SEI Investments Company — Q1 2011 Form 10-Q Summary
Business Context and Reporting Period
SEI Investments Company provides investment processing, fund processing, investment management, and business outsourcing solutions to corporations, financial institutions, financial advisors, and ultra-high-net-worth families. The filing covers the unaudited three months ended March 31, 2011, compared with the three months ended March 31, 2010.
As of March 31, 2011, SEI managed or administered $428.8 billion of client assets, including $179.2 billion under management and $249.6 billion under administration.
Financial Performance and Position
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $232.5 million | $221.5 million | 5% |
| Income from operations | $54.6 million | $53.3 million | 2% |
| Operating margin | 23.5% | 24.1% | Down approximately 60 basis points |
| Net income | $58.0 million | $59.9 million | (3%) |
| Net income attributable to SEI | $57.7 million | $59.4 million | (3%) |
| Diluted EPS | $0.31 | $0.31 | Flat |
| Cash flow from operations | $58.3 million | $18.1 million | Increase of $40.2 million |
| Cash and cash equivalents at period end | $498.0 million | $500.7 million | Comparable period-end figure |
- Asset management, administration, and distribution fees increased 10% to $167.5 million, primarily from market appreciation and new or additional client funding.
- Information processing and software servicing fees declined 5% to $55.8 million, while transaction-based and trade execution fees declined 8% to $9.2 million.
- Total expenses increased 6% to $177.9 million. Consulting, outsourcing, and professional fees increased to $26.0 million from $20.7 million, and personnel costs increased to $71.0 million from $67.2 million.
- Net gain from investments declined to $7.3 million from $17.5 million, primarily reflecting lower gains on structured investment vehicle securities.
- Equity in earnings of unconsolidated affiliate LSV increased 20% to $28.9 million. SEI held approximately 42% of LSV.
- The effective tax rate declined to 37.1% from 37.9%, partly due to reinstatement of the research and development tax credit.
- Total assets were $1.378 billion and total equity was $1.093 billion at March 31, 2011.
Liquidity, Debt, and Capital Allocation
- SEI had $60.0 million outstanding under its $300.0 million unsecured revolving credit facility at March 31, 2011, after making a $35.0 million principal payment during the quarter.
- The facility expires in July 2012, and the company was in compliance with all covenants. The reported leverage ratio was 0.15 times EBITDA versus a maximum permitted ratio of 1.75 times.
- Cash flow from investing activities was positive $6.5 million, compared with negative $47.4 million in Q1 2010. Investing cash flows included $7.4 million of property additions and $10.7 million of capitalized software development.
- Cash flow used in financing activities was $63.1 million, including $35.0 million of debt repayment and $39.5 million of share repurchases. No dividend was paid during Q1 2011 because the prior dividend payment occurred in 2010.
- The company repurchased 1.725 million shares for $39.5 million during the quarter. Approximately $68.0 million remained available under the repurchase authorization at March 31, 2011.
- Management reported $365.5 million of free and immediately accessible cash as of April 30, 2011, while noting that some cash held by subsidiaries may be restricted to operational or regulatory purposes.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by market appreciation and increased funding in asset-based businesses, particularly Investment Managers, Investment Advisors, and Institutional Investors.
- Private Banks revenue was essentially flat, but operating profit fell 55% to $4.3 million and margin declined to 5% from 11%. The segment was affected by lower processing and trade execution fees, pricing concessions, client consolidation activity, and higher Global Wealth Platform costs.
- Investment Managers revenue increased 16% and operating profit increased 18%, although personnel, technology, and servicing costs also increased.
- Investment Advisors revenue increased 6% and operating profit increased 18%; Institutional Investors revenue increased 6% and operating profit increased 9%.
- Stock-based compensation expense declined to $3.7 million from $6.7 million because Q1 2010 included accelerated expense related to expected option vesting.
- Capitalized software development costs increased to $10.7 million from $8.4 million, primarily for continued development of the Global Wealth Platform. The platform had a net book value of $284.8 million at March 31, 2011.
- SIV-related gains declined to $6.9 million from $17.3 million. The company had cumulative losses of $138.0 million from SIV securities and related issues through March 31, 2011.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The filing does not provide formal quantitative earnings or revenue guidance. Management expects operating cash flow, available borrowing capacity, and cash balances to fund operations, product and equipment investment, debt repayment, share repurchases, and future dividends.
- Management expects continued significant development spending for enhancements and upgrades to the Global Wealth Platform and continued operating costs associated with newly implemented clients.
- Material risks include capital-market volatility, product development and technology risk, systems and data security risk, third-party service-provider failures, client and market consolidation, regulatory changes, fund performance, foreign currency movements, and retention of senior management.
- SEI and subsidiaries face putative class actions related to leveraged ETFs distributed by SIDCO and lawsuits related to services provided to Stanford Trust Company. The matters were in early stages, damages were unspecified, and the filing states that SEI believes it has valid defenses. The ultimate exposure is not clearly quantifiable from the filing.
- SEI provided guarantees related to debt of LSV employee groups. As of April 30, 2011, the company reported no current payment obligation under the existing LSV Employee Group loan and expected the borrower to meet its obligations. It also provided an unsecured guarantee for a new LSV Employee Group II loan.
- Level 3 SIV securities totaled $69.4 million at March 31, 2011, valued using models and significant unobservable inputs. Their valuation remains subject to assumptions regarding defaults, recoveries, prepayments, loss severity, and expected cash flows.
- Unrecognized tax benefits, including interest and penalties, totaled $6.7 million at March 31, 2011; approximately $0.8 million was expected to be recognized within the following twelve months, although timing and ultimate resolution were uncertain.
Important Facts for Investors to Verify
- Reconcile the sustainability of revenue growth tied to market appreciation and the potential sensitivity of asset-based fees to future market declines.
- Monitor SIV valuations, cash recoveries, realized gains, and the remaining $69.4 million Level 3 exposure.
- Assess progress, capitalization, amortization, and operating costs associated with the Global Wealth Platform.
- Review the July 2012 credit facility maturity, covenant requirements, and the company’s debt repayment and refinancing plans.
- Track the Private Banks segment’s recovery from declining margins and client-related processing fee pressure.
- Evaluate the potential financial and reputational effects of the leveraged ETF and Stanford-related litigation, guarantees, and regulatory obligations.
- Confirm the remaining share-repurchase authorization, dividend policy, and the effect of continued repurchases on share count and per-share results.