Envestnet Inc (ENV) 2011 Q1 法說會逐字稿

Good day and welcome to the Envestnet first quarter 2011 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 first quarter 2011 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 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 to Jud.

Thank you, Chris, and good afternoon. I extend my own welcome to everyone on today's earnings call. We are pleased that you could join us. During the first quarter we added assets and advisors to our platform, delivered double-digit growth in revenue and earnings, and we continued to develop our wealth management solutions for advisors not only in terms of enhanced platform functionality, but also in providing access to additional solutions through strategic relationships. This builds the base of continued growth in our business as advisors turn to Envestnet to help them better serve their high net worth and affluent clients.

We'll review the specific performance highlights in a moment, but first I want to provide some context. Today we see an acceleration of the same trends that have fueled our growth for the past decade. More advisors are becoming independent as they look for objectivity and better wealth management solutions for their clients and their practices.

According to a recent report from Cerulli the number of registered investment advisors and duly registered advisors are growing at the expense of broker/dealers and wire houses. More advisors are transitioning their books from commission-based to be -- to fee-based, not only those adopting the RIA or duly registered business model, but also within established broker/dealers as financial advisors take on more fee-based business.

What recent study found, that fee-based assets at the Top 50 independent broker/dealers have grown by more than 25% per year since 2006. And also importantly, more high net worth investors are seeking advisors.

These trends are good for Envestnet and we expect they will continue to benefit us going forward as more advisors adopt a fiduciary standard of care either by choice as a competitive differentiator in the market or at the direction of the regulators.

To serve our growing number of advisors we continue to enhance the richness of our wealth management platform through innovation and new product offerings. During the past quarter we announced Envestnet PMC's liquid alternative program, introduced a series of investment solutions sub-advised by Singer Partners, and enabled access to Brinker Capital's Absolute Return Separate Account portfolios.

We also initiated an offering with Vestmark, another leader in investment advisory technology that will give advisors access to both firms' capabilities on the investment platform. Additionally, we have deepened deployment of the paradigm, our unified managed household capability, with several registered investment advisors. Our commitment is to empower advisors to achieve excellence in performance and client service, improve their profitability and help them grow without the growing pains.

Some highlights of our financial and operating performance during the first quarter. Total revenue is $29 million, up 35% from one year ago. Driving that was a 42% increase in year-over-year revenue from assets under management or administration. Adjusted EBITDA was $6.2 million, more than double of that over a year ago.

Our adjusted EBITDA margin was 21.3%, and that's more than 100 basis point expansion over the previous quarter, and more than 700 basis points expansion over one year ago reflecting the operating leverage inherent in our business.

Adjusted net income was $0.09 per share compared with $0.04 in the first quarter last year. At the end of the quarter, Envestnet serviced more than $152 billion in assets overseen by some 22,000 advisors. These are record levels for our company underscoring the leadership position we have established in the industry through our commitment to empowering advisors.

During the quarter gross sales of assets under management or administration were $8.2 billion. That's $4.2 billion higher than the first quarter of 2010. And included in this quarter's gross sales were approximately $1.2 billion of conversion assets from several new clients.

Redemptions during the quarter moderated from recent months but are still high by historical standards with the monthly rate of about 2.7%. Overall, we are seeing volatility coming down. In the first quarter, [VIX] averaged 18.6% as compared to the fourth quarter where it averaged 19.3%. And this factor should result in a further mitigation of redemption rates in the near to intermediate-term.

We also expect to win more than our share of business with new and existing advisors and with new firms. So, despite the redemption activity, our $8.2 billion of gross sales resulted in net flows of $3 billion during the first quarter, double of that over a year ago. In a moment, I'll wrap-up with a few words on our outlook, but first, I would like to turn it over to Pete D'Arrigo, our Chief Financial Officer, to discuss out financial results in more detail.

Thank you, Jud, and good afternoon everyone. I'm going to highlight our financial results for the quarter. Revenues from assets under management or administration grew 42% to $23.3 million in the first quarter of 2011, compared to $16.4 million in the first quarter of 2010.

