SEI Investments Company — Q1 2019 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 in the United States, Canada, the United Kingdom, continental Europe, and other markets. This unaudited report covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018.
As of March 31, 2019, SEI managed, advised, or administered approximately $945.0 billion of assets, including $331.7 billion under management and $608.9 billion under administration. LSV Asset Management, in which SEI held a 38.9% interest, managed $103.2 billion.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $400.8 million | $405.6 million | Down 1% |
| Income from operations | $103.6 million | $116.3 million | Down 11% |
| Operating margin | 25.8% | 28.7% | Down 290 basis points |
| Income before taxes | $146.3 million | $158.8 million | Down 8% |
| Net income | $114.0 million | $139.8 million | Down 18% |
| Diluted EPS | $0.73 | $0.86 | Down 15% |
| Effective tax rate | 22.1% | 11.9% | Up 1,020 basis points |
| Net cash from operations | $59.9 million | $104.2 million | Down 43% |
Asset management, administration and distribution fees were $313.9 million, down from $316.2 million. Information processing and software servicing fees were $86.9 million, down from $89.4 million. Expenses increased 3% to $297.3 million, driven primarily by higher compensation, consulting, technology, facilities, amortization, and depreciation costs.
Other income included a $37.3 million equity-method contribution from LSV, compared with $40.6 million in the prior-year quarter. Net investment gains were $1.3 million versus a $0.4 million loss, and net interest income increased to $4.1 million from $2.2 million.
At March 31, 2019, cash and cash equivalents were $669.3 million, compared with $754.5 million at December 31, 2018. Total assets were $2.0 billion and total shareholders' equity was $1.6 billion. The company reported no borrowings outstanding under its revolving credit facility; $13.8 million of letters of credit reduced available capacity to $286.2 million. The facility expires in June 2021.
Cash flow, capital allocation, and liquidity
- Operating cash flow was $59.9 million, compared with $104.2 million, primarily reflecting lower net income, lower LSV distributions, and working-capital changes.
- Investing activities used $15.7 million, including $7.3 million of property and equipment expenditures, $9.9 million of capitalized software costs, and net purchases of marketable securities.
- Financing activities used $132.6 million, including $90.8 million for share repurchases and $50.8 million for dividends, partially offset by $8.9 million of stock issuance proceeds.
- SEI repurchased 1.725 million shares for $88.8 million during the quarter at an average price of $51.47. Approximately $127.1 million remained available under the repurchase authorization at March 31, 2019.
- Management stated that operating cash flow, available borrowing capacity, and existing cash should provide adequate funding for operations, product and equipment investment, headquarters expansion, share repurchases, and dividends.
Material changes versus the prior comparable period
- Revenue declined modestly because lower assets under management reduced investment management fees, partially offset by growth in assets under administration and Investment Managers revenue.
- Average assets under management, excluding LSV, declined 4% to $223.2 billion, while average assets under administration increased 12% to $594.2 billion.
- Investment Managers revenue increased 8% to $104.6 million, supported by positive client cash flows; operating profit increased 6% to $35.6 million.
- Private Banks revenue declined 3% and operating profit declined 27%, reflecting lower international assets, reduced professional services activity, client losses, higher SWP-related support costs, and foreign-exchange effects.
- Investment Advisors revenue declined 4% and operating profit declined 10%; Institutional Investors revenue declined 6% and operating profit declined 7%.
- Corporate overhead increased to $20.0 million from $14.9 million, primarily because of non-recurring personnel-related costs, including severance.
- LSV revenue and net income each declined 8%, and SEI's equity-method earnings from LSV declined 8%.
- The effective tax rate increased substantially because of lower tax benefits from reduced stock-option exercise activity.
- SEI adopted ASC 842 lease accounting using the modified retrospective method, recording approximately $44.2 million of right-of-use assets and lease liabilities. Management stated that the adoption did not materially affect consolidated net income or cash flow.
Outlook, commentary, risks, and unusual items
Management did not provide quantitative full-year guidance in the filing. The company expects continued investment in the SEI Wealth Platform, new products, equipment, client migrations, and headquarters expansion. Capitalized SWP development costs were $9.9 million in Q1 2019, while SWP amortization expense increased to $10.4 million.
- Revenue and earnings remain sensitive to capital-market levels, asset flows, client portfolio allocation, investment performance, and foreign-exchange movements.
- Growth in SWP and other platforms may require higher non-capitalized personnel, consulting, technology, and support spending.
- SEI faces extensive regulatory oversight across its broker-dealer, investment-adviser, trust, banking, and international subsidiaries. Regulatory examinations, remediation, fines, sanctions, or business restrictions could materially affect results.
- Key operating risks include cybersecurity, third-party service-provider failures, transaction-processing errors, systems disruptions, data security, competition, pricing pressure, and the ability to retain qualified employees.
- The company is defending seven Louisiana lawsuits related to Stanford Trust Company. Remaining claims primarily involve alleged secondary liability under Louisiana securities law; SEI stated that it cannot reasonably estimate any potential loss.
- An ERISA class action concerning the SEI Capital Accumulation Plan seeks unspecified damages. The litigation was stayed pending non-binding mediation scheduled for May 7, 2019, and potential loss could not be estimated.
- Contingent consideration related to the Huntington Steele acquisition totaled $12.1 million at March 31, 2019, including $1.0 million classified as current.
- Unrecognized tax benefits, including interest and penalties, totaled $16.3 million. The company stated that the timing and ultimate resolution of tax examinations are uncertain.
Investor verification checklist
- Verify the sustainability of assets-under-administration growth and whether it converts into recurring revenue and margin expansion.
- Monitor market levels, net client flows, fee rates, and performance-fee trends affecting SEI and LSV assets under management.
- Assess whether SWP investment, amortization, maintenance, support, and migration costs moderate future operating margins.
- Review the effect of the higher effective tax rate and the future level of stock-option exercises on earnings and cash taxes.
- Confirm cash generation after dividends, share repurchases, capital expenditures, and software capitalization.
- Track the availability and covenant compliance of the revolving credit facility, letters of credit, and lease obligations.
- Follow developments in the Stanford litigation, ERISA class action, regulatory examinations, and related potential contingencies.
- Evaluate the performance and distributions of LSV, which contributed approximately one-quarter of SEI's pretax income in the quarter.