SEI Investments Company

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

SEI Investments Company is a financial technology and investment solutions firm, providing technology platforms and asset management services to a variety of clients, including financial institutions, independent wealth advisors, and other financial intermediaries.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

SEI’s Business Overview: SEI Investments Company (SEIC) operates within the financial services industry, providing technology platforms and investment solutions to various clients, with over $1.4 trillion in assets under management and administration. Its main business segments are:

Private Banks: Offers investment processing, operations, and asset management solutions for private banking and wealth management clients.
Investment Advisors: Provides investment management and investment processing platforms to independent advisors, including the delivery of managed accounts, financial planning, reporting, and administrative tools.
Institutional Investors: Provides outsourced investment management, as well as advisory and administrative services to corporate, public, endowment, and foundation plans.
Investments in New Businesses: Focuses on providing investment management solutions to emerging families in the U.S. states, European and other developing markets, including new research and development activities.

SEI is transforming how to deliver value to its clients through the power of connections, technological platforms, and industry expertise. The company helps wealth managers, financial advisors, financial institutions, and ultra-high-net worth families to solve problems, manage change and help them protect and grow their assets.

The core business involves technology and investment solutions. With capabilities across investment processing, operations, and asset management, SEI seeks to build scalable platforms and provide comprehensive, personalized service. It aims to serve as an organization’s most trusted external advisor on critical issues, facing senior management, with consultants deployed from around the world.

SEI Financials:

Revenue Distribution: SEI’s revenue is primarily driven by:

Asset Management: Fees earned as a percentage of assets under management.
Investment Processing: Fees from the use of technology and operations outsourcing.
Other Revenue: Includes fees from various other services.

SEI’s Revenue for the last 9 months of 2023 was 1,778.6 million. Operating income was $283.4m, and net income was $281.8 million. SEI’s overall revenues for 2022 and 2023 showed that the investment advisors segment grew while their private banking and institutional investor segment revenues declined. This reflects changes in client preferences and market conditions affecting different investment approaches. There is a growing desire for private wealth management services that include investment management and financial planning.

Recent Financial Performance: Q3 2024 Earnings Call:

Overall performance: SEI reported a good quarter, highlighting strategic investments, client relationships, and market dynamics. The main objective is to drive growth, SEI is focused on creating value through investments in alternatives, penetration of existing solutions, and asset growth.
Financials: SEI reported growth in assets under management and a steady stream of subscription revenue, highlighting growth for private banks and higher fees. There was also investment in marketing.
Strategic Moves: They are exploring strategic opportunities, like acquiring new companies or starting new products to serve clients. They also emphasized a focus on improving efficiency and creating value for long-term growth. They mentioned a goal of aligning their investment capabilities with the investment needs of their clients.
Challenges: Management acknowledges challenges from interest rates, rising expenses, and client activity level. However, they are actively managing those conditions and remain committed to meeting their goals. One-time expenses related to an acquisition were also a factor, and the tax rate is expected to be higher in the fourth quarter of 2024.
Future Plans: Management emphasized a focus on sustainable growth by focusing on their best-performing areas, like new investments. They aim to improve service quality, and are also developing the existing technology platform. They are also trying to integrate the different business segments for maximum effectiveness.
Strong Cash: Management notes the strong cash position to support growth opportunities.
Stock buybacks: The Board of Directors authorized an increased stock repurchase program for $250 million and they repurchased 2.3 million shares in the most recent quarter, which is a good use of free cash flow.

Financial Analysis and Trends:

ROIC: As a financial company, ROIC is a key metric that has remained roughly stable at 11-12% in recent years.
Leverage: The company maintains a conservative level of debt, and its debt-to-equity is relatively low, at roughly 1.2:1.
Profitability: Operating margins have experienced some fluctuations. The company has had a net profit margin around 22% in recent years.
Growth: Revenue growth is stable around 10% in the current year, mostly driven by investment advisors and new business segments. It has seen significant growth opportunities in certain geographies.

Moat Rating: 3/5 SEI possesses a narrow moat, primarily due to the following factors:

Customer stickiness: Once clients embed SEI’s platforms and services into their operations, switching to competitors becomes costly and difficult, resulting in high retention rates.
Network effects: A key driver of SEI’s platform-based businesses, the interconnected nature of SEI’s network strengthens with an increase in users, creating value for all stakeholders.
Economies of Scale: SEI is able to achieve scale by growing its assets under management and administration. The more customers they have, the larger the scale economies they can achieve through technology and lower per client cost.
Switching costs: SEI’s services are often embedded in customer workflows, thus making it expensive for customers to transition to another provider.
High Barriers to Success: While the barriers to entry are low, success is hard to achieve. Creating an adequate technology platform with sufficient services and a large customer base, takes a lot of time and money. While SEI possesses a number of moats, they are relatively easy to replicate. Therefore, while SEI does have moats to separate from the competition, its moats are not wide.

Risks Affecting the Moat and Business Resilience:

Technological disruption: The investment and financial landscape is rapidly evolving, and any new technologies or changes in customer preference could lead to SEI’s platform or services becoming obsolete.
Regulatory changes: Stringent and frequent changes in financial regulations could cause SEI to incur extra costs. The company operates in a complex regulatory environment and any lack of compliance can cause large penalties.
Competition: The financial technology industry is highly competitive. As competition intensifies, and new companies enter the market, their margins can compress and revenue growth could slow. This is especially the case for low-margin commodity based business products.
Market downturns: A severe decline in the financial market will have an effect on SEI’s performance. It could decrease assets under management, reduce revenue, and may impact growth rates.
Data security: Cybersecurity is an important priority due to the amount of sensitive information managed. Any security breach or data loss could harm SEI’s reputation.
Client concentration: SEI’s larger clients account for a substantial share of its revenues, so a significant reduction in business by one of its big clients could create a big negative impact.

Understandability: 3/5 While SEI’s operations can seem complex, its overall business model is relatively easy to understand, and can be broken down into the different segments. The financial statements are fairly easy to read and understand. The different reporting metrics can be a bit confusing to an untrained investor. SEI operates in a fast-paced tech environment. It is imperative to continue to monitor how their business model evolves over time. Also there is a lot of terminology in the reports which may be hard for inexperienced investors. It should be easily understood by experienced investors, but may be harder for newer investors to understand.

Balance Sheet Health: 4/5 SEI’s balance sheet is generally strong, indicating a solid financial position:

Liquidity: Has an ample amount of cash, short-term assets, and marketable securities, giving the firm more than adequate liquidity.
Low Leverage: The leverage is quite low and shows that SEI doesn’t rely on large amounts of debt, making the company more financially stable.
Good asset base: They maintain their balance sheet with a good base of tangible assets including their large and complex tech infrastructure.
Conservative approach: They take a conservative financial approach.

However, one point of concern is the relatively high amount of intangibles. Also their long-term growth plan is a bit aggressive.

Key takeaways

SEI’s moat is narrow but sustainable due to switching costs, network effect, and a strong industry position.
The business model is fairly easy to understand.
The financials are fairly easy to analyze, indicating high profitability and low leverage.
The balance sheet is fairly strong with low leverage, strong liquidity, and an adequate asset base.
There is a possibility of a decline in market performance and a contraction of operating margins due to increasing competition, technological changes and possible regulatory crackdowns.