from operations | $410.0 million | $321.9 million | +27% |
| Operating margin | 28.9% | 26.0% | +2.9 percentage points |
| Net income | $401.3 million | $321.4 million | +25% |
| Diluted EPS | $2.79 | $2.14 | +30% |
| Net cash from operating activities | $483.9 million | $396.5 million | +22% |
Q3 revenue consisted of $393.3 million of asset management, administration and distribution fees and $92.0 million of information processing and software servicing fees. Nine-month amounts were $1.143 billion and $273.2 million, respectively.
Equity in earnings from LSV contributed $35.0 million in Q3 and $103.4 million for the nine-month period, increases of 24% and 20%, respectively. The nine-month effective tax rate was 22.2%, compared with 22.0% in 2020.
Nine-month operating cash flow was $483.9 million. Investing activities used $87.5 million, including $22.5 million for property and equipment, $19.5 million for capitalized software, and a net $34.1 million for marketable securities. Financing activities used $387.4 million, principally reflecting $315.8 million of share repurchases and $105.5 million of dividends paid.
Financial position, liquidity, and capital allocation
- Cash and cash equivalents were $793.9 million at September 30, 2021, compared with $784.6 million at December 31, 2020. Cash, cash equivalents, and restricted cash totaled $794.2 million.
- Total assets were $2.192 billion and total liabilities were $353.7 million. Shareholders’ equity was $1.838 billion.
- The new five-year revolving credit facility, entered into April 23, 2021, provides borrowing capacity of $325.0 million and expires in April 2026. No material borrowings were reported; $5.8 million of letters of credit reduced availability to approximately $319.2 million.
- SEI was in compliance with its credit-facility covenants. Management stated that operating cash flow, cash balances, and borrowing capacity should fund operations, investment, repurchases, and dividends.
- SEI repurchased 5.2 million shares for $316.1 million during the first nine months and had approximately $126.8 million of repurchase authorization remaining at September 30, 2021. The company declared a $0.37-per-share dividend during the period.
- Free and immediately accessible cash for general corporate purposes was $376.1 million as of October 21, 2021, excluding cash held by foreign subsidiaries and certain operating or regulatory accounts.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by higher average assets under management and administration, market appreciation, positive client flows in several offerings, higher SWP processing balances, and stronger LSV results.
- Average client assets under administration increased 21% to $845.2 billion for the first nine months. Average assets under management increased 22% to $391.6 billion, including LSV.
- Investment Managers revenue increased 19% in both Q3 and the nine-month period, with operating margin improving to 39% and 40%, respectively, from 36% in each 2020 comparable period.
- Investment Advisors revenue increased 21% in Q3 and 19% for nine months; its nine-month operating margin increased to 51% from 48%.
- Private Banks revenue increased 7% in Q3 and 9% for nine months, while its operating margin improved to 5% from approximately 2% and 1%, respectively.
- Institutional Investors revenue increased 8% in Q3 and 9% for nine months, but Q3 margin declined to 51% from 52%; defined-benefit client losses partially offset market appreciation and new OCIO sales.
- Operating expenses increased 10% for both Q3 and nine months, reflecting higher direct costs, personnel expense, competitive labor markets, and increased stock-based compensation. Nine-month stock-based compensation rose to $31.2 million from $20.5 million, including a $3.2 million increase from revised vesting estimates.
- Share count declined: shares outstanding were 139.3 million at September 30, 2021 versus 143.4 million at December 31, 2020, primarily due to repurchases.
Guidance, outlook, commentary, risks, and unusual items
- No formal quantitative revenue or earnings guidance was provided in the filing. Management expects continued investment in the One SEI strategy through the fourth quarter of 2021 and into 2022.
- Management noted that future performance remains sensitive to capital-market levels because a substantial portion of revenue is asset-based. Market declines, unfavorable client portfolio shifts, negative flows, pricing pressure, and client losses could reduce revenue and earnings.
- COVID-19 remote-work capabilities remained effective, but the pandemic, variants, vaccination effectiveness, economic conditions, government actions, infrastructure disruption, and changes in investor behavior remain uncertain.
- SEI continued to incur costs related to its One SEI strategy, including platform integration, modularization, and development. These costs were primarily recognized in Investments in New Businesses; no related software development costs had been capitalized.
- A third-party developer, M.J. Brunner, experienced a ransomware attack in 2020 involving access to certain client data. SEI stated that its network and operations were not compromised and that related costs were not expected to be material. SEC and FFIEC-related inquiries remained ongoing, and the SEC identified limited, discrete deficiencies in third-party vendor-management execution.
- The SS&C Advent litigation continued. A preliminary injunction requiring continued software access was affirmed in June 2021. Several contract and related claims remained pending after an October 2021 ruling. SEI expects any provider transition to be a multi-year process but believes alternatives are available and the near-term client-service impact would be immaterial.
- Stanford-related litigation remained unresolved, although the Fifth Circuit affirmed summary judgment for SEI in the Lillie and Ahders matters. The company could not reasonably estimate a potential loss.
- Unrecognized tax benefits totaled $18.6 million, including interest and penalties. The timing and ultimate resolution of related tax examinations remain uncertain.
- Stock-based compensation may be volatile because expense depends on management’s estimates of when performance-based vesting targets will be achieved. Approximately $72.4 million of unrecognized compensation cost remained at September 30, 2021.
Most important facts for investors to verify
- Whether continued market appreciation and asset flows support the elevated assets-under-management and administration levels that drive a significant portion of revenue.
- The sustainability of operating-margin expansion amid higher personnel costs, stock-based compensation, technology investment, and competitive pricing pressure.
- Progress and spending related to the One SEI strategy, SWP enhancements, and other platform investments.
- Developments in the Advent litigation, Stanford-related matters, regulatory inquiries, and the Brunner ransomware investigation.
- Future capital allocation, including the remaining repurchase authorization, dividends, potential acquisitions, and use of the revolving credit facility.
- Exposure to LSV performance, client outflows, defined-benefit client losses, foreign exchange movements, cybersecurity incidents, third-party service providers, and changing financial-services regulation.