SEI INVESTMENTS CO quarterly report, Q1 FY2022

SEI Investments Company 10-Q Summary

Business context and reporting period

SEI Investments Company provides technology, investment processing, investment operations, and investment management platforms to wealth managers, financial advisors, investment managers, family offices, institutional investors, and private investors. The filing covers the unaudited three months ended March 31, 2022, compared with the three months ended March 31, 2021.

At March 31, 2022, SEI managed, advised, or administered approximately $1.3 trillion of assets, including $385.3 billion under management and $899.6 billion under administration. LSV Asset Management, in which SEI held a 38.7% interest, managed $96.0 billion.

Financial performance and key metrics

Metric	Q1 2022	Q1 2021	Change
Total revenue	$581.4 million	$455.7 million	28%
Income from operations	$214.8 million	$132.8 million	62%
Net income	$190.3 million	$129.5 million	47%
Diluted earnings per share	$1.36	$0.89	53%
Net cash from operating activities	$260.4 million	$136.6 million	91%

Asset management, administration, and distribution fees increased 7% to $394.1 million.
Information processing and software servicing fees increased 113% to $187.3 million, primarily reflecting an $88.0 million one-time early termination fee from a significant Private Banks client.
Total operating expenses increased 14% to $366.6 million. Compensation, benefits, and other personnel costs rose to $160.5 million from $137.2 million.
Operating margin was approximately 36.9%, compared with 29.1% in the prior-year quarter. Net margin was approximately 32.7%, compared with 28.4%.
Equity in earnings of LSV declined 3% to $32.5 million. LSV revenue and net income declined 2% each, primarily because of negative client cash flows and client losses.
Effective income tax rate increased to 23.1% from 22.6%, primarily because of lower tax benefits from stock option exercises.
Cash, cash equivalents, and restricted cash totaled $908.2 million at March 31, 2022, up from $831.8 million at December 31, 2021.
SEI had $30.0 million outstanding under its $325.0 million revolving credit facility after repaying $10.0 million during the quarter. The facility matures in April 2026.
Total liabilities were $399.5 million and shareholders’ equity was $1.973 billion at March 31, 2022.
Capital expenditures and capitalized software additions totaled $15.9 million. The company paid $55.5 million of dividends and repurchased 1.713 million shares for $100.1 million.

Material changes versus the prior comparable period

Private Banks revenue increased 82% to $213.5 million and operating margin increased to 43% from 6%, substantially because of the $88.0 million early termination fee.
Investment Advisors revenue rose 5%, but operating profit declined 6% and margin fell to 46% from 51% because of higher personnel, direct, and promotional costs.
Institutional Investors revenue increased 3%, while operating profit declined 9% and margin fell to 48% from 54%, reflecting costs associated with the SEI Novus and Atlas Master Trust acquisitions.
Investment Managers revenue increased 15% and operating profit increased 9%, while margin declined to 37% from 39% because of higher personnel, vendor, consulting, and new-business costs.
Average client assets under administration increased 9% to $893.4 billion. Average assets under management increased 3% to $390.1 billion, but first-quarter market declines partially offset growth from 2021 market appreciation and client flows.
Amortization increased to $16.9 million from $14.4 million due largely to acquired intangible assets. Management expects amortization related to older capitalized software to decline beginning in the third quarter of 2022.
Accumulated other comprehensive loss increased to $28.2 million from $19.8 million, primarily due to foreign-currency translation losses and unrealized investment losses associated with higher interest rates.

Cash flow, liquidity, outlook, and risks

Operating cash flow increased by $123.9 million year over year, helped by higher earnings, working-capital movements, and a $54.6 million increase in advances due from the unconsolidated affiliate.
Management stated that operating cash flow, cash balances, and available borrowing capacity should fund operating needs, dividends, and the stock repurchase program for at least the next 12 months and the foreseeable future.
Management intended to repay the remaining $30.0 million revolving-credit balance during 2022. The filing states that the company was in compliance with its credit covenants.
The filing contains inconsistent credit-facility availability figures: Note 6 reports $288.7 million available as of April 21, 2022 after $6.3 million of letters of credit, while the MD&A reports $359.4 million. The correct amount should be verified against the filed credit agreement disclosure.
Management does not provide formal revenue or earnings guidance in the filing. Results remain sensitive to capital-market levels, assets under management and administration, client flows, investment performance, pricing pressure, and client contract renewals.
Key risks include cybersecurity and data-protection failures, technology outages or defects, reliance on third-party providers, regulatory examinations and enforcement, competition, employee retention, foreign exchange and interest-rate movements, acquisition integration, and litigation.
In the SS&C Advent litigation, a New York court on April 15, 2022 granted SEI’s motion for partial summary judgment and rejected SS&C’s cross-motion. Remaining claims and an appellate proceeding continued; management expected the financial impact of litigation to be immaterial.
Stanford-related litigation remained subject to potential ancillary proceedings, although major federal class-action dismissals had been affirmed and the plaintiffs did not seek further Supreme Court review. The company could not estimate any potential loss.
The company recorded no material liability for contractual indemnifications and stated that other ordinary-course proceedings were not expected to materially affect its financial position, while acknowledging that outcomes could affect results in particular periods.

Facts investors should verify

How much of the 28% revenue growth and 62% operating-income growth was attributable to the nonrecurring $88.0 million termination fee.
Whether the Private Banks segment can sustain its higher reported margin after the termination fee is excluded.
The correct April 21, 2022 availability under the revolving credit facility, given the conflicting figures in the filing.
The sustainability of asset-based revenue amid first-quarter 2022 market declines, client losses, and negative cash flows at LSV.
Integration costs, revenue contribution, and future performance of the SEI Novus, Atlas Master Trust, and other 2021 acquisitions.
Potential effects of regulatory proceedings, the SS&C Advent dispute, Stanford-related matters, and other contingencies that the filing states cannot currently be estimated.
The extent to which continued share repurchases and dividends affect cash balances, debt repayment, and future share count.