SEI Investments Company — Form 10-Q Summary
Business Context and Reporting Period
SEI provides technology-driven investment processing, investment operations and investment management platforms to wealth managers, financial institutions, advisors, investment managers and institutional investors globally. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods.
As of September 30, 2020, SEI managed, advised or administered approximately $1.1 trillion of assets, including $330.2 billion under management and $754.5 billion under administration. LSV Asset Management, an unconsolidated affiliate in which SEI held a 38.8% interest, managed $82.1 billion.
Financial Results and Key Metrics
| Metric | Q3 2020 | Q3 2019 | Change | 9M 2020 | 9M 2019 | Change |
|---|---|---|---|---|---|---|
| Total revenue | $424.9 million | $416.3 million | +2% | $1.240 billion | $1.227 billion | +1% |
| Income from operations | $111.3 million | $120.6 million | -8% | $321.9 million | $344.3 million | -7% |
| Net income | $111.1 million | $132.2 million | -16% | $321.4 million | $372.7 million | -14% |
| Diluted EPS | $0.75 | $0.86 | -13% | $2.14 | $2.40 | -11% |
| Operating margin | 26.2% | 29.0% | -280 bps | 25.9% | 28.1% | -220 bps |
| Net margin | 26.1% | 31.8% | -570 bps | 25.9% | 30.4% | -450 bps |
Asset management, administration and distribution fees increased 3% in the third quarter and 2% for the first nine months. Information processing and software servicing fees were essentially flat in the quarter but declined 3% year to date. Expenses increased 6% in the quarter and 4% year to date, driven by personnel, consulting, outsourcing and technology-related costs.
Interest and dividend income declined substantially because of lower interest rates. Equity earnings from LSV declined 25% in the quarter and 23% year to date. The effective tax rate was 21.4% in the quarter and 22.0% year to date, compared with 18.9% and 21.0%, respectively, in the prior-year periods.
Cash Flow, Liquidity and Capitalization
- Operating cash flow was $396.5 million for the first nine months, compared with $381.5 million in 2019.
- Investing cash flow used $64.2 million, including $43.1 million of capital expenditures and $18.6 million of capitalized software costs.
- Financing cash flow used $401.8 million, including $327.1 million for share repurchases and $103.9 million for dividends.
- Cash, cash equivalents and restricted cash totaled $770.8 million at September 30, 2020, down from $844.5 million at December 31, 2019.
- Cash and cash equivalents were $767.7 million; the filing reports no drawn debt. A $300 million revolving credit facility had $288.4 million available after $11.6 million of letters of credit. The facility expires in June 2021.
- Management reported $392.1 million of free and immediately accessible cash as of October 21, 2020 and stated that operating cash flow, cash balances and borrowing capacity should fund operations, investment, repurchases and dividends.
- SEI repurchased 6.185 million shares for $325.6 million during the first nine months. On October 20, 2020, the board increased repurchase authorization by $250 million, leaving approximately $291.9 million available.
Material Changes Versus the Prior Comparable Period
- Revenue grew modestly, but profitability declined because expense growth exceeded revenue growth and LSV earnings fell.
- Average assets under administration increased 12% year to date to $697.0 billion, while average assets under management, excluding LSV, increased to $236.7 billion.
- The Private Banks segment experienced client losses and higher maintenance, support and migration costs. Nine-month operating profit declined 81%, and its operating margin fell to 1% from 6%.
- Investment Managers benefited from positive client cash flows and new business. Nine-month revenue increased 10%, operating profit increased 12%, and operating margin remained 36%.
- Investment Advisors revenue was flat, while Institutional Investors revenue declined 3% year to date.
- Investments in New Businesses generated a $27.4 million operating loss year to date, compared with an $11.1 million loss in 2019, reflecting increased investment in initiatives including One SEI and IT Services.
- LSV’s nine-month revenue declined 21% and net income declined 24%, reflecting lower assets, negative client flows, market volatility and client losses.
Guidance, Outlook, Risks and Unusual Items
- Management expects the full-year 2020 state effective tax rate to be approximately in line with the third-quarter rate.
- COVID-19 created market volatility, affected asset-based revenues and shifted client assets toward lower-margin liquidity products. Nearly the entire workforce was operating remotely, and management stated that remote capabilities had remained effective.
- A May 2020 ransomware attack at third-party vendor M.J. Brunner exposed certain client data. SEI stated that its network and operations were not compromised. Regulatory bodies, including the SEC and FFIEC, requested information, and related costs were not expected to be material, although additional costs may occur.
- A July 2020 failure of a Dell-EMC-supported storage array materially limited platform transaction activity for July 1 and 2. Systems were subsequently fully operational. SEI expects additional resiliency investments but could not yet estimate their total cost.
- SEI revised estimates regarding the vesting timing of certain performance-based stock options. The change was not material for the first nine months but is expected to affect the fourth quarter of 2020 and 2021. Remaining unrecognized stock-based compensation was approximately $59.1 million.
- Significant risks include capital-market and interest-rate fluctuations, cybersecurity and third-party service-provider failures, operational resilience, regulatory scrutiny, litigation, competition, client losses, LSV performance, foreign exchange and pandemic-related disruption.
- Seven lawsuits related to Stanford Trust Company remain in various stages, including appeals in the Lillie and Ahders matters. SEI stated that it cannot reasonably estimate any potential loss. In a separate SS&C Advent contract dispute, SEI seeks contractual and monetary remedies; management expects immaterial litigation costs and believes alternatives exist if a provider change becomes necessary.
Most Important Facts to Verify
- Whether revenue growth can continue despite lower LSV earnings, client losses and sensitivity to capital markets.
- The sustainability of higher operating costs, particularly Private Banks migration costs, Investment Managers personnel costs and Investments in New Businesses spending.
- The status and financial consequences of the Brunner ransomware investigation and the July infrastructure outage, including planned resiliency investments.
- Renewal or refinancing of the $300 million credit facility before its June 2021 expiration and any effect of LIBOR transition terms.
- Future share repurchases, dividends and their effect on liquidity and share count.
- Potential outcomes of the Stanford litigation, SS&C Advent matter, tax examinations and other regulatory proceedings.
- The effect of performance-based stock-option vesting estimates on future compensation expense and earnings volatility.