SEIC

SEI Investments Company 2004 Annual Report Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2004. SEI Investments Company is a leading global provider of outsourced business solutions for the financial services industry, serving investors and investment firms. The company operates through five segments: Private Banking and Trust, Investment Advisors, Enterprises, Money Managers, and Investments in New Businesses. As of year-end, SEI administered over $288 billion in mutual fund and pooled assets and managed over $120 billion in assets across 22 offices in 12 countries.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 9% to $692.3 million, driven by higher asset-based fees due to market appreciation and new business sales in the Enterprises, Money Managers, and Investments in New Businesses segments.
• Profitability: Net income rose 18% to $169.0 million. A significant driver was the unconsolidated affiliate, LSV Asset Management, which contributed approximately 64% of the earnings growth. LSV's equity earnings increased from $22.5 million in 2003 to $45.7 million in 2004.
• Segment Performance:
  • Private Banking and Trust: Revenues declined 7% due to the loss of a large bank mutual fund complex and fee compression, though new sales partially offset these losses.
  • Investment Advisors: Revenues grew 16% due to asset appreciation and the gross recognition of pass-through fees.
  • Money Managers: Revenues surged 39% driven by new business in alternative investments.
  • Investments in New Businesses: Revenues increased 45% but the segment reported an operating loss of $20.3 million due to heavy investment in global expansion and the family wealth solution.
• Stock Repurchases: The company repurchased 4.1 million shares in 2004 at an average price of $32.83, totaling $135.5 million.

Guidance, Outlook, and Risks

• Technology Investment: Management continues to invest heavily in the "Global Wealth Management Platform," capitalizing $37.0 million in software development costs in 2004. This is critical for future expansion and operational leverage.
• Accounting Changes: The adoption of SFAS 123(R) in 2005 will require expensing the fair value of employee stock options, which is expected to increase compensation expenses and negatively impact reported earnings.
• Market Risks: Revenues are highly sensitive to capital market performance as a significant portion is asset-based. Declines in market values would reduce fees. Additionally, currency fluctuations and interest rate changes pose risks to global operations and money fund fees.
• Legal Contingency: A subsidiary (SIDCO) is named as a defendant in a class action lawsuit regarding market timing practices in PBHG mutual funds. The company intends to defend vigorously, and no provision has been made for potential losses.

Investor Verification Checklist

• LSV Dependency: Verify the sustainability of earnings growth given that LSV Asset Management contributed 64% of the year-over-year earnings increase.
• Private Banking Headwinds: Assess the impact of continued client losses and fee compression in the Private Banking and Trust segment, which remains the largest revenue contributor (42%).
• Capitalization of Software: Review the recoverability of the $37.0 million in capitalized software costs for the Global Wealth Management Platform.
• Stock Buyback Impact: Confirm the remaining authorization for the stock repurchase program ($47.8 million remaining as of Feb 2005) and its effect on future EPS.
• Legal Exposure: Monitor the status of the Pilgrim Baxter class action lawsuit for potential financial impact.