Total revenues which include revenue from licensing and professional services increased 35% to $29.3 million in the first quarter from $21.6 million in the first quarter of last year. Additionally, we have non-cash amortization of customer inducement payments which reduces our reported revenue. Adding that back, the effective fee-rate for assets under management or administration during the first quarter, was just over 15 basis points which is in line with recent quarters.

Growth in assets under management or administration was strong in the quarter with gross sales of $8.2 billion and net flows of $3 billion. We expect our effective fee rate in the near term to be relatively consistent with the first quarter.

Licensing and professional services revenues increased 14% to $6 million compared to $5.2 million in the same period a year ago. The increase in revenue was driven by new business that came on during the fourth quarter. On the expense side, total expenses were up 10% on a GAAP basis. Adjusting our expenses as we do for our adjusted EBIRDA reconciliation, total expenses were up 29%.

Our cost of revenues increased to $10.1 million from $7 million last year. Cost of revenues include the sub-advisory fees we pay the managers or funds that are included in PMCs investment solutions as well as clearing, custody and brokerage costs.

Compensation and benefits increased to $10.1 million from $8.1 million last year primarily related to increasing headcount as the business is growing. On a non-GAAP basis, adjusted EBITDA increased 104% to approximately $6.2 million from approximately $3.1 million for the first quarter a year ago. And our adjusted EBITDA margin for the first quarter of 2011 was 21.3% compared to 14.1% in 2010.

Adjusted net income for the first quarter grew to $2.8 million or $0.09 per diluted share. Turning to the balance sheet. We ended the first quarter with almost $72 million in cash and cash equivalents. With that, I will turn it back to Jud for his closing comments.

Thank you, Pete. By way of wrap-up, we continue to expect that new client conversion activity will contribute materially to our net flows throughout 2011 and into next year benefiting our top line leader this year and then to 2012 and beyond.

We've a very significant pipeline of potential clients and several new clients are already in various stages of conversion. As one example, we signed a contract this week with a top ten independent broker/dealer which we expect will result in $2.5 billion in conversion activity over the next couple of quarters. And with regard to strategic activity, we believe that the current environment continues to be favorable for selective mergers and acquisitions.

We are currently exploring transactions with several candidates. We are committed to accelerating our top and bottom line growth through a combination of consolidating and strategic transaction over the coming quarters.

Our long-term financial targets include organic revenue growth of over 20% per year, and growth and adjusted EBITDA of over 25% per year. In 2011, we continue to expect to deliver results at or above these levels. We expect to expand our margins as we progress towards a long-term adjusted EBITDA margin of 30%. We believe we can achieve these results as we empower advisors to better serve their high net worth and affluent clients. I thank you, again, for your time this afternoon and your support of Envestnet. With that, we're very happy to take your questions.

Thank you.

(Operator Instructions)

And we will take our first question from Alex Cram from UBS.

Hi.

Hi, Alex. How are you?

Hi, Alex.

Good. Good. Let me just start with, you know, like a numbers questions here if that's okay. I think, Pete, you said you had pricing or revenue per asset fairly flat, but in my numbers it looks like they came down a little bit despite, I would say, again, that my numbers is a mixed shift towards more AUM which would actually suggest that the pricing sort of moved up a little bit. So, anything in terms of mixed shift that kind of work against that that we don't have visibility into?

No. I don't think it's a mixed shift, I think it has to do with the timing of the conversions that came on during the quarter. In the fourth quarter we saw a little bit more in conversion activity which kicked in more revenue which wouldn't relate to the beginning AUM/AUA number. And so, you get more revenue from kind of a lower base than you did in the first quarter. So I think the effective fee rate is pretty consistent.

And probably should stay consistent, right? Was there any other mixed shift that we should be aware of here into the second quarter?

For what we can see in the near term we do not anticipate a mixed shift that's significant.

And, sticking on the theme of conversions, I -- thanks for the color on the top ten win. It sounds great. In terms of the other conversions you're seeing out there, I mean, the $1.2 billion this quarter and maybe some of the other ones in the pipeline, can you give us a little bit more color on where exactly you're having success right now?

Is this, you know, again, like some of the bigger independent broker dealers? Is there's actually a lot of, you know, smaller RIAs that you're maybe having -- some of your initiatives there. And where exactly are you having the most success that's pretty broad-based? Thanks.

