Envestnet Inc (ENV) 2010 Q4 法說會逐字稿

Good day, and welcome to the Envestnet Fourth 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, Treasurer. 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 fourth 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 included 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 reconciliation 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 to 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 developments. We will take questions after our prepared remarks, and with that I will turn the call over the Jud Bergman.

Thank you, Chris, and good afternoon. I extend my own welcome to everyone on today's earnings call. We are very happy you could join us. On our call we will discuss our results for the fourth quarter, for the full year and also our outlook for 2011.

When we met with investors this past summer as part of our IPO we talked about long-term trends in our market that believe would enable us to target long-term organic top-line growth of 20% per year, long-term growth and adjusted EBITDA of 25% per year and to achieve operating margins in the longer term of 30%. In addition, we identified the client conversions and selected merger and acquisition activity would likely accelerate our growth over the near term, which we identified as the next six to eight quarters, and also that growth from these activities, which are less predictable as to timing, shouldn't be extrapolated into the longer term.

With that backdrop we are very pleased to report that during the fourth quarter we grew revenue from assets under management or administration by 33% over the fourth quarter of 2009. For the full year we grew revenue from assets under management or administration by 34% to $76 million. Overall revenue growth, which includes licensing and professional services revenue, was up 27% for the quarter and up 26% for the full year.

Just as important, we were able to reach over 21,000 advisors with our services and offerings and nearly 14,000 advisors who leverage our asset-based offerings. Advisors who use these offerings grew by over 60% from one year ago. Organic growth contributed to 15% growth in this area and the balance of grow resulted from the FundQuest conversion. This growth is considerably above our long-term target of 10% per year in advisor growth.

Gross sales were also very strong for the quarter. Net flows, while still significantly positive, were not as strong as the previous quarter, a result of higher than expected redemption. Still, we were able to add $1.7 billion in net flows to assets under management or administration in the quarter. Redemptions affect our business as they do the entire industry that are a function of many factors, but we do expect redemptions to normalize in 2011 and revert to levels closer to historical amounts of 1.5% per month.

Regarding conversions, we continue to see them as a near-term accelerator of our growth. Conversions added about $18.6 billion in net assets to our platform during 2010. With the most recent quarter we added $5.7 billion in gross conversion assets and $3.7 billion in net conversion assets, and we were able to achieve this growth while also expanding our operating margin by 490 basis points compared to 2009.

Looking forward, we expect to benefit from some very strong industry trends that we believe will continue to propel our growth. More advisors are turning independent. More investors are seeking a trusted advisor, and because of regulatory and other changes a fiduciary standard of care is emerging as the industry standard. We see a significant and growing opportunity to help improve the quality of wealth management services that advisors can deliver to their high net worth and affluent clients.

If I could expand for a moment on these trends, we expect breakaway brokers and the firms that support them will grow much faster than the industry in the coming quarters and years. We want to grow with these firms by partnering with them to deliver the wealth management solutions they need to best serve their clients in the new independence environment.

We have also found, having conducted a study last year, that high net worth and affluent investors want objective, conflict-free, sophisticated wealth advisory services. As boomers turn to retirement they need advice from someone that they can trust and are increasingly turning to the trusted advisors who are independent and objective.

Also, an emerging standard of care are helping the best advisors gain more high net worth clients. Last year the Dodd-Frank Act directed the SEC to conduct a study on standard of care under which brokers and advisors serve their clients. The SEC recently completed its study and recommends creating a common fiduciary standard that would apply to brokers as well as advisors.

This reflects a profound opportunity for advisors who adhere to a clear fiduciary standard of care. Those who align with the best interests of clients can solidify and broaden relationships, and today Envestnet is fully able to support the emerging fiduciary standard for advisors.

Because of these trends, and also our more episodic conversion activity, we noted in previous investor meetings and calls that during the shorter term we expect that growth, and revenue and EBITDA will be significantly higher than our long-term targets. We want to affirm our long-term growth targets, but our conviction has grown during the past six months that there is a growth window in the nearer term that can provide higher growth opportunities for us over the coming quarters.

This window is open because of the accelerating changes in the industry just outlined and to take advantage of this opportunity we will be investing in the ongoing growth of our business. This means investing in channel and platform development. We will be doing this with one eye on our long-term target of 30% operating margin and with a very clear focus on taking full advantage of our near-term accelerated growth opportunities. As such, we expect that operating margins in 2011 will expand in line with the approximately 500 basis points that we achieved in 2010.

