SEI Investments Company: Q1 2020 Form 10-Q Summary
Business context and reporting period
SEI Investments Company provides technology-driven investment processing, investment operations, and investment management platforms to wealth managers, financial institutions, advisers, investment managers, institutional investors, and ultra-high-net-worth families. The filing covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019. The period included significant market volatility and the onset of the COVID-19 pandemic.
As of March 31, 2020, SEI managed, advised, or administered approximately $920.2 billion of assets, including $283.4 billion under management and $632.3 billion under administration.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $414.8 million | $400.8 million | +3% |
| Income from operations | $110.2 million | $103.6 million | +6% |
| Operating margin | 26.6% | 25.8% | +0.8 percentage points |
| Income before taxes | $139.2 million | $146.3 million | -5% |
| Net income | $109.2 million | $114.0 million | -4% |
| Diluted EPS | $0.72 | $0.73 | -1% |
| Net margin | 26.3% | 28.4% | Down |
| Net cash from operations | $99.0 million | $59.9 million | +$39.1 million |
Asset management, administration, and distribution fees increased 6% to $331.9 million. Information processing and software servicing fees declined 5% to $82.9 million. Expenses increased 2% to $304.5 million. Other income declined primarily because equity in earnings of unconsolidated affiliate LSV Asset Management fell 20% to $29.9 million, while investment results changed from a $1.3 million gain to a $4.0 million loss.
Cash, cash equivalents, and restricted cash totaled $750.0 million at March 31, 2020, compared with $672.8 million a year earlier and $844.5 million at December 31, 2019. Free and immediately accessible cash was reported at $354.5 million as of April 17, 2020. The company had no reported borrowings under its $300 million credit facility, with $288.4 million available after outstanding letters of credit of $11.6 million. The facility expires in June 2021, and SEI was in compliance with its covenants.
Operating cash flow funded investments and shareholder returns. Investing cash outflows were $17.4 million, including $20.7 million of property and equipment additions and $6.5 million of capitalized software. Financing cash outflows were $165.1 million, including $130.6 million for share repurchases and $52.5 million for dividends.
Material changes versus the prior comparable period
- Revenue increased 3%, supported by higher average assets under administration and growth in the Investment Advisors and Investment Managers segments.
- Private Banks revenue declined 4% and operating profit declined 65% to $2.6 million, primarily due to client losses, lower processing fees, market volatility, and higher personnel and consulting costs.
- Investment Advisors revenue increased 8% and operating profit increased 18%; operating margin improved to 49% from 45%.
- Institutional Investors revenue declined 1% and operating profit declined 1%; operating margin remained 52%.
- Investment Managers revenue increased 11% and operating profit increased 19%; operating margin improved to 36% from 34%.
- Investments in New Businesses generated a $7.5 million operating loss versus a $2.9 million loss in the prior-year quarter, reflecting substantially higher expenses.
- LSV revenue declined 17%, net income declined 20%, and SEI’s share of LSV earnings declined by $7.4 million. LSV’s average assets under management fell 16% to $88.1 billion.
- Ending assets under management declined 15% to $283.4 billion, while client assets under administration increased 4% to $632.3 billion. Total assets under management, advisement, and administration declined 3% to $920.2 billion.
- SEI repurchased 2.433 million shares for $127.4 million and increased the repurchase authorization by $250 million on March 18, 2020. Approximately $240.1 million remained authorized at March 31, 2020.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide specific quantitative earnings or revenue guidance in the filing. Management stated that operating cash flow, available borrowing capacity, and existing cash should provide adequate funding for operations, product and equipment investment, share repurchases, headquarters expansion, and dividends.
COVID-19 had not materially disrupted operations as of the filing date. Nearly the entire workforce was working remotely, and management reported that business-resiliency plans were functioning effectively. However, market volatility reduced asset-based fee revenue, shifted client assets toward lower-margin liquidity products, and could continue to pressure revenue and earnings if market disruption or governmental restrictions persist. Restrictions affecting outsourced operations, particularly in India, could also impair service delivery.
Headquarters expansion was scheduled for completion in the fourth quarter of 2020, with approximately $15.1 million of remaining expenditures expected. Management noted that prolonged COVID-19-related work restrictions could delay completion.
Key ongoing risks include capital-market declines, client asset outflows, LSV performance, technology and cybersecurity failures, third-party service-provider risks, regulatory scrutiny, pricing pressure, foreign-exchange and interest-rate movements, litigation, and business-continuity challenges.
SEI disclosed seven Stanford Trust Company-related lawsuits and related appeals. The company believes it has valid defenses but cannot reasonably estimate a potential loss. A settlement of the SEI Capital Accumulation Plan litigation was approved on March 3, 2020 and was not material. SEI also initiated litigation against SS&C Advent concerning contractual obligations; management expects litigation costs to be immaterial and does not expect near-term service disruption.
Unusual items included a $4.0 million net investment loss caused primarily by market-related unrealized losses, a $13.1 million after-tax foreign-currency translation loss included in other comprehensive income, and a $6.9 million stock-based compensation expense. The company adopted the expected credit loss standard and the simplified goodwill impairment standard on January 1, 2020 without a material impact.
Most important facts for investors to verify
- Whether continued market volatility and COVID-19-related asset outflows reduce asset-based fees and further shift client assets into lower-margin liquidity products.
- The sustainability of LSV distributions and earnings, which materially supported operating cash flow and other income.
- The expiration and refinancing implications of the $300 million credit facility in June 2021, including its covenants and LIBOR transition provisions.
- The pace and cost of SWP development, headquarters expansion, and related capital expenditures.
- The status and potential exposure of the Stanford Trust litigation, SS&C Advent matter, regulatory examinations, and uncertain tax positions.
- The company’s continued use of cash for share repurchases and dividends relative to liquidity needs and future operating performance.