Well, Alex, when we talk about success it's measured. Our conversation is measured because the success really doesn't benefit the company and shareholders until the conversions are actually complete and the accounts are being built on, of course.

But, we're seeing a strong demand and strong interest across all of our channels ranging from very large broker/dealers to mid-sized broker/dealers, very large RIAs all the way down to mid-sized registered investment advisors. And we are -- we're still expecting that $12 billion to $14 billion of conversion to happen over the coming quarters over and above what has been or again at growth rate.

We saw $1.2 billion in the first quarter. We'll see some additional in the second quarter. There are some very large ones on [PAC] that I do not expect we're going to see contributing materially to revenue until the third or fourth quarter, but there -- they represent some very leading firms, large broker/dealers, large registered investment advisors. And, as been our practice I don't expect that we're going to be doing very many announcements prior to the actual conversion although some of these we may deviate from time to time.

Okay. Great. And then, last quarter, I think, you surprised us a little bit by, you know, basically saying we're going to use some of the running ahead -- let's put it this way -- to reinvest in the business. So, can you talk about that a little bit more in terms of what has been done already? Has that actually, in terms of the financials already ran the lot or is there to come and then obviously related to that are you seeing any earlier results or what areas in particular are you making any sort of headway?

That's a very good question. Several dimensions to it. First of all we've begun to invest as we had identified that we would. Although that investment is both to invest ahead of the curve of the coming volume which we are in the process of doing the best not to complete. And then, also, to invest in customer service, sales and marketing, because we believe that the volume that we're seeing picking up now in the first and in the early part of the second quarter is going to continue to be strong and we want to invest so that we are taking full advantage of the opportunity that we have.

We've begun to make some of those hires. We have announced hires at the senior vice president level and up. We have filled a number of staffs that we are looking to fill and invest in that have not been announced, but there's more -- there is more investments to be made and I expect that that will have an impact on our margins in the second, third -- second and third quarter.

Okay. Great. And then, just lastly and I'll jump back into the queue, but -- so your paid average account size for AUM declined sequentially despite, you know, I think, pretty nice growth here and obviously markets were up. Is that just a function of maybe some of the conversions coming in maybe at lower levels or is there anything else going on that was should be aware of?

Yes. Anytime that there's conversion assets -- and there were some conversion assets -- it's going to have a function of that distribution partners business. And it's a -- it is not -- we do not believe it's indicative of any change in the basic business that reflects more the channel mix of the conversions that we're bringing on.

Okay. Very good. Thank you.

Our next question comes from Thomas Allen from Morgan Stanley.

Your licensing assets increased significantly this quarter. Can you talk what was driving that? And, also, did you add any other -- just enterprise relationships in the quarter?

Well, we added a number of enterprise relationships in the quarter. The exact number of new broker/dealer signatures, I would say, the quarter was in the low double digits as well as a number of new registered investment advisors. Licensing assets from existing enterprises is a part of what the growth of the license revenue was and there was one additional new enterprise license client that came on in the first quarter.

So, it's a combination of activity from existing license clients, having greater volume and some escalator as well as one new client. And, yes, there were a number of new enterprise clients that they were not licensed clients, they were our asset under management and asset under administration business clients.

Okay. Great.

And then, following -- another question. You announced in the quarter that you added Brinker Capital to your platform, you're offering Vestmark's functionality and then also National Advisors Trust has that added your UMA capabilities to its platform. Can you just talk -- I mean, these all very different relationships, can you just talk about how the economics work for you for each of these types of deals?

Well, for -- they are different. Our overwriting commitment to the advisors we serve is one of open architecture and access to products that enable them to run their businesses they want. We often have used a cable analogy or a cable TV analogy where Envestnet is in some ways basic cable enabling the advisor to be the fiduciary and run their own business. Envestnet PMC is our premium investment solution -- if you will, premium programming -- for the advisor that would like to outsource investment management.

And what we have found is that many advisors want choice and an open architecture availability of not only many different managers of funds, but also strategists. So when we bring on a firm like Brinker Capital, a very find firm based in Berwyn, Pennsylvania, been in the business for a long time, we are bringing on there a portfolio which is an absolute return portfolio. While this will be assets under management to Brinker, it is assets under administration to Envestnet. And Envestnet will be making revenue in more or less conformity with what we do on all of our AUA business.

