Envestnet Inc (ENV) 2010 Q3 法說會逐字稿

Good day everyone, and welcome to the Envestnet Third Quarter 2010 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Chris Curtis, VP of treasury. Please go ahead sir.

Thank you, and good afternoon everyone. With me on today's call are -- Jud Bergman, Founder and Chief Executive Officer, and, Pete D'Arrigo, Chief Financial Officer.

Our third quarter 2010 earnings press release can be found at envestnet.com under the investor relations section. During this conference call, we will be discussing certain non-GAAP financial information, including adjusted EBITDA, adjusted net income, and adjusted net income per share. This information is not calculated in accordance with GAAP, and may be calculated differently than other companies' similarly titled non-GAAP information.

Quantitative reconciliations of our non-GAAP financial information, to the most directly comparable GAAP financial information, appear in today's press release. During the call, we will also be discussing certain forward-looking information. These discussions are not guarantees of future performance, and therefore, you should not put undue reliance on them.

These statements are subject to numerous risks and uncertainties, that could cause actual results that differ materially from what we expect. Please refer to our most recent SEC filings, as well as our earnings press release which are available on our website, for more information on factors that could affect these matters.

This call is being webcast live, and will be available for replay for one month on our website. All remarks made during the call are current at the time of the call, and will not be updated to reflect subsequent material development. We'll take questions after our prepared remarks, and with that, I will turn the call over to Jud Bergman.

Thank you, Chris, and good afternoon. And, I'll add my own welcome to everyone, to our third quarter earnings call. We're pleased with the third quarter results. I would like to mention a few highlights.

First, regarding new account activity. Gross sales of assets under management or administration during the third quarter were $5.7 billion, compared to $3.6 billion in the third quarter of 2009. Net flows were $2 billion for the quarter. As we are experiencing redemption rates that are higher than historical average, in the quarter we had about a 6.9%, or what averages about 2.3% redemption rates per month.

We ended the quarter with $59 billion in total assets under management or administration, and we are at an all-time high for Envestnet, in terms of the number of advisors we serve. As of September 30th we supported some 13,000 advisors on our platform.

Revenue for the quarter was $24.6 million, up 25% from the prior year. Revenue from our assets under management or administration business, was up 31%, over one year ago. These results drove adjusted EBITDA to $5 million for the quarter, which is up 84% from the prior year's third quarter. We also achieved adjusted earnings per share of $0.07, up 133% from a year ago.

This being our second earnings call, I offer this reminder of who we are, and what we do. Envestnet is a leading provider of technology-enabled investment and practice management solutions to financial advisors. We integrate a wide range of solutions and services.

We provide financial advisors with the flexibility to address their high net worth and affluent clients' needs. We empower these advisors, registered investment advisors, independent broker dealer reps, larger institutions, to better serve their clients with a higher standard of care and advice.

I'd like to describe our organic growth strategy. When grow our business by signing up enterprises, and then adding advisors, and then doing more business with each of these advisors. We continue to on-board new enterprises and large registered investment advisory practices, which allow access to an increasing number of advisors, and expands the potential for us to service these advisors' clients.

Innovation fuels our ability to grow. So, we continually improve and expand the capabilities of our wealth management platform, and the investment solutions offered through our portfolio management consultant's group, or PMC, which is our in-house portfolio consulting group and investment solutions provider.

As we further scale our business, we leverage our technology infrastructure and operating model, to expand our margins while we grow top-line revenue. And, from time to time, we expect to accelerate our organic growth by making selective acquisitions of companies that further add to our scale, or that broaden or deepen the platform capabilities or investment solutions we offer.

During the third quarter, we exhibited solid evidence of growth in all aspects of our business. Advisors, accounts, assets under management and administration, all grew between June 30th and September 30th. In the third quarter we launched new wealth management platforms for several new clients, led by a very large broker dealer and a global bank. We expect to benefit from this new business in terms of assets and revenues over the coming quarters.

These new business wins had been anticipated. They were part of our new business pipeline, which continues to be very full. The pipeline includes a wide range of opportunities with registered investment advisors, independent broker dealers, money managers, other tamps or turn-key asset management platforms, and wire houses.

Our view in the pipeline is consistent with the last conference call, in that we expect that in the upcoming quarters, we will see new enterprise conversion activity, and net flows and assets that will be higher than our long-term sustainable growth rates. In other words, a sort of stair step of activity over the coming quarters, that will provide an increased base of assets for us to grow from in the future.

To support our growth, we continue to invest in our business, and the platform that supports the advisors that we serve. In the coming quarter's upcoming release on our wealth management platform, there are several things that we're very enthusiastic about. New tools for financial planning, and a new ability to construct, strategize, implement, manage, re-balance, and portfolio overlay at a household level, as opposed to an individual brokerage account or trust level.