Regarding strategic activity, we continue to expect that we will complete two or three mergers or acquisitions in the coming four to six quarters. We believe that the current environment is favorable for this activity and are in the process of exploring transactions with several candidates. I would like to now turn it over to Pete D'Arrigo, our Chief Financial Officer, to discuss our financial results in more detail.

Thank you, Jud, and good afternoon, everyone. Thank you for joining us on the call this afternoon. I am going to review our financial results for the fourth quarter and full year and provide more detail on how the growth of our business is reflected in the numbers.

Revenues from assets under management or administration grew 33% to $21.8 million in the fourth quarter of 2010 compared to $16.4 million in the fourth quarter of 2009. Total revenues, which include revenue from licensing and professional services, increased 27% to $27.6 million in the fourth quarter from $21.8 million in the fourth quarter of last year.

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 these asset-based fees, so our fourth quarter revenues from assets under management or administration were driven primarily by the asset values as of September 30, 2010.

Additionally, we have noncash amortization related to the FundQuest conversion which reduces our reported revenue, adding customer inducement costs to reported revenue. The effective fee rate for AUM/A during the fourth quarter was approximately 15.7 basis points, which is higher than the 15 basis points we saw in the third quarter, but that increase was due to the AUM/A conversions coming on during the fourth quarter that weren't in the denominator of September 30 of assets. If you include the $2.3 billion of AUM/A conversions in the starting number the effective fee rate is still approximately 15 basis points.

Licensing and professional services revenues increased 7% to $5.8 million compared to $5.4 million in the same period a year ago. Licensing revenues are more fixed in nature and are generally not sensitive to short-term changes in asset values for our existing relationships.

During the fourth quarter we added $3.4 billion of assets and enterprise conversions that are covered under new licensing agreements. The combination of licensing revenue and professional services fees were earned from these new relationships in the fourth quarter, contributing to the year-over-year increase.

Our advisor-focused business model continues to drive net account growth and positive flows into assets under management or administration. During the fourth quarter we added $9 billion of assets under management or administration on a gross basis, including the $2.3 billion of conversions, bringing the total for the year to $37.7 billion. Accounts in AUM/A increased 75% in 2010 to over 300,000.

Redemptions during the quarter totaled $7.3 billion. That included approximately $2 billion related to a client deconversion from a client was acquired by another firm earlier in 2010. That client moved their assets to an in-house solution at the end of the year. The remaining $5.3 billion in redemptions translates to a rate of approximately 3% per month.

On the expense side, our cost of revenues increased 35% to $9.3 million from $6.9 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 on basis points on the underlying assets and varying with the level of assets under management.

Cost of revenue as a percent of our AUM/A revenues increased in the fourth quarter to 42.7%, up from 39% in the third quarter. Compensation and benefits increased 29% to $9.8 million from $7.6 million last year, primarily related to increased headcount supporting the growth of the business.

On a non-GAAP basis, adjusted EBITDA increased 56% to approximately $5.5 million from approximately $3.6 million for the fourth quarter a year ago, and our adjusted EBITDA margin for the fourth quarter of 2010 was 20.1%. We believe adjusted EBITDA is a good fundamental measure for how our business is performing as we make adjustments for noncash and nonrecurring items. Our adjusted EBITDA margin expanded from 13.6% for the full year of 2009 to 18.5% in 2010. We expect to continue to expand margins at this magnitude through 2011, still with a long-term goal of 30%.

Adjusted net income for the fourth quarter grew to $2.3 million and adjusted net income per share was $0.07 per diluted share. Turning to the balance sheet, we ended the year with $67.7 million in cash and cash equivalents. We intend to invest that cash in M&A opportunities, which could include consolidating and strategic transactions that add to our scale or that broaden or deepen our capabilities to better serve our advisors. Thank you and here is Jud, who will make some closing remarks.

We are proud of the advisor relationship that we have been able to build over the past decade. As we look forward there are big trends that are in our favor. Our pipeline of opportunities is full and more and more advisors are seeking Envestnet's wealth management solution to better serve their clients. All of this positions us very well to have a good year in 2011 and beyond. With that, we thank you again for joining the call and we will turn it back to the operator for your questions.

