SEI Investments Company - 10-Q Summary (Period Ended Sept 30, 2007)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2007, and the nine-month period ended on the same date. SEI Investments Company is a global provider of investment processing, fund processing, and investment management business outsourcing solutions. The company serves corporations, financial institutions, financial advisors, and affluent families. Effective January 1, 2007, the company reorganized and renamed three business segments: Private Banking & Trust to Private Banks, Enterprises to Institutional Investors, and Money Managers to Investment Managers.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sept 30, 2007 | 9 Months Ended Sept 30, 2007 |
|---|---|---|
| Total Revenues | $349,636 | $1,015,619 |
| Net Income | $73,299 | $206,177 |
| Diluted EPS | $0.37 | $1.02 |
| Operating Cash Flow | N/A | $265,902 |
| Cash and Equivalents (End of Period) | $297,194 | $297,194 |
| Total Debt (Current + Long-term) | $57,943 | $57,943 |
| Assets Under Management & Administration | $422.6 Billion | $422.6 Billion |
Note: Debt consists entirely of borrowings by the LSV Employee Group subsidiary. The company has a $200 million credit facility with no outstanding borrowings as of September 30, 2007.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 17% ($51.6 million) for the quarter and 18% ($155.4 million) for the nine-month period compared to the prior year. Growth was driven by capital market appreciation increasing asset-based fees and new business sales.
- Profitability: Net income rose 21% for the quarter and 19% for the nine-month period. Diluted EPS increased 23% and 20% respectively.
- Segment Performance:
- Investment Advisors: Operating income increased 25% (quarter) and 22% (nine months), with margins improving to 52%.
- Institutional Investors: Operating income increased 36% (quarter) and 39% (nine months), with margins rising to 40%.
- Private Banks: Operating income declined 5% (quarter) and 12% (nine months) due to increased direct expenses and technology spending, despite revenue growth.
- Software Capitalization: The Global Wealth Platform was placed into service in July 2007. The company capitalized $50.1 million in software development costs for the nine months ended Sept 30, 2007, compared to $53.9 million in the prior year. Amortization of the platform began in Q3 2007.
- Stock Repurchases: The company repurchased 6.46 million shares for $183.9 million during the nine-month period.
Guidance, Outlook, Risks, and Unusual Items
- Capital Support Agreements (Subsequent Event): On November 8, 2007, SEI entered into Capital Support Agreements with two money market funds (Prime Fund and MM Fund) to provide credit support for holdings of Cheyne Finance LLC senior notes. SEI is committed to contribute up to $129 million in aggregate if the funds realize losses on these securities. As of the filing date, no capital contributions were required, and no expense was recorded.
- Tax Rate: The effective tax rate increased to 36.5% for the nine months ended Sept 30, 2007, compared to 33.5% in the prior year, primarily due to higher state tax rates.
- Legal Proceedings: SIDCO remains a defendant in a class action lawsuit regarding market timing practices in PBHG mutual funds (filed 2004). Plaintiffs proposed dismissal in 2006, but the court has not yet acted.
- Risk Factors: Management highlights risks related to capital market volatility, the performance of funds managed, and the potential impact of structured investment vehicles (specifically Cheyne) on money market fund ratings and potential capital contributions.
Investor Verification Checklist
- Cheyne Exposure: Verify the current status of the Cheyne Finance LLC notes held by SEI's money market funds and any potential impact on the $129 million capital support commitment.
- Global Wealth Platform Costs: Monitor future amortization expenses and ongoing capitalization costs associated with the Global Wealth Platform enhancements.
- Segment Margins: Review the Private Banks segment's ability to offset increased technology and personnel costs with revenue growth to stabilize operating margins.
- Stock Buyback Program: Confirm the remaining authorization ($133.4 million as of Oct 31, 2007) and pace of future repurchases.
- Legal Resolution: Track the status of the PBHG class action lawsuit and any potential financial provisions required.