SEI Investments Company - 10-Q Summary (Period Ended Sept 30, 2006)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2006, and the nine months ended September 30, 2006. SEI Investments Company provides investment processing, fund investment processing, and investment management business outsourcing solutions globally. A significant accounting change occurred in January 2006: the Company began consolidating the accounts of LSV Asset Management (LSV) and LSV Employee Group due to a new Guaranty and Collateral Agreement, whereas previously LSV was accounted for under the equity method. This consolidation significantly impacts revenue and expense comparisons to the prior year.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sept 30, 2006 | 3 Months Ended Sept 30, 2005 | 9 Months Ended Sept 30, 2006 | 9 Months Ended Sept 30, 2005 |
|---|---|---|---|---|
| Revenues | $298,084 | $193,659 | $860,235 | $569,420 |
| Income from Operations | $128,565 | $53,300 | $367,184 | $155,328 |
| Net Income | $60,549 | $49,196 | $173,366 | $137,089 |
| Diluted EPS | $0.60 | $0.48 | $1.71 | $1.32 |
| Operating Cash Flow (9mo) | $251,900 | $142,955 | ||
| Cash and Equivalents (End of Period) | $231,281 | $133,709 | $231,281 | $133,709 |
| Total Debt (Current + Long-term) | $84,474 | $14,389 | $84,474 | $14,389 |
Note: Debt figures include the consolidation of LSV Employee Group's term loan ($75.5M outstanding as of Sept 30, 2006).
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 54% for the quarter and 51% for the nine-month period. This growth is primarily attributable to the consolidation of LSV, which contributed $75.1 million in revenue for the quarter and $210.8 million for the nine months. Excluding LSV consolidation effects, organic growth was driven by capital market appreciation and new client sales.
- Profitability: Net income increased 23% for the quarter and 26% for the nine-month period. Operating income surged 141% for the quarter and 136% for the nine months, largely due to LSV consolidation.
- Debt Structure: Long-term debt increased significantly due to the consolidation of LSV Employee Group's $82.8 million term loan used to purchase an 8% interest in LSV. The Company guaranteed this debt.
- Stock-Based Compensation: The Company adopted SFAS 123(R) in Q1 2006, recognizing $7.2 million in stock-based compensation expense for the quarter and $15.3 million for the nine months. This includes an acceleration of $3.1 million in Q3 due to revised vesting target estimates.
- Software Write-offs: The Company wrote off $3.4 million related to the SEI Advisor Desktop front-end component and $2.3 million related to the Global Wealth Platform during the period.
Guidance, Outlook, and Risks
- Outlook: Management expects significant development costs for the Global Wealth Platform to continue through the remainder of 2006 and 2007. Stock-based compensation expense is expected to remain elevated in Q4 2006. The effective tax rate is expected to return to 2005 levels in Q4.
- Liquidity: The Company maintains strong liquidity with $231.3 million in unrestricted cash and a $200 million credit facility with no borrowings outstanding under the facility as of Sept 30, 2006.
- Capital Allocation: The Company continues its stock repurchase program, having spent $81.6 million in the first nine months of 2006. Approximately $13 million of the $1.1 billion authorization remains.
- Risks: Key risks include changes in capital markets affecting asset-based fees, product development risks (specifically the Global Wealth Platform), regulatory scrutiny regarding marketing and distribution practices (including an ongoing SEC inquiry), and the potential impact of the LSV guaranty if an event of default occurs.
Investor Verification Checklist
- LSV Consolidation Impact: Verify the pro-forma impact of LSV consolidation on year-over-year comparisons, as the change in accounting treatment (from equity method to consolidation) distorts organic growth metrics.
- Debt Covenants: Review the covenants associated with the LSV Employee Group term loan and the Company's $200 million credit facility to ensure compliance, particularly regarding leverage ratios.
- Software Capitalization: Monitor the capitalization vs. expensing of Global Wealth Platform costs and the potential for future write-offs if functionality targets are not met.
- Stock-Based Compensation Volatility: Assess the sensitivity of future earnings to the achievement of diluted EPS vesting targets, which can cause acceleration of expense recognition.
- Regulatory Status: Track the resolution of the SEC inquiry regarding marketing and distribution expense payments and the status of the PBHG class action lawsuit.