This capability, which we call unified managed household capability, is a portfolio management tool set, that the highest end wealth managers have been asking for, and we're now delivering. So that they can manage wealth across registrations, multiple custodians, different account types, and also IRAs, 401ks, and insurance assets.

This breakthrough capability will be an important building block for advisors who want to provide a holistic wealth management program for their clients, and raise the standard of care and advice that they render to their high net worth and affluent clients.

Also, we continue to develop innovative investment solutions at PMC. Just under two years ago, we launched a strategic and tactical ETF program, and during that time we have attracted over $1 billion in net flows to these solutions. We are now launching a series of dynamic portfolios, sub-advised by Singer Partners. Singer Partners, based in the Chicago area, is led by Bryan Singer, the former head of Global Investment Solutions, and America's chief investment officer for UBS Global Asset Management.

These dynamic portfolios will incorporate Singer Partners time tested, dynamic, global asset allocation strategy. We believe that these portfolios will be a valuable component of many advisors' allocations in the quarters to come. Also, we have built more capability, and flexibility, and functionality into our aggregated reporting solutions. More custodial connections that ever before.

We are continuing to win business as a high-quality provider of highly accurate, timely, fully-reconciled, aggregated performance reporting to advisors. We also are very interested in sharpening our branding and our messaging to the marketplace. We want increase advisors' awareness of Envestnet's capabilities, which range from the value-added investment solutions offered through PMC, to an end-to-end wealth management platform, to stand-alone aggregated performance reporting in back office administration.

This branding and communication effort will be led by Envestnet's new Chief Marketing Officer, Marion Asnes, who joins us next week, I am very pleased to announce. Marion was previously the editor-in-chief of Financial Planning Magazine. So, she brings a valuable perspective on our advisor clients, as we continue to position investment as an industry leader.

We expect growth in revenue and earnings, to result from both continued net flows from existing advisors and enterprises, and a meaningful amount of new business coming on board in the coming quarters, due to enterprise conversions. We will balance margin expansion, and growth and earnings with investing in the business longer-term, to boost our longer-term growth. Which we believe will add significant value for shareholders. I'd like to turn it over now to Pete D'Arrigo, our Chief Financial Officer, to discuss our financial results in more detail. And, I'll be available for questions, following Pete's comments. Pete.

Thank you, Jud, and good afternoon everyone. And, thank you for participating in the call this afternoon. Total revenues for the third quarter increased 25% to $24.6 million, from $19.7 million in the third quarter of last year. The increase was primarily due to an increase in revenues from assets under management or administration, which grew 31% to $19 million, from $14.5 million in the third quarter of 2009.

Our revenues from assets under management or administration are fees charged from accounts on our platform in either category. These fees are calculated as basis points on the value of the assets held in these accounts. We bill quarterly in advance for over 85% of our asset-based fees.

Our advisor-focused business model continues to drive net account growth, and positive new flows into assets under management or administration. During the third quarter, assets under management or administration increased $5.6 billion, with $2 billion of net flows, and a favorable market contributing another $3.6 billion.

We ended September with assets under management of $12.4 billion, and assets under administration of $46.7 billion, for a combined total of approximately $59 billion. A year ago, our total assets under management or administration was $36 billion. Licensing and professional services revenues increased 7% to $5.6 million, compared to $5.2 million in the same period a year ago. Licensing revenues are more fixed in nature, and are not based on asset values.

Cost of revenues increased 18% to $7.4 million, from $6.3 million last year. Cost of revenues include the sub-advisory fees we pay the managers of funds that are included in PMC's investment solutions, as well as, clearing, custody, and brokerage costs. Like our asset-based revenues, these costs are primarily assessed in basis points on the underlying assets, and vary with the level of assets under management.

Compensation in benefits increased 36% to $9.9 million, from $7.3 million last year. Primarily related to increased head count, supporting the growth of the business. General administration expenses increased 21% to $4.5 million, from $3.7 million in 2009.

On a non-GAAP basis adjusted EBITDA increased 84% to $5 million, from $2.7 million a year ago. And, our adjusted EBITDA margin for the third quarter of 2010 was slightly over 20 percent. We believe adjusted EBITDA is a good fundamental measure for how our business is performing, as we make adjustments for non-cash and non-recurring items.

Adjusted net income increased 118% to $2.1 million, from $1 million for the third quarter of 2009. Basic and diluted shares shown in our statement of operations, reflect the 28 days of July prior to the completion of our IPO, when we had a mix of common and preferred shares outstanding. At the end of the third quarter, there were 31.3 million common shares outstanding. And, we anticipate the basic weighted average common shares outstanding to remain around this throughout the fourth quarter.