Vestmark is also indicative of our commitment to open architecture. We're offering Vestmark as an additional trade order entry system for the many managers that are on our platform as well as offering Vestmark's capabilities to high end RIAs who want to have access to their capabilities. And the revenue for us for business that comes in to this will also be assets under administration.

The business with National Advisors Trust, the Unified Managed Household or the UMA capability is the full platform or the full wealth management platform so we expect that that will have a combination of AUM, assets under management, and AUA, very much in conformity with how our business is growing in the past.

That's really helpful. Thank you. And then finally, just quickly, a question -- numbers question. The conversions, can you just give us some mix between AUA and AUM, that $1.2 billion?

That in the first quarter I do not have that on my fingertips and I'm sorry. I want to answer that anecdotally. I expect that that was about one-third AUM and two-thirds AUA.

I think it's almost all AUM/UMA.

I'll pull it up.

We can follow up.

Thank you.

We'll now go to Eric Bertrand from Barclays Capital.

Hi, guys. On the licensing, you know, when did this client come on during the quarter? I'm thinking, should we, you know, be looking forward to really grow the line next quarter as they have the full quarters affecting or is this, you know...

...was a fourth quarter (inaudible) client so, you know, you should not expect that there's going to be -- that that was a one-month and now we tripled that.

Okay.

That was a fourth quarter 2010 client that didn't have a full quarter of license revenue.

Got it. Thanks for clarifying. And then, on your disclosure around the conversion pipeline, you're kind of parsing in a part, you're saying additional conversions in the second quarter and then, you know, a heavier third quarter and fourth quarter. Am I to kind of expect, you know, the conversion pipeline to be basically sequentially building for the entire year? Is that what you're...

I think that's a little too specific in terms of an interpretation. We know the clients. We're in various stages of either letters of intent, contracts, conversion planning and the actual specific timing of the conversion is not entirely in our ends so as we -- household on this type of scheme in the past, the amount is known, the specific training is unknown. We know that there will be some of that coming over the second quarter, but we also know that there are two very large conversions in this mix that won't be hitting until late third or fourth quarter.

So, it's -- training provides some color and some understanding of how this works for us. It's a very important part of our business. It's an accelerator, but it's not as easy to predict as our ongoing organic signals that -- you know, that's the most predictable part of our business.

And I can appreciate the uncertainty. Lastly, could you remind us your intentions around the $72 million of cash sitting down in your balance sheet? How much do you need, you know, for, you know, working capital purposes day in and day out and how much are you looking to, you know, put down into, you know, accretive acquisitions or other uses? Thanks.

Yes. You know, we can run with, you know, around $10 million to $15 million of cash. You know, most days less than that, but, you know, to be safe, $10 million to $15 million so it's probably $60 million to $65 million of what we have is what we're looking to invest.

Great. Thanks, guys.

(Operator Instructions)

We'll now go to Hugh Miller from Sidoti & Company.

Hi. Good afternoon. You guys had given a little bit of color on, obviously, the expectation for conversions coming down the pipe, but made a comment how strong your pipeline kind of is. Are you seeing any change in mindset with the firms that, you know, you've been speaking with that have been on the fence about their technology and outsourcing operations? And has there been a change at all? You know, are they more willing to maybe make a commitment?

I think that there's not been very much change in one of our segments which would be the independent broker/dealer marketplace. Independent broker/dealer marketplace is looking for the best technology, the best investment solutions as they roll out wealth management programs and that hasn't changed very much.

Where we have seen several but very important changes is in some of the larger broker/dealers that have their own in-house technology. They are at the very top looking at the technology deployment decision freshly. They're looking at as chief executive or as a business line executive and not as a technology executive looking at what does the market require in terms of functionality, in terms of richness, and then looking at what will it cost, what's the buy, what's the build, what's the rent.

And I think that there's important differences in that part of the market. And I think that's -- that we're -- we have high anticipation about our ability to realize benefits from that. Also, in the registered investment advisor marketplace, these advisors tend to look at things as a best of breed or a best in class application. They prefer when it's integrated that they do not require their solution to be fully integrated.

