SEI Investments Company: Q1 2023 Form 10-Q Summary
Business Context and Reporting Period
SEI provides investment processing, operations, technology, administration, and investment management platforms to wealth managers, financial institutions, investment managers, institutional investors, and high-net-worth families. The filing covers the unaudited three months ended March 31, 2023, compared with the three months ended March 31, 2022.
SEI managed, advised, or administered approximately $1.3 trillion in client assets through its subsidiaries and significant partnerships at March 31, 2023.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $469.1 million | $581.4 million | (19%) |
| Income from operations | $101.8 million | $214.8 million | (53%) |
| Operating margin | 21.7% | 36.9% | Down 15.2 points |
| Net income | $107.0 million | $190.3 million | (44%) |
| Diluted EPS | $0.79 | $1.36 | (42%) |
| Net cash from operating activities | $114.4 million | $260.4 million | (56%) |
- Asset management, administration and distribution fees were $371.8 million, down from $394.1 million.
- Information processing and software servicing fees were $97.3 million, down from $187.3 million. The prior-year period included an $88.0 million early termination fee from a significant Private Banks client.
- Interest and dividend income increased to $8.8 million from $0.8 million, primarily because of higher interest rates.
- Equity in earnings from LSV Asset Management was $28.9 million, down 11% year over year. SEI owned approximately 38.6% of LSV.
- Cash, cash equivalents, and restricted cash totaled $834.7 million at March 31, 2023, compared with $853.4 million at December 31, 2022.
- Total assets were $2.32 billion and total liabilities were $304.2 million at March 31, 2023.
- The company reported no outstanding revolving credit borrowings at quarter-end. Its $325.0 million credit facility expires in April 2026; $320.1 million was available for general corporate purposes as of April 18, 2023.
- SEI repurchased 1.361 million shares for $80.3 million and paid $57.8 million in dividends during the quarter.
Material Changes Versus the Prior Comparable Period
- Revenue and earnings declined primarily because Q1 2022 benefited from the $88.0 million one-time Private Banks termination fee, while Q1 2023 reflected lower asset-based fees and client losses.
- Average assets under management in equity and fixed-income programs, excluding LSV, declined 14% to $167.8 billion, reflecting market depreciation during 2022 and negative cash flows.
- Total assets under management increased 6% to $410.2 billion, mainly because Investment Managers collective trust fund assets increased 71% to $146.2 billion.
- Total client assets, including assets under management, advisement, administration, and platform-only assets, declined 2% to $1.281 trillion.
- Segment operating margins declined in Private Banks to 7% from 43%, Investment Advisors to 40% from 46%, Institutional Investors to 45% from 48%, and Investment Managers to 34% from 37%.
- Operating expenses were broadly stable at $367.4 million versus $366.6 million, as higher personnel, compliance, and technology costs were offset by lower amortization and certain direct costs.
- Capitalized software development costs increased to $9.0 million from $6.6 million, including $4.3 million for a new Investment Managers platform.
- Operating cash flow decreased by $146.1 million, primarily due to lower net income and unfavorable working-capital changes, including accrued liabilities.
Guidance, Outlook, Risks, and Unusual Items
Management stated that available cash, operating cash flow, and borrowing capacity are expected to be sufficient to fund operations and the stock repurchase program for at least the next 12 months and the foreseeable future. The filing does not provide formal revenue or earnings guidance.
- Management cited competitive labor markets, increased compliance investment, regulatory costs, client losses, market performance, and negative or changing client flows as important operating factors.
- SEI amended its credit facility on April 17, 2023 to add SOFR as an alternative reference rate in place of LIBOR.
- The stock repurchase authorization was increased by $250.0 million on April 18, 2023, leaving approximately $262.5 million available.
- Unrecognized tax benefits totaled $17.3 million, including interest and penalties. The timing and ultimate resolution of tax examinations remain uncertain.
- Remaining contingent consideration related to the Huntington Steele acquisition was $8.8 million at March 31, 2023. Beginning in April 2023, SEI or the sellers could demand immediate payment; neither party had done so as of April 18, 2023.
- SEI faces risks from capital-market fluctuations, investment performance, client and contract losses, competition, cybersecurity and service interruptions, software defects, third-party providers, regulatory examinations and enforcement, litigation, privacy requirements, foreign exchange, interest rates, and employee retention.
- The company reported various ordinary-course legal claims that it does not currently believe are material, but stated that future losses could adversely affect results in the periods in which matters are resolved.
- Management concluded that disclosure controls were effective and that no material change occurred in internal control over financial reporting during the quarter.
Most Important Facts to Verify
- Whether the decline in recurring Private Banks and asset-based revenue stabilizes after the comparison with the Q1 2022 termination fee.
- Trends in client flows, equity and fixed-income market values, and assets under management in Investment Advisors and Institutional Investors.
- Whether Investment Managers’ significant increase in collective trust fund assets produces sustainable fee growth, given that those products generally carry lower fees than customized programs.
- The effect of personnel, compliance, technology, and regulatory costs on operating margins.
- Future earnings contributions and client retention at LSV Asset Management.
- Cash deployment, continued share repurchases, dividends, and the company’s use of its available credit facility.
- Resolution and potential financial impact of regulatory inquiries, tax positions, legal claims, and the Huntington Steele contingent consideration.