Thank you, Mr. Bergman.

(Operator Instructions)

Our first question comes from Alex Cram with UBS.

Hey, good evening everyone.

Hi Alex.

Let me start actually with some numbers questions in terms of the last quarter. I think you mentioned the cost of revenue tick up relative to AUM, AUA, but I don't think, unless I overheard it, you gave somewhat of any sort of reason, so is there any sort of shift in products that people are using, any sort of higher fees that you have to pass through to the I guess outsourced providers of asset management services, or where did it come from? And more importantly, is this a good run rate right now going forward?

Yes. The tick up is mainly related to a tick up in the AUM as a percentage of total AUM/A from about 21% to 23%, so it is related to that asset mix. As we brought on -- I think about 30% of our gross sales in the fourth quarter were AUM and so all of those costs of revenues they will get picked up, so I think directionally it is a reasonable assumption going forward.

Okay. Just because from my perspective it looked like obviously there was a mixed shift, but the mixed shift happened during the fourth quarter and unless I am mistaken I think a lot of this in the charge or the costs are assessed basically at the end, or the beginning, the end of the third or the beginning of the fourth, so was a little confused about the mixed shift because the mixed shift from the second to the third quarter was not as big, but --

What happened so is some of the conversions that came on earlier in the quarter so you see the revenue and the cost associated with that. And we talked about the deconversion that happened at the end of the quarter certainly --

Sure.

-- and that was in for the quarter and affects all that mixed shift.

Okay.

Of course there was other business. There was a lot of other business and shifting going on with the AUM/A outside of just that focus, but that was the main driver.

Okay, and then a couple of other quick ones here. In terms of the new conversion you just brought on with the heavy licensing component, now that brought up a little bit in the fourth quarter, but it is going to be an additional step up in the first quarter as that maybe fully ramps up, in terms of licensing fees?

Yes. Some of -- again, the revenue rate we will get on an annualized basis on that is comparable to other licensing arrangements and some of that was picked up. I think there will be a slight pickup in the first quarter and beyond, but I think most of that is going to be reflected by assuming a similar type of arrangement that we have had with other license arrangements.

Okay. And then one more numbers question, but I noticed the, on a sequential basis your G&A expense ticked up a lot. Again, is this a good run rate here, or did somebody, something onetime press this up, or is it maybe incremental investments that you were talking about in terms of taking advantage of this environment here?

Yes. Again, there is nothing really big that is in G&A there. There were a few smaller items that contributed to that and, again, it had to do with some of this reinvestment in the business that Jud talked about and that is really the main driver. There is no one measure or outlier thing that happened in G&A.

Okay. And then let me just ask one other question real quick, but can you give us an update of the pipeline in terms of any sort of big conversions? Obviously you had a big one in the fourth quarter. I think last time we talked you said there might be a couple of bigger ones at the beginning of the year as well, so any sort of help you can give us in terms of timing, any sort of quantifying those that would great. Thank you.

Alex, we would like to give as much as we can here. As we have mentioned before, the conversions, the fact that they are going to happen we are highly certain of, the exact timing of which we are less certain of. And so the conversion pipeline that we have talked about we expect to fully realize in the year, but whether that happens yet in the first quarter, early second quarter, third quarter, the timing of those we are just, even as of now we are less certain, although there is activity that we expect to see beginning in this current quarter.

Okay. Why don't I jump in back in the queue and let somebody else ask questions. Thanks.

All right. Our next question comes from Suzi Stein with Morgan Stanley.

Hi. Going back to your comments on potential M&A activity, can you talk about what is of most interest to you in terms of targets? Is it acquisitions for technology or acquisition of a competitor, a new geography? Is -- can you maybe put in order or give us some sense of what you are really focused on?

Yes. We are -- and as we have indicated in past investor meetings we look at the strategic activities that fall into a couple of areas. One would be consolidating transactions that would expand our reach into advisors. Consolidating transactions are more accretive financially, yet they don't materially alter the positioning or the capability of the platform or service offerings.

So as we look to the coming quarters we would expect that we will be balancing strategic activity, which with an orientation towards consolidating strategic activity for financially motivated reasons, but we are also looking to single point application providers, as we identify specific needs for high end RIAs and high end breakaway brokers that would complement, deepen, enhance or extend the current platform offering we have and enable us to offer more or better to our targeted advisors. And this type of transaction we refer to as more strategic in its nature and we expect that we will do one or two of each of these over the coming four to six quarters.