And what we're seeing in the -- among the large industry investment advisors is a greater willingness to consider outsourcing a part of what they're doing. Many of them have had a -- I won't say a wall, but many of them have met resistance for them to continue to grow profitably. And so, we're looking at a different type of registered investment advisor who is adopting our solutions.

Okay. That's very helpful. One of the question with regards to the advisors that you're working with, you know, you mentioned that you expect to see rates remain relatively stable for a period of time. Are you seeing kind of the advisors moving into more of a mindset of a growth mode as opposed to client handholding into maybe their appetite for the types of services and the number of services used might start to improve overtime? And if so, you know, what type of a timeframe would you anticipate?

Well, we see big demand for the services that we offer fueled primarily by just the growth of independent advisors and the growth of the fee-based side of the practice as more and more advisors adopt the fee-based model as opposed to the commission-based model.

So, within -- that's where we expect most of our growth to occur. Within those advisors who are mostly or all fee-based, we're seeing some changes around the margin in allocations although these are not material nor are they profound changes in the way these advisors are doing their business.

So, what we see is the real growth drivers for our business, the increased number of independent advisors, the increased share of fee-based business and the increased number of high net worth clients that are seeking advisors, this is what we see is the drivers of the business less so that advisors are looking to change how they're going in their practice.

With that said, for the last five years, most of our growth has come from advisors that we already serve adding comps. And those -- that help growth comes from two primary areas. One is, they're changing brokerage accounts, the fee-based accounts, the other is they're winning new business and they're winning new business at the expense of the -- of those firms that aren't making the transitions to the fee-based side of the business as quickly as they ought to be.

Okay. Thank you very much.

We'll now go to Justin Hughes with Philadelphia Financial.

Good afternoon. Thanks for taking my questions. First question I have -- hi -- was on the cost of revenue. I know that's driven, you know, a lot by the product mix. We talked about that in quarters in the past, but should we continue to see that trend up a little bit even as the fee rate stays flat?

Again, in the near term I think it's going to be about what we've seen in the low 40s. About 43% of our AUM/AUA revenue.

Okay. So around this area not trending up.

Again, in the near term we don't see a big change in that given what we are seeing in terms of the new business that's coming on.

Okay. And then, my second question is that, you know, as we're getting to kind of the middle of 2011, is there any more clarity on the Fidelity licensing fees? I believe they dropped off this year, at the end of this year they're being offset. Is that going into 2012?

You know, again, we have a very good relationship with Fidelity. They are a very important client. As I've indicated before we do not expect that we are going to engage in substantive negotiations about the next version of the contract until the second half of 2011.

I've mentioned before that our large enterprise clients or the continuation of services is something that we anticipate, we expect, and we'd not be surprised if there were changes in the Fidelity arrangement, but we are highly confident that our business relationships will continue with them. Specifics are what that looks like. We're not going to have those until the second half of this year.

Okay.

And probably until later in the second half.

Okay. Fair enough. That may be -- maybe you've started working on it by now.

(Operator Instructions)

And we'll now go to [Nicole Conway] with Stifel Nicolaus.

Good afternoon. I was wondering if you could talk a little bit about your renewal activity in the quarter, if you lost any clients and then any upcoming renewal activity besides, you know, the Fidelity?

We don't have any licensed clients coming up for renewal within the next six months to nine months other than Fidelity. Are you asking, do we have any license -- enterprise license that are coming up over default?

Yes. Yes.

We do not.

Okay. And then, also, could you provide how much of your business is based on -- is fee-based as percentage of your AUM/AUA?

Our overall revenue, the amount that's assets under management or administration is overwhelmingly fee-based.

Got it. Thank you.

Yes, it's about -- 80% of our total revenue is fee based. It's the AUM/AUA is predominantly all fee-based.

Okay.

And there are no further questions so I will turn the conference back over to management for any closing remarks.

Yes. Tom, Chris has handed me the notes on the $1.2 billion of conversions in the first quarter about 80% of that was assets under administration and about 20% was assets under management.

Those are all the questions.

So, again, we thank you for your continued interest in the company. Thank you for your support and we look forward to talking with you again in the near future.

This concludes today's presentation. Thank you for your participation.