SEI Investments Company — Q1 2018 Form 10-Q Summary
Business context and reporting period
SEI Investments Company provides investment processing, investment management, and investment operations platforms to financial institutions, advisors, institutional investors, investment managers, and ultra-high-net-worth families. The filing covers the unaudited three months ended March 31, 2018, compared with the three months ended March 31, 2017. All financial amounts below are in thousands unless otherwise noted.
As of March 31, 2018, SEI managed, advised, or administered $869.0 billion of assets, including $334.7 billion under management and $530.1 billion under administration. LSV Asset Management, an unconsolidated affiliate, managed $108.2 billion.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenues | $405,598 | $359,984 | 13% |
| Income from operations | $116,316 | $93,517 | 24% |
| Net income | $139,838 | $88,737 | 58% |
| Diluted earnings per share | $0.86 | $0.55 | 56% |
| Net cash provided by operating activities | $104,174 | $73,012 | 43% |
| Cash, cash equivalents and restricted cash at period-end | $751,806 | $664,872 | 13% |
Operating margin was approximately 28.7%, compared with 26.0% in the prior-year quarter. Net margin was approximately 34.5%, compared with 24.7%. The unusually high net margin reflected the substantially lower effective tax rate and the contribution from LSV.
- Asset management, administration and distribution fees increased 13% to $316,209.
- Information processing and software servicing fees increased 11% to $89,389.
- Total expenses increased 9% to $289,282, primarily from higher personnel, consulting, technology, and direct asset-management costs.
- Equity in earnings of LSV increased 21% to $40,607; SEI owned a 38.9% partnership interest.
- The effective tax rate declined to 11.9% from 31.0%, primarily because of the 2017 Tax Cuts and Jobs Act and higher tax benefits from stock-option exercises.
Financial condition, cash flow, debt, and liquidity
- Total assets were $1.894 billion at March 31, 2018, compared with $1.853 billion at December 31, 2017. Shareholders’ equity increased to $1.614 billion from $1.477 billion.
- Operating cash flow was $104.2 million. Investing activities used $15.4 million, including $12.9 million of capitalized software development and $5.6 million of property and equipment additions.
- Financing activities used $87.3 million, including $88.0 million for share repurchases and $47.2 million for dividends, partially offset by $57.9 million of proceeds from stock-option exercises.
- Borrowings under the revolving credit facility declined to $20.0 million at March 31, 2018 from $30.0 million at December 31, 2017. The remaining $20.0 million was repaid in April 2018, leaving the full $300.0 million facility available as of April 19, 2018.
- Free and immediately accessible cash for general corporate purposes was $315.9 million as of April 19, 2018. Management stated that operating cash flow, cash balances, and borrowing capacity should fund operations, investment, repurchases, and dividends.
Material changes versus the prior comparable period
- Revenue growth was driven by market appreciation, positive client cash flows, higher assets under management and administration, and the contribution from the Archway acquisition completed in the third quarter of 2017. Archway contributed $5.5 million of Q1 revenue.
- Ending assets under management, advisement, and administration increased 12% to $869.0 billion. Average assets under management increased 17% to $343.5 billion, while average client assets under administration increased 12% to $530.3 billion.
- Segment operating profit increased in Private Banks to $10.0 million from $4.1 million, Investment Advisors to $46.7 million from $40.7 million, Institutional Investors to $44.2 million from $38.2 million, and Investment Managers to $33.5 million from $28.4 million. Investments in New Businesses reported a $3.2 million operating loss.
- SEI repurchased 1.122 million shares for $82.3 million during the quarter. Approximately $88.4 million remained available under the repurchase authorization at March 31, 2018.
- SEI adopted ASC 606 using the modified retrospective method, recording a $14.4 million cumulative adjustment to retained earnings at January 1, 2018. The adoption was not material to net income; it reduced reported revenue and expenses by $3.7 million for the quarter because of net presentation of soft-dollar research arrangements.
- SEI also adopted accounting guidance concerning restricted cash and financial assets. Prior-period cash-flow presentation was adjusted, with no impact on prior-period net cash flows.
Outlook, commentary, risks, contingencies, and unusual items
The filing does not provide formal quantitative earnings or revenue guidance. Management’s outlook indicates continued investment in the SEI Wealth Platform, new products, technology, and client servicing, supported by operating cash flow and available liquidity.
- Management cited sensitivity to capital-market conditions, which affect asset levels and fee revenue, and to the performance of LSV Asset Management.
- Key operating risks include cybersecurity and data protection, systems and transaction-processing failures, third-party service-provider risk, technology and product-development risk, competition and pricing pressure, foreign exchange, and interest-rate changes.
- SEI and regulated subsidiaries remain subject to extensive regulatory examinations, investigations, and potential enforcement actions. Compliance and remediation costs, fines, business restrictions, and reputational effects could materially affect results.
- Seven Louisiana lawsuits relate to alleged involvement in Stanford Trust Company certificate-of-deposit sales. The most advanced matter is a certified class action involving secondary-liability claims under Louisiana securities law. SEI believes it has valid defenses, but the company cannot reasonably estimate any potential loss.
- Unrecognized tax benefits and related interest and penalties totaled $15.9 million at March 31, 2018. The ultimate timing and amount of resolution remain uncertain.
- Stock-based compensation expense was $5.2 million. Because option vesting depends on financial performance targets, changes in management’s estimates could create future volatility in compensation expense.
Important facts for investors to verify
- Whether market appreciation and client cash flows continue to support assets under management, administration, and related fee revenue.
- The sustainability of the 11.9% effective tax rate, given the benefit from tax reform and stock-option exercises.
- LSV’s future performance and distributions, which materially affect SEI’s earnings and operating cash flow.
- Integration, growth, and cost trends associated with the Archway acquisition and the Investment Managers segment.
- Progress and potential exposure in the Stanford-related litigation and other regulatory examinations.
- Future capital allocation among software investment, dividends, share repurchases, acquisitions, and liquidity reserves.