Okay. And then just a question on the tax rate, can you just talk about why the tax rate was so high in Q4 and what you would expect that to be going forward?

The tax rate is, again, reflective of some -- we have our profitability. We have some uncertainties that we include with various state taxes. I think we can take it offline and get into more detail on the components of what is in the taxes, but again, we are still using the tax laws carry forwards and very focused on using them up as we generate profits.

Okay, great. Thank you.

So there is a big difference between the accrual rate, which you are seeing, and the actual rate which is zero, or near, actual near zero.

Okay, great. Thank you.

Our next question is from Mark Lane with William Blair & Company.

Good afternoon. I have a couple. So, first of all, on the assets under administration you referred to the redemption activity and I wasn't sure if you were referring to the just the loss of the large client, which I don't think was a big surprise, but it seems like the underlying redemption activity was also much worse. So you could explain the large client, but what happened on an underlying basis? It seems actually quite severe relative to the past several quarters.

So the approximately $2 billion client loss is captured as a deconversion and so it is netted out against the conversion assets that flow. You are right that the underlying redemption rate was about 3% for the quarter and this compares with almost the exact same amount one year ago in the fourth quarter of '09, although the mix was slightly higher a year ago on AUM and in line on AUA.

So, just to step back with some industry perspective, fourth quarter is the one quarter that tends to be non-seasonal for the rest of the year. There is often yearend tax planning, reallocations of the advisor, some distributions that are made.

As we investigated what is going on with redemptions we didn't see very much that was extraordinary from this kind of activity. The only kind of event-driven difference was that there was a 12/31/2010 Roth IRA conversion deadline that created some churn, if you will, in some of the tax-deferred accounts. So that 3% level is approximately twice what historic levels are, up considerably from where we were in the second quarter and the third quarter, and it represents a higher level than what we expect it is going to be for 2011.

Okay. And the other part of the business then, the AUM, the $1.4 billion of net flows, I think we only have quarterly data going back to like the first quarter 2008, at least that is what I have. Was this -- it looks like it was close to a record quarter, or at least the data that I have. Can you put that in some context?

Some of that $2.3 billion that we said of AUM/A conversions was in AUM.

Some of it is both, is each of the buckets.

In both, but there is more of it in the AUM bucket.

Can you split it out specifically?

No. We are -- it is slightly favoring the AUM side, but --

Okay.

-- I don't think we want to split it.

Okay. And then on the expense for the margin guidance, I am a little bit unclear as to what revenue growth estimate that is associated with. I don't know if you can give maybe more of an idea of what the underlying expense growth would be associated with that sort of margin goal guidance. And I am assuming you are talking about 500 basis points and of adjusted EBITDA margin versus the 18.5% that you cited for the year, for 2010. That's what we are talking about, right?

So what we are doing is we are trying to balance investment in the business to achieve the near-term accelerated growth opportunities with the long-term targets that we have identified and committed to of 30% of operating margin. So we are seeing that for this coming year the outworking, or the balancing of that would mean an operating margin expansion of about 500 basis points, still very much committed to the long-term operating margin of 30%, but expecting that over the next quarters that the near-term growth opportunity will be higher than our long-term targets.

Okay. How about on the enterprise opportunities? So I think you said that, okay, the timing uncertain, but the fact that you are going to get them is highly certain. So if you look at the conversion number this quarter, $5.7 billion, let's say who cares if it comes in, in over two years? What is the opportunity that you see because I think you have described six to eight quarters, so if you compare to the $5.7 billion and you look out over the next several quarters if is a multiple of that? Is it -- what is, what is the relative opportunity?

Well, first of all the $5.7 billion is a gross conversion amount. It was $3.7 billion net of the deconversion.

Yes.

And that being there now represents the assets that as of the quarter are being billed on, so there is -- once a conversion occurs there is generally in line growth with that enterprise's assets at post-conversion, but we are identifying an episodic opportunity really over the coming quarters to do more of those, but it is going to be lumpier. It is not as predictable.

