SEI Investments Company — Form 10-Q Summary
Reporting period: Quarterly and year-to-date periods ended September 30, 2022, compared with September 30, 2021. Financial statements are unaudited and amounts are in thousands except per-share data and asset balances.
Business Context
SEI provides technology-driven wealth and investment management platforms, investment processing, investment operations, investment management, and related outsourcing services to wealth managers, financial advisors, investment managers, family offices, institutional investors, and private investors. At September 30, 2022, SEI reported $378.2 billion of assets under management, $785.4 billion of client assets under administration, and $1.2 trillion of total assets managed, advised, or administered, including LSV assets.
Financial Performance and Position
| Metric | Three months ended September 30, 2022 | Year-over-year change | Nine months ended September 30, 2022 | Year-over-year change |
|---|---|---|---|---|
| Total revenues | $471.3 million | Down 3% | $1.534 billion | Up 8% |
| Income from operations | $51.0 million | Down 64% | $381.7 million | Down 7% |
| Operating margin | 10.8% | Down from 29.1% | 24.9% | Down from 29.0% |
| Net income | $61.7 million | Down 55% | $363.2 million | Down 9% |
| Diluted EPS | $0.45 | Down 54% | $2.63 | Down 6% |
| Net cash from operations | Not separately reported | — | $428.5 million | Down from $483.9 million |
Revenue mix: Asset management, administration and distribution fees were $372.1 million in the third quarter and $1.149 billion year to date. Information processing and software servicing fees were $99.2 million in the third quarter and $385.6 million year to date; the year-to-date increase was substantially affected by an $88.0 million early termination fee recorded in the first quarter.
Expenses and profitability: Total expenses increased 22% in the third quarter and 15% year to date. Compensation, benefits and other personnel costs increased to $227.1 million in the third quarter and $545.5 million year to date. A $57.0 million voluntary separation program charge was recognized in the third quarter, materially reducing operating profit and margins.
Liquidity and capital: Cash and cash equivalents were $791.4 million at September 30, 2022, compared with $831.4 million at December 31, 2021. The company generated $428.5 million of operating cash flow and used $381.3 million in financing activities. It repaid the $40.0 million outstanding revolving-credit balance, leaving no borrowings outstanding. As of October 20, 2022, approximately $319.0 million was available under the $325.0 million credit facility after outstanding letters of credit.
Capital returns: SEI repurchased 4.573 million shares for $258.8 million during the first nine months and paid $109.8 million of dividends. The company declared dividends of $0.40 per share during the period. Approximately $172.5 million remained available under the repurchase authorization at September 30, 2022.
Balance sheet: Total assets were $2.295 billion and total liabilities were $365.1 million at September 30, 2022. Shareholders’ equity was $1.930 billion. Accumulated other comprehensive loss increased to $67.6 million, primarily from foreign-currency translation losses and unrealized investment losses.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue declined 3%, while year-to-date revenue increased 8%, primarily because of the $88.0 million early termination fee and new client conversions.
- Third-quarter operating income fell 64% and net income fell 55%, primarily due to the $57.0 million voluntary separation program charge, lower market-related revenue, higher personnel and consulting costs, and lower earnings from LSV.
- Average client assets under administration declined 8% in the third quarter to $786.6 billion, although the nine-month average increased 2% to $859.2 billion.
- Ending total assets managed, advised, or administered declined 8% to $1.181 trillion. Assets under management declined 3% to $378.2 billion and client assets under administration declined 9% to $785.4 billion.
- Equity in earnings from LSV decreased 14% year to date to $88.9 million, reflecting negative client cash flows, market depreciation, and client losses.
- Segment trends were mixed: year-to-date Private Banks revenue increased 26%, Investment Managers revenue increased 10%, Investment Advisors revenue decreased 4%, and Institutional Investors revenue decreased 3%.
- The company’s average diluted share count declined 4% year to date, reflecting share repurchases, partially offset by stock option exercises.
Guidance, Outlook, Risks, and Unusual Items
Management stated that operating cash flow, cash balances, and available borrowing capacity should be sufficient to fund operations, obligations, and the stock repurchase program for at least the next 12 months and the foreseeable future. The filing does not provide specific revenue, earnings, or margin guidance.
- Market declines, interest-rate changes, foreign-exchange movements, client losses, investment performance, and changes in assets under management or administration may reduce fee revenue and earnings.
- Competitive labor markets, increased compliance spending, regulatory changes, technology investment, cybersecurity threats, service outages, and reliance on third-party providers may increase costs or disrupt operations.
- The company remains subject to extensive regulatory examinations, investigations, litigation, and potential fines or other sanctions. Management reported no material change in the Stanford Trust Company matters.
- The SS&C Advent litigation was settled confidentially on September 26, 2022, and dismissed by court order on October 3, 2022.
- Unrecognized tax benefits totaled $19.2 million, including interest and penalties. The timing and ultimate resolution of tax examinations remain uncertain.
- Available-for-sale securities had $15.0 million of gross unrealized losses at September 30, 2022, primarily attributable to interest-rate increases. Management stated it did not intend, and was not required, to sell the securities before recovery.
- The Pennsylvania corporate tax-rate reduction and the Inflation Reduction Act’s corporate minimum tax and stock-repurchase excise tax were enacted during the period. Management did not expect a material impact but was still evaluating the provisions.
- The voluntary separation program is expected to result in most participating employees leaving during the first quarter of 2023, with all departures expected by the end of 2023.
Important Facts for Investors to Verify
- Separate recurring revenue growth from the $88.0 million non-recurring early termination fee when assessing future revenue trends.
- Determine whether the $57.0 million voluntary separation charge is non-recurring and assess expected future cost savings and execution risks.
- Monitor assets under management and administration, client flows, market exposure, and the effect of further market or currency declines on fee revenue.
- Review LSV’s performance, client retention, distributions, and contribution to SEI’s earnings and operating cash flow.
- Confirm the company’s continuing share-repurchase authorization, dividend policy, and available liquidity after capital returns.
- Assess exposure to regulatory proceedings, cybersecurity and operational risks, tax contingencies, and unresolved ordinary-course litigation.