SEI Investments Company: 2019 Q3 Form 10-Q Summary
Business context and reporting period
SEI Investments Company provides investment processing, investment management and investment operations platforms to financial institutions, advisors, institutional investors, investment managers and ultra-high-net-worth families globally. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
At September 30, 2019, SEI managed, advised or administered approximately $1.0 trillion of assets, including $334.7 billion under management and $662.0 billion under administration. LSV Asset Management, in which SEI held a 38.9% interest, managed $100.3 billion.
Financial performance and key metrics
| Metric | Q3 2019 | Q3 2018 | Change | Nine months 2019 | Nine months 2018 | Change |
|---|---|---|---|---|---|---|
| Total revenue | $416.3 million | $408.7 million | +2% | $1.227 billion | $1.219 billion | +1% |
| Income from operations | $120.6 million | $112.4 million | +7% | $344.3 million | $339.0 million | +2% |
| Net income | $132.2 million | $128.3 million | +3% | $372.7 million | $389.8 million | -4% |
| Diluted EPS | $0.86 | $0.80 | +8% | $2.40 | $2.41 | Flat |
| Operating margin | 29.0% | 27.5% | +1.5 points | 28.1% | 27.8% | +0.3 points |
| Net margin | 31.7% | 31.4% | +0.3 points | 30.4% | 32.0% | -1.6 points |
Asset management, administration and distribution fees were $330.9 million in the quarter and $969.8 million year to date. Information processing and software servicing fees were $85.3 million in the quarter and $256.8 million year to date.
Interest and dividend income, net of interest expense, increased to $4.0 million in Q3 and $12.3 million year to date. Equity in earnings from LSV declined 10% in Q3 to $37.6 million and 9% year to date to $112.8 million. The nine-month effective tax rate increased to 21.0% from 17.2%, primarily because of lower tax benefits from stock option exercises.
Liquidity, cash flow, debt and capital allocation
- Cash, cash equivalents and restricted cash totaled $770.9 million at September 30, 2019, compared with $745.5 million at September 30, 2018 and $758.0 million at December 31, 2018.
- Operating cash flow was $381.5 million for the first nine months of 2019, down from $417.9 million in 2018.
- Investing cash outflow was $43.0 million, including $30.5 million of property and equipment additions and $26.8 million of capitalized software costs.
- Financing cash outflow was $321.7 million, primarily reflecting $262.9 million of share repurchases and $100.7 million of dividend payments.
- The $300 million revolving credit facility expires in June 2021. At September 30, $288.4 million was available for general corporate purposes after $11.6 million of letters of credit. The company was in compliance with all covenants and had no borrowings outstanding.
- SEI repurchased 4.95 million shares for $267.2 million during the first nine months and had approximately $198.7 million of repurchase authorization remaining at September 30.
- Total assets were $2.041 billion and shareholders’ equity was $1.703 billion at September 30. Operating lease liabilities totaled $45.7 million following adoption of ASC 842.
Material changes versus the prior comparable period
- Investment Managers was the primary growth contributor: Q3 revenue increased 11% and nine-month revenue increased 10%, supported by positive client cash flows and higher assets under administration. Its nine-month operating margin improved to 36% from 35%.
- Private Banks revenue declined 1% in Q3 and 3% year to date because of client losses, lower non-recurring fees, lower international investment management fees and foreign exchange effects. Cost reductions improved its nine-month operating margin to 6% from 5%.
- Institutional Investors revenue declined 4% in both periods, primarily due to defined-benefit client losses and foreign exchange effects. Cost reductions kept Q3 margin at 54% versus 51% in the prior year.
- Investment Advisors revenue was flat in Q3 and down 1% year to date. Separately managed account fees increased, but were offset by lower fund-program fees and client shifts toward lower-fee products.
- Average client assets under administration increased 14% year to date to $623.9 billion, while average assets under management declined 2% to $330.8 billion.
- LSV’s lower revenue, earnings and assets under management reduced SEI’s equity income contribution. LSV’s average assets under management declined 6% year to date to $102.5 billion.
- Corporate overhead increased to $52.8 million from $46.4 million year to date, primarily due to non-recurring personnel-related costs, including severance.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal quantitative revenue or earnings guidance. Management states that operating cash flow, available borrowing capacity and cash balances should fund ongoing operations, product and equipment investment, share repurchases, headquarters expansion and future dividends. Headquarters expansion is scheduled for completion in mid-2020, with approximately $20 million of related expenditures expected in 2020.
- SEI capitalized $26.0 million of SEI Wealth Platform development costs year to date, while related amortization increased to $31.6 million from $29.7 million.
- The company adopted ASC 842 leases using the modified retrospective method, recording $44.2 million of lease assets and liabilities at January 1, 2019. Management reported no material impact on net income or cash flow.
- SEI expects adoption of several accounting standards in 2020, including the current expected credit loss, goodwill impairment, fair value disclosure and variable-interest-entity guidance; management does not expect material impacts.
- The Stanford Trust Company litigation remains unresolved. Key claims were dismissed in the Lillie and Ahders proceedings, but an appeal was filed in the Ahders matter. The company cannot reasonably estimate any potential loss.
- An ERISA class-action settlement involving the SEI Capital Accumulation Plan had preliminary approval, with a fairness hearing scheduled for December 18, 2019. Management expected final approval by year-end and considered the financial impact immaterial.
- Principal risks include capital-market and asset-level fluctuations, LSV performance, client losses, pricing pressure, technology and cybersecurity failures, third-party service-provider risk, regulatory examinations and sanctions, litigation, foreign exchange, interest rates, LIBOR transition, Brexit-related uncertainty, talent retention and business continuity.
- Stock-based compensation expense was $15.6 million year to date. Changes in estimates regarding performance-based vesting could create future earnings volatility.
Most important facts for investors to verify
- Whether Investment Managers’ asset-administration growth and positive client flows offset weakness in Private Banks, Institutional Investors and LSV.
- The sustainability of operating-margin improvement after cost containment, severance effects and continuing SWP investment.
- The effect of lower LSV earnings and performance fees on future consolidated earnings.
- Cash conversion, capital expenditures and the pace of share repurchases relative to operating cash flow.
- Available liquidity, credit-facility covenant compliance and the treatment of restricted or subsidiary-held cash.
- The ultimate resolution and potential exposure from Stanford-related litigation and the ERISA settlement.
- The impact of market performance, client cash flows, fee-rate changes and foreign exchange on assets under management and administration.