The predictable part of our business is the organic growth from same store advisors and enterprises, and that is much easier for us to talk about in terms of where we expect that will be over the coming quarter and quarters. On the conversion side we have identified a nearer term opportunity that in over the past couple of quarters we have identified as a four to six quarter opportunity, which is now a three to four quarter opportunity. And we think that that is likely to continue for at least our horizon through and into 2012, so that is what we are preparing for. That is what we continue to see.

The agreements, the pre-conversion activity is all progressing as planned. The actual date where the converted assets begin to be billed on is what is less certain. And so the -- I am going to have to think about the -- your question is would that $5.7 billion or that $3.7 billion annualize out to a quarter-by-quarter rate, I think that is what you are asking and that is just -- I am not. We are not prepared to give that degree of specificity to the conversion activity.

I am not asking about it on a quarterly basis. I am just asking about what you see this episodic opportunity. It is the three or four quarter opportunity really being in the aggregate, and if it, even it slips into 2012. I am just thinking about this accelerated --

I understand what you are saying. There are, roughly speaking, $12 billion to $14 billion is a number that I think is useful.

Okay. It is. Thank you.

Our next question from Eric Bertrand with Barclays Capital.

Yes. Playing off of the, Suzi's question on acquisitions, understanding the types of companies you are going after, what the metrics that you look at, at these sorts of companies in terms of maybe not necessarily size, but accretion versus maybe a little bit of dilution in the near-term. Is it a TE? Is it an EBIT to EBITDA? What sort of metrics do you target?

Well, we are -- in any of the activity we are very keen on creating shareholder value over the longer term. On the strategic consolidating transactions we expect that those will be financially accretive concurrent with the closing and going forward and that is a result of the economies or the efficiencies that would be generated by a consolidating transaction. Anything we would be doing strategically would have value accretion, but it may take place over a two to three-period.

Nobody wants to do a financially dilutive transaction even if there is strategic value. We expect that if there is any financial dilution it would be very modest and over a very short period of time, and that the strategic benefits, and the long term revenue enhancement and profit enhancement potential would be more than enough to offset that in the longer term.

Okay. On the assets per account we saw a 10% market rally during the quarter and yet assets per account, both in the AUM and the AUA were flat. Is fair to characterize this is a function of the much smaller accounts that are coming in via these net flows and conversions, compared to your existing client base?

Yes. I think, again, the biggest driver, getting back to that deconversion was a sizeable client with a very high average account size, so that's the main impact of that.

Okay. Then asked a different way, are the accounts coming in, in the net flows line correcting out that deconversion, do those look relatively homogenous compared to your existing client base?

Yes.

Okay. And then my last question is more of a strategic one for Jud. We have seen some stepped up activity and at least rhetoric from Ameritrade and Schwab talking about their investments in technology and the RIA space. Do you view them as a sizeable competitor, or what are some of your competitive concerns that you look at as you try to take a step function higher as you take advantage of this window that you have advertised?

So that is a very good question. We see that firms like Schwab, TD, Fidelity and others who provide platform services to RIAs, and who do so with a view towards the clearing and custody side of the business, has traditionally been the first place that an advisor will look for a platform or for a home.

With the advent of firms like Envestnet, we believe that that will continue to be the case, but more and more advisors are looking for a platform that is independent or that does things different than what their custodial relationship does. So it is very important for us to partner with firms like Fidelity, Schwab, TD Ameritrade to offer services for portions of our platform that complement what they are doing.

And we live in a world where some of our best cooperative partners are in some ways also competition for us and we are very comfortable with that dynamic. We know that there is going to be investment in this space because of all financial services it is the growth of the RIA, the duly registered and the independent broker/dealer which is faster than any other segment.

And so it is a very big space. These big trends will attract big investors and we expect that when necessary we will compete effectively with them, but more often we will cooperate effectively with them in order to create beneficial solutions for the, for really who is important, the end advisor and their high net worth client.

Okay, great. Thank you.

(Operator Instructions)

And we have our next question from Thomas Allen with Morgan Stanley.

Hi guys. So you put out a press release about being supportive of the uniform fiduciary standard. Can you just talk a little about how you think you could monetize that if it was to happen?

Well, the uniform fiduciary standard doesn't represent, we don't believe represents a single opportunity. We see it as part of a broader trend where advisors who undertake that standard of care will be more successful in the marketplace. So we have created on our wealth management platform a number of features and functionalities that support a fiduciary process from tracking, or why advisors make certain determinations as to asset allocations, fund selection or manager selection to the full research and capabilities of abling and enabling that advisor to conduct their business following that standard.

