SEI Investments Earnings: Mixed Quarter and Mixed Margin Progress

SEI Investments SEIC reported a mixed first quarter. Excluding one-time items, revenue declined 5% to $469 million, in line with FactSet consensus, while EPS of $0.79 came in $0.03 below consensus. The private banks segment showed modest progress on the operating margin front, but lower asset-based fees weighed on margins for SEI’s higher-margin segments such as investment advisors and institutional investors. Firmwide, SEI’s operating margin of 21.7% improved from 20.6% in the prior quarter but was below the 26.1% (excluding a one-time large termination fee) in the year-ago period. SEI is unique among peers with no net debt and over $6 of cash per share, and it appears to be looking at potential acquisitions more aggressively. We are maintaining our $67 fair value estimate and narrow moat rating.

Private banks revenue was up 6% sequentially, but SEI signed little in net new sales during the quarter. Operating margin was 7%, an increase from 1% in the prior quarter. We believe SEI has considerable exposure to regional and smaller banks in the segment. Increased merger activities among banks may present a headwind but will take years to play out, in our view. Investment advisors segment revenue was up 1% sequentially; SEI saw about $500 million in net inflows, an improvement from the $675 million of new outflows in the prior quarter. The institutional investors segment saw revenue decline as challenges in the defined benefit book of business persist. As a result, the segment’s operating margin declined to 45% from 48% in the year-ago period. As we’ve seen in previous quarters, the fund administration unit continues to be SEI’s strongest performer. Revenue grew 2% despite a negative impact from the markets, and recurring net sales of $16 million in the quarter was healthy, in our view. Though performance was good at LSV, the value equity asset manager continues to bleed assets.