SEI Investments Company Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2017; filed July 27, 2017. SEI provides investment processing, investment management and investment operations solutions globally. As of June 30, 2017, the company managed, advised or administered $809.3 billion of assets, including $307.4 billion under management and $497.5 billion under administration.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $372.3 million | $343.8 million | $732.3 million | $678.1 million |
| Income from operations | $97.2 million | $93.5 million | $190.7 million | $180.3 million |
| Net income | $91.8 million | $81.0 million | $180.5 million | $158.5 million |
| Diluted EPS | $0.57 | $0.49 | $1.11 | $0.96 |
| Operating margin | 26.1% | 27.2% | 26.0% | 26.6% |
| Net margin | 24.6% | 23.6% | 24.7% | 23.4% |
- Revenue increased 8% in both the quarter and year-to-date period. Asset management, administration and distribution fees rose 10% year to date, while information processing and software servicing fees increased 3%; transaction-based and trade execution fees declined 21%.
- Net income increased 13% in the quarter and 14% year to date. Results benefited from higher LSV earnings and a lower effective tax rate, partly offset by higher operating expenses.
- Equity in earnings from unconsolidated affiliate LSV increased 20% to $36.3 million in the quarter and 17% to $69.9 million year to date. LSV represented approximately 39% of SEI’s pretax income contribution before taxes and reflects an important earnings concentration.
- Cash flow from operations was $184.9 million year to date, compared with $163.5 million in the prior-year period. Investing activities used $46.9 million, including $33.3 million of capitalized software and $10.2 million of property and equipment additions.
- Cash and cash equivalents were $660.4 million at June 30, 2017, compared with $695.7 million at December 31, 2016. Total shareholders’ equity was $1.372 billion.
- SEI had no borrowings under its $300 million revolving credit facility at June 30, 2017. The facility expires in June 2021. In July, after the period end, SEI borrowed $40 million for cash management purposes, leaving $260 million available for general corporate purposes as of July 20, 2017.
- Year-to-date financing uses included $122.1 million for share repurchases and $88.9 million for dividends. The quarterly dividend was $0.28 per share, and approximately $98.7 million remained available under the repurchase authorization at June 30.
Material changes versus the prior comparable period
- Investment Advisors revenue increased 13% in the quarter and 14% year to date, with operating margins improving to 47% and 46%, respectively.
- Investment Managers revenue increased 18% in the quarter and 17% year to date; quarterly operating margin improved to 36% from 34%.
- Private Banks operating profit declined 68% in the quarter and 63% year to date. Margins fell to 3% from 10% in the quarter and to 3% from 9% year to date, primarily because of higher platform maintenance, support, personnel, consulting and amortization costs, as well as lower trade execution revenue.
- Institutional Investors revenue increased 5%, but operating margin declined to 50% from 51% due to higher direct and compensation costs and foreign-exchange effects.
- Capitalized software spending increased to $33.3 million from $19.6 million, including $28.0 million for the SEI Wealth Platform. Stock-based compensation increased to $12.4 million from $8.0 million year to date.
- The effective tax rate declined to 32.1% from 35.2% in the quarter and to 31.6% from 35.2% year to date, primarily because ASU 2016-09 requires excess tax benefits from stock-option exercises to be recognized in income tax expense in the period incurred.
- The prior-year period included a $2.8 million gain from the final contingent payment related to the sale of SEI Asset Korea; no comparable gain was recorded in 2017.
Outlook, commentary, risks and unusual items
- No specific revenue, earnings or margin guidance was provided. Management expects operating cash flow, available borrowing capacity and existing cash to fund operations, product and equipment investment, repurchases and dividends.
- On July 3, 2017, SEI acquired Archway Technology Partners and related entities for approximately $81.5 million in cash, with up to $8.0 million of contingent consideration. Archway will be integrated into Investment Managers; purchase accounting was not complete when the filing was issued.
- SEI expects to adopt the new revenue recognition standard, ASU 2014-09, in the first quarter of 2018. The company was still assessing effects on implementation fees, fund conversion fees, contract costs, presentation and disclosures, and expected to select a transition method by the third quarter of 2017.
- Key risks include capital-market declines, dependence on asset-based fees, LSV performance, competition and pricing pressure, technology and cybersecurity failures, third-party service-provider failures, regulatory changes and examinations, foreign-exchange volatility, litigation and client concentration.
- SEI and subsidiaries face seven Louisiana lawsuits related to Stanford Trust Company services. The company states that it has valid defenses but cannot reasonably estimate any potential loss. A separate Belgian claim seeks approximately $84 million against nine defendants, including two SEI subsidiaries; the appeal of a jurisdictional dismissal remained pending.
- The company reported no material changes to previously disclosed market-risk or risk-factor information and stated that its disclosure controls were effective as of June 30, 2017.
Important facts for investors to verify
- Whether revenue growth and asset balances remain supported by market appreciation and positive client cash flows rather than only organic sales.
- The sustainability of LSV’s contribution to earnings and the effect of market performance on LSV distributions and SEI’s equity-method income.
- Whether elevated Wealth Platform investment, capitalization and amortization costs improve future revenue and margins, particularly in Private Banks.
- The completed purchase accounting, integration results and contingent consideration for the Archway acquisition.
- The impact of ASU 2014-09 adoption on revenue timing, contract-cost capitalization, presentation and disclosures.
- Developments and potential financial exposure in the Stanford-related and Belgian litigation.
- Future stock repurchases, dividend funding, credit-facility borrowings and the company’s level of immediately accessible cash.