So we see that as the standard emerges we are perfectly positioned to take the advisor who wants to generate and deliver that standard of care, and do so in partnership with an outsourced provider of services, technology or investments. That is how we have built our business and so we think that that emerging standard is a very good thing for independent advisors, and that being good for independent advisors that is good for Envestnet.

Okay, great, and then one more question. The client that you lost, the $2 billion client, were -- how much revenue book -- was the loss of revenue so much to that $2 billion number? Were they -- did they just do -- were they a smaller client?

We were sorry to lose them. The client went to, was acquired by a much larger entity that has an in-house solution. We lost $2 billion and the approximately run rate of revenue on that was just over six basis points.

Perfect, all right, sorry, one more follow-up. Can you tell us who the conversion to your platform was?

We don't have authorization, so I think that we are not prepared to do that, from the client.

Okay, understood. Thank you.

Our next question comes from David Grossman with Stifel Nicolaus.

Great. Thank you very much. I apologize if this was addressed earlier, but I hopped on a little late but, Jud, I heard you talk about the $12 billion to $14 billion of conversion activity I guess over the next four to six quarters is underlying your 500 basis point improvement in margin. How does that $12 billion to $14 billion today compare to perhaps what it was six months ago?

David, there is two ways that I answer that. It is -- there is -- it is a little clearer in terms of where that is going to be coming from and the amount is a little bit bigger, so it -- there is two dimensions to that.

One is client-specific and how it is going to be done. Some of it will find its way in the conversion assets that are billed on the basis of AUM. Some will find its way, this conversion asset that is billed as AUA. Some will find its way as conversion asset that is billed by way of licensing arrangements because that cuts across our whole business. So that is clearer.

And then the size of that opportunity is also clearer. We are growing in our conviction that this may not be just a onetime backup from activity that was put on hold during the 2008, 2009 market seize up and while, yes, there is that, as we have in the past as markets thaw technology decisions, outsourcing decisions that have been put on the backburner are then accelerated, so that is a part of it, but we also see that these broader trends are prompting reviews of the overall competitiveness of various institutions' offerings.

Do we have the most recent capabilities for managing a household of assets, even if the assets may not be within a custody account that the advisor has fiduciary access to? Do they have the broadest and the best aggregation and reporting capabilities? Are the assets under management solutions are from an in-house environment, are they reflective of what is out there with respect to the best of breed open architecture offerings?

So both the thawing from what had been a seize up, and originally when we had scoped this out last summer we saw a lot of it as being deferred, cheap decisions for technology or outsourcing, we are a little bit more confident. There is greater conviction with us now that this is not just a three to four or five quarter activity, is maybe something that happens over a little bit longer period of time.

I see. Thank you for that, and then just as a follow-up to that then, as you think about the investments that you articulated that you are going to make, can you help us understand better what those investments include, at least the major items?

David, we have tried to keep apprised -- it's people. It's platforms and there may be strategic activity, so with respect to the organic investment in the business we have accelerated some of our hires, people that we had been planning on bringing on. We are enhancing our, developing our, deepening our presence for enterprises, independent broker/dealers and for registered investment advisors, adding people who can service and support those practices.

We are adding people in technology and engineering to ramp up our capabilities for platform and product development. And then we are intending to invest in the business in the area, strategically, which would also be around accelerating our opportunities for platform enhancement, for channel development. And just -- and so those investments are being made with an eye towards expanding our operating margins this year and in future years.

Okay. Thank you very much, and just one question I guess for you, Pete. When you talk about the effective fee rate and you are making adjustments, can you just quickly review what those adjustments you make to get the net number?

Sure. So I am starting with the revenue from assets under management or administration and I am dividing that by the beginning assets under administration, or assets under management or administration, but the revenue number I am adding back the customer-inducement costs.

Okay. I remember that now. I got it. Great, thanks very much.

You're welcome.

And that does conclude out question-and-answer session. I would like to turn the call back over to management for any further comments.

Very pleased for the questions. We are looking forward to following up with many of you in the coming days, and we sincerely appreciate your following the firm and your support of Envestnet and the advisors we serve. Thank you.

And that does conclude our conference and we appreciate your participation. ??

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