Turning to the balance sheet, we completed the third quarter with $63.6 million in cash and cash equivalents, reflecting the net proceeds we received from the IPO. Over time, we expect to grow the business through a combination of organic growth driven by favorable industry trends, and opportunities for strategic activities to accelerate that growth. We also believe our scale and operating leverage, will allow us to grow earnings faster than revenues. With that, we thank you again for joining the call today, and we'll turn it back to the operator for any questions.

And, ladies and gentlemen, the question and answer session will be conducted electronically.

(Operator Instructions)

And first, we'll go to Suzi Stein, with Morgan Stanley.

Hi. Thanks for taking my question. Can you just provide some color on the spike in licensing assets in the quarter?

Yes, we can -. So, again, some of the licensing assets came through existing relationships, and they also reflect some new reporting business that was brought on with existing clients and new clients.

Well, then how are you thinking about that just in terms of, you know, growth going forward?

I missed the end of that. How are we thing about that in terms of -?

Just going forward, how are you thinking about that, because there was a big spike in the quarter? I'm just curious, how you're thinking about growth in that going forward?

Well, growth in the underlying account activity is, of course, not directly and predictably tied to growth in revenue. And, we find that, that with the enterprises licensees that we do business with, there are times when new programs are initiated that we are servicing, and so we think about that business very differently than we think about our assets under management or assets under administration business.

Since these come from a handful, I think a total of six enterprises, where we are - either have done a customized platform for the enterprise, or it is the sole platform that the enterprise uses. As a result of that, there's a lot of scale and efficiency in administering those accounts.

We don't wholesale. We don't support. We don't do client service. There aren't -. There's not a fiduciary aspect to it. So, it's priced differently, and it attracts flows differently, and less predictably than our assets under management or administration.

Okay. And then, just a separate question on the acquisition pipeline. Can you just talk about how that looks, and has there any material change in asset prices that you can see?

Well, we are reviewing actively selective acquisitions that could accelerate our growth, and deepen platform capabilities. As we've looked at this, we've not seen a significant change in asset prices. There are a number of opportunities that would offer financially accretive growth opportunities for the company. But, we are selectively and very closely evaluating those opportunities. And, we don't have anything to announce now or eminently.

Okay. Thank you.

Next, we'll go to Eric Bertrand with Barclays Capital.

Hey guys. Firing off of that, you know, on the acquisition pipeline again. Let me try it a different way. Would you say that you're in the early innings of that pipeline, and still surveying the landscape? Or, are you in the later innings and, you know, getting close to something to announce in the next, you know, we'll call it quarter or two?

Well, let me just make sure I understand your question. You know, we acquire new enterprise conversions through business. And, we talked about acquiring business wins. I'm assuming you're not talking about business wins in the normal course of business, with new enterprises or large RIAs. Is that right?

That's correct. I'm thinking about, you know, your $64 million cash (inaudible - multiple speakers) on the balance sheet.

Capital of (inaudible) acquisition. We have consistently been evaluating, reviewing opportunities over the last several quarters. And, as we've said in the past, we would expect - we would do two or three strategic acquisitions in the coming four to six quarters. And, again, we have nothing that we are eminently going to - prepared - or is announceable. But, we expect that there will be meaningful activity over time that will accelerate our growth.

Okay, that's fair. And then, firing off of one of the comments you made in the prepared remarks on redemption rates. Definitely has picked up, you know, ever so slightly over the last couple quarters. Are you seeing any worsening trends there? Or, would you characterize it as a blip? Said another way, should we expect redemption rates to improve in the fourth quarter, based on what you know?

We don't know -. All I can give is some historical perspective. It's loosely correlated to VIX, to volatility, and it tends to quiet down over - depending on how volatile the market was - over several months following the spike. We had an increasing amount of volatility in the June, July, and August time frame that tended to result in redemptions, turnover, re-allocation.

We're expecting that the levels that we've realized through this year, which have ranged from 1.8% per month to as high as 2.3% per months, is going to continue for the foreseeable future at around 2% per month. This higher than our historical average of 1.3% or 1.4% per month. We don't know if this is the new new. Or, whether it will eventually settle down. But, for the foreseeable future, this quarter in particular, we don't expect a dramatic improvement in redemption rates.

What sort of lag -?

(inaudible - multiple speakers) just a little more perspective on that. If you go back to, you know, the early stages of 2009 during the market downturn, redemption rates were very high. So I think, you know, what we see overall is that there's a general improvement to redemption rates going back, you know, several quarters.

Now this quarter in itself, again seems -. What Jud said, you know, there was a little more volatility. But again, indicative of what we're feeling going forward. And, to use your word, it feels more like a blip than a reversal of the long-term trend that has (inaudible) the more intermediate-term trend, which has been trending down since the end of 2008.

