SEI Investments Company — 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, 2018, compared with the corresponding 2017 periods.
At September 30, 2018, SEI managed, advised, or administered approximately $919.9 billion of assets, including $339.2 billion under management and $575.8 billion under administration. LSV Asset Management, in which SEI held a 38.9% interest, managed approximately $109.4 billion.
Financial Performance and Key Metrics
| Metric | Q3 2018 | Q3 2017 | Change | 9M 2018 | 9M 2017 | Change |
|---|---|---|---|---|---|---|
| Total revenues | $408.7 million | $386.0 million | 6% | $1.219 billion | $1.118 billion | 9% |
| Income from operations | $112.4 million | $99.2 million | 13% | $339.0 million | $290.0 million | 17% |
| Net income | $128.3 million | $101.7 million | 26% | $389.8 million | $282.2 million | 38% |
| Diluted EPS | $0.80 | $0.63 | 27% | $2.41 | $1.74 | 39% |
| Operating margin | 27.5% | 25.7% | +180 bps | 27.8% | 25.9% | +190 bps |
| Net margin | 31.4% | 26.4% | +500 bps | 32.0% | 25.2% | +680 bps |
Revenue growth was driven primarily by market appreciation, positive client cash flows, higher asset management fees, increased assets processed on the SEI Wealth Platform, and the contribution from the 2017 Archway acquisition. Equity in earnings from LSV increased 6% in the quarter and 13% year to date, to $41.7 million and $123.4 million, respectively.
The effective tax rate declined to 18.6% from 27.7% in the third quarter and to 17.2% from 30.2% for the first nine months. The decline primarily reflected the 2017 Tax Cuts and Jobs Act, including the lower federal statutory rate, as well as tax adjustments and stock-option exercise benefits.
- Operating cash flow: $417.9 million for the first nine months, compared with $316.4 million in 2017.
- Cash and restricted cash: $745.5 million at September 30, 2018, compared with $688.5 million at September 30, 2017 and $747.8 million at December 31, 2017.
- Free immediately accessible cash: $385.1 million as of October 18, 2018, excluding cash held by foreign subsidiaries and cash needed for subsidiary operations or regulatory requirements.
- Debt: No borrowings were outstanding under the $300.0 million revolving credit facility at September 30, 2018. The facility expires in June 2021 and was fully available as of October 18, 2018.
- Investing cash flow: $77.4 million used, including $33.4 million of capitalized software, $21.7 million of property and equipment additions, and $5.8 million for the Huntington Steele acquisition.
- Financing cash flow: $336.2 million used, including $290.6 million of share repurchases, $94.3 million of dividends, and $30.0 million of revolving-credit repayments, partially offset by $78.7 million from stock-option exercises.
- Share repurchases: 4.4 million shares repurchased for $289.5 million during the first nine months; approximately $81.1 million of authorization remained at September 30.
Material Changes Versus the Prior Comparable Period
- Investment Advisors revenue increased 9% in Q3 and 10% year to date, with operating margin improving to 48% and 47%, respectively.
- Institutional Investors revenue increased 4% in Q3 and 7% year to date; operating margin reached 51% in both periods.
- Investment Managers revenue increased 11% in Q3 and 16% year to date, partly due to Archway; Q3 operating margin improved to 36% from 34%.
- Private Banks revenue was essentially flat in Q3 but rose 4% year to date. Q3 operating profit declined 27%, while nine-month operating profit rose 72%; maintenance, support, migration, and other non-capitalized platform costs remained a constraint.
- Average assets under management, excluding LSV, increased 9% year to date to $229.4 billion, while average assets under administration increased 11% to $546.6 billion.
- SEI adopted ASC 606 in 2018 using the modified retrospective method, recording a $14.4 million cumulative adjustment to retained earnings. The adoption had no material effect on consolidated net income; it reduced reported revenue and expenses for soft-dollar arrangements and deferred certain contract acquisition costs.
- SEI acquired Huntington Steele on April 2, 2018, for a preliminary total purchase price of $17.9 million, including $12.1 million of contingent consideration.
- Total assets increased to $1.939 billion from $1.853 billion at December 31, 2017, while total liabilities declined to $308.8 million from $376.5 million, primarily reflecting repayment of the revolving credit facility and lower accrued liabilities.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide specific quantitative revenue, earnings, or margin guidance. Management stated that operating cash flow, existing cash, and available borrowing capacity should fund ongoing operations, product and equipment investment, share repurchases, and future dividends.
- Management highlighted exposure to capital-market performance, which affects asset-based fees and earnings, as well as LSV's investment performance.
- Key operating risks include cybersecurity, technology and processing failures, third-party service-provider failures, competition and pricing pressure, product-development execution, foreign exchange, interest rates, client losses, and retention of key personnel.
- The company faces extensive regulatory oversight across the United States, United Kingdom, Ireland, Canada, and other jurisdictions. Regulatory examinations, remediation, enforcement actions, fines, or registration restrictions could materially affect results or reputation.
- SEI and subsidiaries were defendants in seven Louisiana lawsuits related to alleged involvement in Stanford Trust Company certificate-of-deposit sales. The company reported that the outcome remains uncertain and that a loss estimate cannot reasonably be made.
- In October 2018, SEI and related entities were named in an ERISA class action concerning investment options and affiliated products in the SEI Capital Accumulation Plan. Damages were unspecified, and the company could not estimate a potential loss.
- The credit facility contains covenants restricting certain transactions and, upon default, could restrict dividends and share repurchases. SEI reported compliance with all covenants.
- Upcoming accounting matters include adoption of the lease standard in the first quarter of 2019. The company expected recognition of right-of-use assets and lease liabilities but had not finalized the impact.
Most Important Facts for Investors to Verify
- Whether continued market appreciation and client inflows sustain growth in assets under management and administration and related fee revenue.
- The durability of the lower effective tax rate following the 2017 Tax Act and the extent to which tax benefits from stock-option exercises recur.
- Progress, costs, and client adoption of the SEI Wealth Platform and other technology investments, including the effect of capitalization and amortization policies.
- The contribution, retention, and integration costs of Archway and Huntington Steele, including the $12.1 million contingent consideration liability.
- Future share-repurchase and dividend levels relative to operating cash flow and available liquidity.
- Developments in the Stanford-related litigation, the Stevens ERISA complaint, regulatory examinations, and any potential financial or reputational exposure.
- The effect of the 2019 lease standard and other pending accounting standards on reported assets, liabilities, expenses, and disclosures.