SEI Investments Company 2017 Form 10-K 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 fiscal year ended December 31, 2017, with comparisons to 2016 and 2015. SEI reported approximately $860.6 billion in assets under management, advisement and administration at year-end, including $337.3 billion under management and $518.4 billion under administration. Its 38.9% affiliate interest in LSV Asset Management represented $105.3 billion of managed assets.
Financial performance and key metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $1.527 billion | $1.402 billion | 9% |
| Income from operations | $396.9 million | $375.7 million | 6% |
| Operating margin | 26.0% | 26.8% | Down approximately 80 basis points |
| Net income | $404.4 million | $333.8 million | 21% |
| Diluted EPS | $2.49 | $2.03 | 23% |
| Net margin | 26.5% | 23.8% | Up approximately 270 basis points |
| Operating cash flow | $459.9 million | $434.2 million | 6% |
| Cash and cash equivalents | $744.2 million | $695.7 million | 7% |
Revenue growth was led by higher asset management, administration and distribution fees, market appreciation and positive client cash flows. Information processing and software servicing fees increased to $321.7 million, while transaction-based and trade execution fees declined to $24.0 million. Equity in earnings from LSV increased to $152.6 million from $126.1 million.
Year-end total assets were $1.853 billion and shareholders’ equity was $1.477 billion. Borrowings under the revolving credit facility were $30.0 million at year-end. The facility provides $300.0 million of total capacity, expires in June 2021, and was subject to a maximum leverage ratio of 1.75 times EBITDA; the company reported compliance with its covenants.
Cash used in investing activities was $172.3 million, including $80.2 million of net cash paid for the Archway acquisition and $61.0 million of capitalized software development costs. Cash used in financing activities was $253.6 million, including $248.3 million of share repurchases and $88.9 million of dividends, partially offset by stock issuance proceeds and net credit-facility borrowings. SEI repurchased 4.403 million shares at an average price of $56.36.
Material changes versus the prior comparable period
- Investment Advisors revenue increased 13% to $373.5 million, with a 46% operating margin.
- Investment Managers revenue increased 19% to $349.4 million, including $10.2 million contributed by Archway; operating profit increased 19% to $122.9 million.
- Private Banks revenue increased 4%, but operating profit fell 48% to $19.2 million and margin declined to 4% from 8%, primarily because of higher Wealth Platform maintenance, support, personnel and consulting costs.
- Institutional Investors revenue increased 3% to $322.5 million, while operating margin declined to 50% from 51%.
- Average assets under management, excluding LSV, increased 13% to $214.1 billion; average assets under administration increased 13% to $497.6 billion.
- Stock-based compensation expense increased to $36.4 million from $16.0 million, including an $11.2 million increase from revised estimates of performance-based option vesting.
- The effective tax rate declined to 27.4% from 34.3%, benefiting from the Tax Cuts and Jobs Act and adoption of ASU 2016-09. The Tax Act produced an estimated net tax benefit of $12.4 million, or $0.08 per diluted share.
Guidance, outlook, management commentary, risks and unusual items
Management expects continued investment spending in 2018 for the SEI Wealth Platform, particularly in Private Banks and Investment Advisors, which may pressure operating margins until sufficient revenue scale is achieved. The Platform’s weighted-average remaining useful life was revised to 8.2 years; estimated first-quarter 2018 amortization for components already in service was approximately $9.7 million. Platform development costs in progress were $38.1 million at year-end.
Management expected a 2018 effective tax rate of approximately 20% to 22%, excluding the effect of stock-option exercises. The company also planned $12 million to $15 million of 2018 spending to expand its corporate headquarters.
Material risks include sensitivity of asset-based fees to capital-market declines, pricing pressure and competition, execution risk in the Wealth Platform rollout, cyber and data-security risks, operational and technology failures, reliance on third-party providers, regulatory changes and examinations, foreign exchange exposure, Brexit-related uncertainty, LSV performance, and potential litigation.
SEI faces seven Louisiana lawsuits related to services provided to Stanford Trust Company. The company states that it has valid defenses but cannot reasonably estimate any potential loss. A Belgian claim seeking approximately $84 million was dismissed on appeal in October 2017. The filing also identifies regulatory investigations and examinations whose financial and reputational effects remain uncertain.
Archway was acquired on July 3, 2017 for $81.6 million in cash consideration, with potential contingent consideration of up to $8.0 million. The 2017 contingent amount was reversed because specified performance measures were not achieved. The company adopted ASU 2016-09 in 2017 and expected the 2018 adoption of the new revenue standard to have no material consolidated impact, although some contract acquisition costs will be capitalized and soft-dollar research costs will be reported net.
Most important facts for investors to verify
- Whether asset growth and market appreciation continue to support recurring asset-based revenue.
- Progress, client conversions, costs and margin impact associated with the SEI Wealth Platform, including the Wells Fargo and Regions Bank implementations.
- The sustainability of LSV’s contribution, including performance fees, assets under management and quarterly distributions.
- The final tax accounting for the Tax Cuts and Jobs Act and whether the anticipated 20% to 22% 2018 effective tax rate is achieved.
- Operating leverage after elevated technology, personnel, consulting and stock-based compensation costs.
- Remaining credit-facility borrowings, covenant headroom and the planned repayment of the outstanding balance.
- Potential exposure from the Stanford-related lawsuits, regulatory matters and other contingencies for which the filing provides no reliable loss estimate.
- Capitalized software balances, amortization assumptions and any future impairment or write-off risk.