SEI Investments Company — Q2 2018 Form 10-Q 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 globally. This unaudited Form 10-Q covers the three and six months ended June 30, 2018, with comparisons to the corresponding 2017 periods.
At June 30, 2018, SEI managed, advised or administered $881.6 billion of assets, including $331.1 billion under management and $545.1 billion under administration. LSV Asset Management, in which SEI held a 38.9% interest, accounted for $106.5 billion of managed assets.
Key financial metrics
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Total revenue | $404.8 million | $372.3 million | $810.4 million | $732.3 million |
| Income from operations | $110.3 million | $97.2 million | $226.6 million | $190.7 million |
| Operating margin | 27.2% | 26.1% | 28.0% | 26.0% |
| Net income | $121.7 million | $91.8 million | $261.5 million | $180.5 million |
| Diluted EPS | $0.75 | $0.57 | $1.61 | $1.11 |
| Operating cash flow | Not separately presented | Not separately presented | $262.9 million | $184.9 million |
Six-month revenue consisted primarily of asset management, administration and distribution fees of $632.7 million and information processing and software servicing fees of $177.7 million. Six-month net income benefited from $81.7 million of equity earnings from LSV and a lower effective tax rate of 16.5%, compared with 31.6% in the prior-year period.
Cash, cash equivalents and restricted cash totaled $697.0 million at June 30, 2018, compared with $747.8 million at December 31, 2017. Free and immediately accessible cash was $315.1 million as of July 16, 2018. The $300.0 million revolving credit facility was fully available as of July 16, 2018, and the company was in compliance with its covenants.
Total assets were $1.891 billion and shareholders’ equity was $1.591 billion at June 30, 2018. The company had no borrowings outstanding under its revolving credit facility after repaying the remaining $30.0 million during the first six months.
Material changes versus the prior comparable period
- Second-quarter revenue increased 9% and six-month revenue increased 11%, primarily from higher average assets, market appreciation, positive client cash flows and increased platform activity.
- Second-quarter operating income increased 13%; six-month operating income increased 19%. The six-month operating margin improved to 28.0% from 26.0%.
- Second-quarter net income increased 33% and six-month net income increased 45. Diluted EPS increased 32% and 45%, respectively.
- LSV equity earnings increased 13% in the quarter and 17% year to date, reflecting higher assets from market appreciation and client inflows.
- The Investment Managers segment benefited from $5.6 million of second-quarter and $11.1 million of year-to-date revenue from the 2017 Archway acquisition.
- Average assets under management excluding LSV increased 12% year to date, while average assets under administration increased 11%.
- SEI adopted ASC 606 and recorded a $14.4 million cumulative adjustment to retained earnings at January 1, 2018. The adoption was not material to consolidated financial results; it reduced reported revenue and expenses by $3.3 million in the quarter and $7.2 million year to date for soft-dollar arrangements, with no net-income effect.
- The Tax Cuts and Jobs Act reduced the federal statutory tax rate from 35% to 21%, materially lowering the effective tax rate.
- SEI repurchased 2.8 million shares for $186.9 million during the first six months and paid $94.3 million of dividends. Approximately $183.7 million remained available under the repurchase authorization at June 30.
Segment performance
| Segment | Q2 2018 revenue | Q2 2018 operating margin | Six-month revenue growth |
|---|---|---|---|
| Private Banks | $121.1 million | 5% | 6% |
| Investment Advisors | $99.9 million | 47% | 10% |
| Institutional Investors | $83.4 million | 51% | 9% |
| Investment Managers | $97.6 million | 35% | 18% |
| Investments in New Businesses | $2.8 million | Operating loss of $3.1 million | 41% |
Cash flow, capital allocation and liquidity
- Six-month operating cash flow was $262.9 million, up from $184.9 million.
- Investing activities used $63.9 million, including $24.6 million of capitalized software development, $12.7 million of property and equipment additions and $5.8 million for the Huntington Steele acquisition.
- Financing activities used $243.7 million, primarily for $189.4 million of share repurchases, $94.3 million of dividends and repayment of the $30.0 million credit-facility balance, partially offset by $70.0 million of stock-option exercise proceeds.
- Management stated that operating cash flow, cash balances and available borrowing capacity should fund ongoing operations, product and equipment investment, repurchases and dividends.
Guidance, outlook, commentary and unusual items
The filing does not provide quantitative revenue, earnings or margin guidance. Management cited continued opportunities from client asset growth, new and existing client cash flows, platform development and investment in new businesses, but noted that results remain sensitive to capital-market conditions.
- Management expects continued costs for platform maintenance, support, migrations, technology, consulting and client servicing.
- Software development capitalized during the first six months was $24.6 million; the SEI Wealth Platform represented $23.8 million of that amount. Platform amortization declined to $19.6 million from $24.5 million due to a useful-life adjustment made in late 2017.
- Huntington Steele was acquired on April 2, 2018 for an estimated total purchase price of $19.0 million, including $5.8 million of net cash consideration and $13.2 million of contingent consideration. The allocation remains preliminary.
- Unrecognized tax benefits and related interest and penalties totaled $16.5 million at June 30, 2018. The estimated transition tax liability under the Tax Act was $11.5 million, of which $9.6 million was classified as long term.
- Seven Louisiana lawsuits relating to Stanford Trust Company remain pending. SEI and its subsidiary believe they have valid defenses, but the company cannot reasonably estimate a potential loss.
- Key risks include capital-market volatility, dependence on LSV performance, cybersecurity and technology failures, third-party service providers, regulatory examinations and enforcement, litigation, competition and pricing pressure, foreign exchange, interest-rate changes, Brexit-related effects and client or executive retention.
- The company is evaluating future accounting standards covering leases, credit losses, goodwill impairment and nonemployee share-based payments. The filing does not provide a clear quantified impact for these standards.
Most important facts for an investor to verify
- Whether asset growth and favorable capital markets continue to support management and administration fee revenue.
- The sustainability of LSV’s contribution, which represented $81.7 million of six-month pretax earnings.
- The effect of market declines, client losses, fund closures and fee or pricing pressure on revenue and margins.
- Execution costs and operating performance of the SEI Wealth Platform, Archway and Huntington Steele businesses.
- The cash impact of ongoing repurchases and dividends relative to operating cash flow and available liquidity.
- Developments in the Stanford-related litigation, regulatory examinations and other contingencies for which no loss estimate is currently available.
- The effect of the lower tax rate, stock-option exercise benefits and any future changes in tax or accounting standards on reported earnings.