Right. And, you know, quarter to date the markets have, you know, done reasonably well. Volatility is declining. So, you know, my hypothesis is that there is, you know, likely some improvement in that in the near term.

We are anticipating and hoping for that. To say that we are expecting that, would be a little bit too strong.

Okay. And - in terms of one little detail - are there any notable conversions of new assets coming online that we should expect in the next, you know, quarter or so?

Well yes, I think that there are a number of conversions that -- now notable for us. There will not be anything in the magnitude of the fund quest conversion. But, we expect that the fourth -. There will be an upturn in enterprise conversions, beginning this coming quarter.

However, having said that, you know how the billing works on these sorts of things - they're pro-rated. I would not expect a significant revenue adjustment in this coming quarter from that. It would result beginning the subsequent quarters, because of how we bill for our services.

Which dovetails to my last question. You know, as you do bill, you know, in advance, you know, we did have a nice rally during the third quarter. Fair to expect that revenues, you know, management fees from AUM and AUA to improve sequentially? Or, is there any sort of, you know, offset to the average revenue spread that we should be aware of that would offset that?

We think the revenue - the fee rates on average for variable rate of the asset-based fees, are going to be consistent with what we've seen in the past.

Fair enough. Thanks.

The recent past.

(Operator Instructions)

Now we'll go to Mark Lane, with William Blair.

Good afternoon. Thanks. So, just a couple quick ones on expenses. From a cost of revenue perspective, as well as from an operating perspective, you know, thinking about the level this quarter. Is that pretty consistent with what your expectations are in the past, and as we look at the fourth quarter, anything unusual that you expect?

Yes, again, on the costs of revenues, we view that more as a percentage of the revenue from AUM and AUA.

Right. Of course.

And, we're expecting that percentage to be consistent.

Okay.

So Jud, do you want to talk about some of the other expenses?

The operating expenses, payroll, personnel, that sort of thing - you can look at very much in line with where it's been in the recent past. We have taken, I guess, maybe the opportunity to invest in a marketing leadership, as I mentioned with Marion Asnes. And, we expect that we may have another investment in personnel, that we believe would enable us to grow our top line consistently and strongly over the long-term. But, it would be perhaps one or two individuals that would be increased in an operating expense, to some level.

Okay. And, then on the asset flows. Can you characterize the - the growth asset flows during the quarter by month, and particularly September? Did we start to see some better strength as the market started to improve throughout the quarter?

Yes, absolutely we did. August was a little slow. September started to pick up. And, we anticipate and expect that that will - that will continue through the fall. There's - there is investing going on across a whole spectrum of strategic products, tactical products. Equity-oriented fixed income continues to be highly in demand across the various programs.

And then, in the assets under administration that we serve - where usually the fiduciary is the advisor themselves, we're seeing - we're seeing - we're seeing nice flows from new account acquisition at the advisor level.

All right. Now, just one last question on the number of advisors. You know, just kind of a very slight upkick second quarter to third quarter. Was there anything unusual in that growth why, you know, maybe it wasn't a little bit greater. Any insight there?

You know, I don't have insight there. It - it - there's -. I expect that that has been perhaps -. I don't know the answer to that.

Okay.

The growth in advisors that we've had is generally not seasonably adjusted. It tends to be quite consistent over the course of the year. And -. Of course, we've grown -. Just some perspective - over the last five years, we grown same-store advisors - which is not a particularly advantageous way of talking about it. Because I don't think advisors, nor do we, think of themselves as stores.

But, same enterprise advisors have grown around 11% to 12% per year. The real growth comes because they add accounts at 18% or 19% per year. And, that compounds out to just over 30% account growth. So, advisor growth over time has been consistently around 2.5% a quarter over the last five years.

Okay. Great. Thank you.

And, we'll now go to Morgan Stanley, with Thomas Allen.

Hi, guys.

Hey.

Just a followup on Suzi's question. Your licensing assets have gone up 25% this quarter. And, I know that these are longer-term contracts. But, should we see some spike in revenue from licensing, or no?

Not in the near term. No.

Okay. Great. And then, my second question was - For your cost of revenue, it was 39% of AUM and AUA revenue in the third quarter. And, it was, you know, about 41%, for the, you know, six quarters prior. It looks like it's been trending down the past two quarters. Can you just speak to that a little?

I do not believe it's necessarily a trending down. It bounces around from quarter to quarter, based on the asset mix of the products that are being served. I think you deduce from that, that we did more fixed income-type products, and less - relatively less equity products. But, it does bounce around a little bit. And, we're not seeing that as a - as necessarily a trend.

Okay. That's great. Thank you.

(Operator Instructions)

Well, there not being any more questions, I think I will just wrap things up by thanking you very much for calling in this afternoon, and for your interest in our company. Thank you, and good afternoon.

Once again, this does conclude today's conference. We do thank you all for joining us.