SEI INVESTMENTS CO quarterly report, Q3 FY2015

SEI Investments Company — Form 10-Q Summary

Reporting period: Quarterly and year-to-date periods ended September 30, 2015. The interim financial statements are unaudited. SEI provides investment processing, investment management, and investment operations solutions globally. At quarter-end, the company managed or administered $637.5 billion, including $244.5 billion under management and $393.0 billion under administration.

Financial performance and position

Metric	Q3 2015	Q3 2014	9M 2015	9M 2014
Total revenue	$335.6 million	$322.0 million	$998.8 million	$943.2 million
Income from operations	$87.0 million	$90.5 million	$276.0 million	$262.5 million
Net income	$79.4 million	$84.0 million	$250.3 million	$241.6 million
Diluted EPS	$0.47	$0.49	$1.47	$1.39
Operating margin	25.9%	28.1%	27.6%	27.8%
Net margin	23.7%	26.1%	25.1%	25.6%

Revenue growth reflected higher asset management, administration and distribution fees, positive client flows, new business, and higher average assets. Information processing and software servicing fees increased to $218.8 million for the nine-month period, while transaction-based and trade execution fees increased to $23.9 million.
Operating expenses increased 7% in the third quarter and 6% year to date, exceeding quarterly revenue growth and pressuring margins. Key increases included personnel, consulting, data processing, facilities, amortization, and depreciation costs.
Cash flow from operations was $274.5 million for the first nine months, compared with $244.3 million in the prior-year period.
Investing cash outflow was $56.9 million, including $35.7 million of property and equipment additions and $22.5 million of capitalized software costs.
Financing cash outflow was $229.5 million, primarily reflecting $213.3 million of share repurchases and $80.0 million of dividends, partially offset by $52.3 million from stock issuance.
Cash and cash equivalents were $647.6 million at September 30, 2015, compared with $667.4 million at December 31, 2014. Total assets were $1.54 billion and shareholders’ equity was $1.31 billion.
The company had no borrowings under its $300 million revolving credit facility, which expires in February 2017, and was in compliance with its covenants.

Material changes versus the prior comparable period

Third-quarter revenue increased 4%, but operating income declined 4% and net income declined 5%. Year-to-date revenue increased 6%, operating income increased 5%, and net income increased 4%.
Third-quarter performance was affected by declining capital markets, which reduced asset-based fee revenue and LSV Asset Management earnings. Equity earnings from LSV declined 12% to $33.6 million in the quarter, although year-to-date earnings increased slightly to $104.9 million.
Investment Advisors’ third-quarter operating profit declined 16% to $30.7 million, and its margin fell to 40% from 49%, primarily because of higher direct, personnel, sales compensation, and platform-related costs.
Private Banks’ third-quarter operating profit increased 25% to $12.1 million, with margin improving to 10% from 9%. Institutional Investors’ operating profit increased 1%, while Investment Managers’ operating profit declined 1%.
The company recorded approximately $6.0 million of software write-offs in the third quarter, including approximately $3.6 million in Private Banks and $2.4 million in Investment Advisors. The charge reduced diluted EPS by approximately $0.02.
SEI repurchased 4.5 million shares for $212.1 million during the first nine months. Approximately $90.6 million remained authorized for repurchases as of October 16, 2015.
Capitalized software spending declined to $22.5 million from $26.2 million, while platform amortization increased to $31.6 million from $28.3 million.

Outlook, risks, contingencies, and unusual items

Management stated that operating cash flow, available borrowing capacity, and existing cash should fund ongoing operations, investment in products and equipment, repurchases, and future dividends. The filing does not provide formal earnings or revenue guidance.
Management expects to complete relocation of its London operations during the fourth quarter of 2015. Total facility improvement costs are estimated at least $14.8 million, of which $8.4 million had been spent at September 30.
Principal risks include capital-market volatility, investment performance, LSV performance, regulatory change and examinations, litigation, cybersecurity and systems failures, third-party service-provider risks, client and market consolidation, foreign-exchange movements, interest-rate changes, and product-development risk.
SEI and subsidiaries face litigation relating to Stanford Trust Company and alleged Stanford International Bank certificate-of-deposit activities. A Louisiana-related class has been certified; certain claims were dismissed in September 2015, while other claims remain pending. The company cannot reasonably estimate any potential loss.
A shareholder derivative action alleges excessive fees under Section 36(b) of the Investment Company Act. The court denied dismissal as to SIMC but dismissed claims against SGFS; the company cannot estimate any potential loss.
A Belgian action seeks approximately $84 million from multiple defendants, including two SEI subsidiaries, relating to lapsed life-settlement policies. The subsidiaries state that they have valid defenses, and no loss estimate is available.
The company guaranteed up to $45.0 million of LSV Employee Group III’s obligations; the remaining unpaid principal was $23.8 million as of October 16, 2015. No payment obligation had arisen, and management expected the borrower to meet future obligations.
Unrecognized tax benefits and related interest and penalties totaled $16.4 million at September 30, 2015. The timing and ultimate amount of resolution remain uncertain.
New accounting standards concerning revenue recognition, consolidation, and fair-value disclosures were under evaluation. Management did not expect the consolidation update to affect the financial statements; the revenue standard was expected to become effective in 2018.

Key facts investors should verify

Whether capital-market conditions and lower LSV performance continue to affect asset-based fees and equity-method earnings.
Whether revenue growth can outpace personnel, technology, platform amortization, and other operating-cost increases.
The future economic impact and remaining development, maintenance, capitalization, and impairment risks of the SEI Wealth Platform.
Progress and costs associated with the London facility relocation and other capital expenditures.
The status and potential exposure from the Stanford-related, Section 36(b), and Belgian litigation, for which the filing provides no reliable loss estimate.
The sustainability of substantial share repurchases and dividends relative to operating cash flow and available liquidity.
Expiration and renewal terms of the $300 million credit facility in February 2017 and continued covenant compliance.