SEI Investments Company: Fiscal 2016 Form 10-K Summary
Business context and reporting period
SEI Investments Company provides investment processing, investment management and investment operations solutions to financial institutions, advisors, institutional investors, investment managers and ultra-high-net-worth families. The filing covers the fiscal year ended December 31, 2016; fourth-quarter data is included but the filing is an annual report.
- Managed assets: $283.1 billion; client assets under administration: $468.0 billion; combined assets managed or administered: $751.1 billion at year-end.
- Approximately 8,600 clients across the United States, Canada, the United Kingdom, continental Europe, South Africa and East Asia.
- Principal segments: Private Banks, Investment Advisors, Institutional Investors, Investment Managers and Investments in New Businesses.
Financial results and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $1.402 billion | $1.334 billion | +5% |
| Income from operations | $375.7 million | $358.2 million | +5% |
| Operating margin | 26.8% | 26.9% | Approximately flat |
| Net income | $333.8 million | $331.7 million | +1% |
| Diluted EPS | $2.03 | $1.96 | +4% |
| Net margin | 23.8% | 24.8% | Down approximately 1 percentage point |
| Cash flow from operations | $425.2 million | $391.5 million | +9% |
| Cash and cash equivalents | $695.7 million | $679.7 million | +$16.0 million |
| Total assets | $1.637 billion | $1.589 billion | +3% |
| Shareholders’ equity | $1.303 billion | $1.290 billion | +1% |
Asset management, administration and distribution fees increased to $1.072 billion from $1.011 billion, while information processing and software servicing fees rose to $300.3 million from $290.9 million. Transaction-based fees declined to $29.0 million from $32.8 million.
The company reported no borrowings under its $300.0 million senior unsecured revolving credit facility at year-end. The facility expires in June 2021 and includes a maximum leverage ratio of 1.75 times EBITDA. Total liabilities were $333.7 million, compared with $298.9 million in 2015.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by improved client cash flows, market appreciation and higher assets under management and administration. Average assets under management, excluding LSV, increased 8% to $189.9 billion; average assets under administration increased 11% to $439.9 billion.
- Ending assets under management and administration increased 12% to $751.1 billion, including a 15% increase in client assets under administration to $468.0 billion.
- Investment Advisors revenue increased 8% and operating profit increased 12%; Investment Managers revenue increased 10% and operating profit increased 8%; Institutional Investors revenue and operating profit each increased 5%.
- Private Banks revenue was essentially flat, while operating profit decreased 19% to $36.7 million and operating margin declined to 8% from 10%, primarily because of higher Wealth Platform development, maintenance, support and amortization costs, as well as adverse foreign exchange effects.
- Equity in earnings from LSV declined 8% to $126.1 million, primarily because of lower performance fees and higher personnel expenses. SEI’s ownership interest declined from approximately 39.2% to 38.9%.
- Research and development expenditures increased to $134.3 million from $102.9 million, representing 9.6% of revenue versus 7.7%. Capitalized software development costs increased to $50.4 million from $29.4 million.
- The company repurchased approximately 6.6 million shares for $294.4 million and declared dividends of $0.54 per share, compared with $0.50 per share in 2015.
Cash flow, liquidity and capital allocation
- Operating cash flow of $425.2 million exceeded net income. Investing cash usage was $79.6 million, including $50.4 million of capitalized software development and $31.4 million of property and equipment additions.
- Financing cash usage was $319.7 million, primarily reflecting $292.3 million of share repurchases and $84.7 million of dividend payments, partially offset by $48.3 million of stock issuance proceeds.
- Cash increased $16.0 million during the year after a $9.9 million negative foreign-exchange effect. Management stated that operating cash flow, cash balances and borrowing capacity should fund operations, investments, repurchases and dividends.
- Cash considered free and immediately accessible for general corporate purposes was $220.6 million as of January 31, 2017; some subsidiary and foreign cash may be restricted or subject to tax and currency considerations.
Guidance, outlook, risks and unusual items
- Management expects continued investment in the SEI Wealth Platform and related infrastructure during 2017, with additional pressure on Private Banks and Investment Advisors operating margins until sufficient scale is achieved.
- New advisors are expected to be implemented directly onto the Wealth Platform beginning in 2017, while migrations of existing bank and advisor clients continue. The first large U.S. national bank SaaS conversion is a multiyear implementation with execution and cost risks.
- A $12.3 million performance fee and $6.1 million related sub-advisory expense were recorded in the fourth quarter, producing an after-tax benefit of approximately $4.1 million, or $0.03 diluted EPS.
- The company recorded a final $2.8 million pretax gain related to contingent consideration from the 2013 sale of SEI Asset Korea; no further payments are expected under that arrangement.
- Principal risks include capital-market declines affecting asset-based fees, pricing pressure and competition, investment performance, technology and cybersecurity failures, third-party service-provider dependence, regulatory changes and enforcement, litigation, foreign exchange exposure and reliance on LSV earnings and distributions.
- SEI provided an unsecured guaranty for LSV Employee Group III obligations; $5.7 million remained outstanding at year-end. The company states it currently has no payment obligation and expects the borrower to meet its obligations.
- Seven Louisiana lawsuits relating to Stanford Trust Company remain pending, including a certified class action. The company cannot reasonably estimate a potential loss. A separate Belgian claim seeks approximately $84 million against multiple defendants, including subsidiaries; the appeal of an earlier jurisdictional dismissal remains pending.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective at December 31, 2016.
Most important facts for investors to verify
- Whether Wealth Platform conversions and migrations remain on schedule and whether associated spending moderates as revenues scale.
- The sustainability of asset-based revenue growth in changing equity, fixed-income and money-market markets.
- LSV’s assets, performance fees, distributions and the remaining guaranteed loan balance.
- The potential financial and reputational impact of the Stanford-related litigation, Belgian litigation and regulatory examinations.
- Free cash availability after subsidiary regulatory requirements, foreign tax considerations, dividends, repurchases and software investment.
- The effects of the 2017 adoption of share-based compensation accounting changes and the pending revenue-recognition, lease and credit-loss standards.