Envestnet Inc (ENV) 2011 Q2 法說會逐字稿

Good day, everyone, and welcome to the Envestnet Second Quarter 2011 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Chris Curtis Treasurer. Please go ahead

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 second quarter 2011 earnings press release can be found at Envestnet.com under the Investor Relations section.

During this conference call, we'll 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. Good afternoon. I extend my own welcome to everyone on today's earnings call. Our second quarter results show continued progress in empowering advisors to better serve their clients, as we grew revenue year-over-year by nearly 30%.

Adjusted cash flow also increased at about double that rate, reflecting the operating leverage in our business. Envestnet benefits from several long-term trends including an increase in advisors seeking independence, a shift toward fee-based offerings, and increased advisor outsourcing of wealth management solutions.

We believe our solid organic growth can be enhanced by selective merger and acquisition activity. The recently announced transaction with FundQuest, should accelerate Envestnet's growth and provide benefits to both our advisors and shareholders in the coming quarters.

The acquisition of FundQuest will enable us to offer advisors more fully integrated wealth management solutions, and strengthen our relationships with them. With respect to organic growth, we continue to add enterprises, advisors and assets, advisors with assets under management or administration on their platform grew 14% from last year to 14,600. Assets under management are up 52% to $16.5 billion, and assets under administration are up 28% to $54 billion.

During the second quarter, we added $6.9 billion in gross sales of assets under management [towards] administration, included in that figure was $544 million of conversion assets from several new clients.

Redemptions during the quarter were $4.9 billion, which represents an average monthly rate of 2.4%. This is above Envestnet's long-term averages of around 1.4% per month, but down from the 2.7% we experienced in the first quarter. During July, redemption rates further moderated to 1.8%, which as of just one week ago was quite encouraging.

However, as we are all very much aware, volatility has increased significantly in recent days, we expect redemption rates will again increase at least in the short run and will therefore be a factor which limits our ability to meet our full growth potential at least in the short run.

Conversions we expect should increase our gross sales significantly over the coming quarters. In the past, we've indicated $12 billion to $14 billion in pipeline conversions; we've added so far this year around $1.8 billion of those. And we remain very confident that we will achieve this target by early 2012. Our pipeline of opportunities is at record levels and we have recently signed contracts with several large new conversion clients, although the assets are not yet fully converted to our platform.

Based on our contracted conversion, and the implementations already in progress, we expect $4 billion to $6 billion of additional conversion assets will be added to our platform during the third and fourth quarters.

For example on last quarter's call, I mentioned our signing of the top-10 independent broker/dealer. The implementation of that conversion took about 14 weeks, and in early August we converted $1.8 billion of their assets to the investment platform.

Also, we recently signed with top-5 regional firms, and we'll be deploying our platform to support their separately managed accounts business over the coming quarters. Phase one of the conversion is expected during the coming 90 to 120 days and is over $2 billion, with an additional conversion of assets from this client expected in 2012.

Our pipeline is full, contracted conversions are very high, however actual fees generated on these assets are materializing slower than we had expected even six months ago. It has been our strategy to accelerate our organic growth from time-to-time with strategic or consolidating acquisitions. FundQuest is a good example of a consolidating transaction, one that leverages our scale and our platform capabilities and is also accretive in the very near term.

The acquisition of FundQuest culminates a relationship we began more than a year ago. As part of investment, FundQuest will offer more fully integrate its wealth management solutions to more advisors with more solutions, who will also grow our assets under management.

FundQuest's primary channel and product offerings are highly complementary to ours. We look forward to integrating FundQuest's best solutions and personnel, with our own offerings and better enable advisors to serve their affluent and high net worth clients.

We continue to evaluate additional acquisition opportunities including other consolidating transactions as well as strategic transactions that could broaden or deepen the solutions or platform capabilities that we offer. In this market environment, we think that consolidating transactions will likely be more attractive than strategic acquisitions.

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 our financial results and the FundQuest transaction in more detail.

Thank you, Jud, and good afternoon, everyone. I'm going to highlight our financial results for the quarter, and describe the financial and accounting impacts of the FundQuest acquisition.

Starting with our 2011 second quarter results, revenues from assets under management or administration grew 36% to $25.4 million, compared to $18.7 million in the second quarter of 2010. Total revenues which include revenue from licensing and professional services increased 29% to $31.3 million in the second quarter, from $24.2 million in the second quarter of last year.

Additionally, we have non-cash amortization of our customer inducement payments of $1.2 million, which reduces our reported revenue. Adding that back, the effective fee rate for assets under management or administration during the second quarter was 15.5 basis points, which is slightly higher than the first quarter.

Growth in assets under management or administration was strong in the quarter with gross sales of $6.9 billion and net flows of $1.9 billion, while the market was relatively flat, April was up followed by down months in May and June. We ended the quarter with [$70.8 billion] in assets under management or administration, which is 32% higher than June 2010. Licensing and professional services revenues increased 7% to $5.9 million, compared to $5.5 million in the same period a year ago.

Looking ahead to the third quarter, in early July, we lost $3.4 billion in reporting assets and 21,000 accounts from a client that we continued serve on the AUM side of the business. Adjusting for this reduction, our billable assets at the beginning of the third quarter would effectively be $67.4 billion, still 26% above the second quarter last year, because these assets were among the lower fee rate assets we have, the impact will be an increase to our effective AUM fee rate.

Also since approximately 15% of our asset base revenues are billed in arrears, the recent market decline is significant enough to offset to some extent that positive effect on our revenue fee rate for the third quarter. All told, we expect our effective fee rate in the third quarter to be in the range of 15.6 to 16.2 basis points on that adjusted asset base of $67.4 billion.

During the second quarter, a single large licensing client began moving assets off the platform, which is evident in the metrics presented in our earnings release, while the decline in licensing assets is notable, the impact on revenue will not be significant. We also expect some project-based revenue for client implementations during the quarter. Compared to the third quarter of 2010, we believe licensing and professional services revenue in the third quarter will increase 6% to 10%.

As a result, total revenue for the third quarter should increase between 26% and 31% compared to 2010. While any client loss is disappointing, both of these were the results of ownership changes in a consolidated industry. At the former, a wealth management client was acquired by a large self-clearing broker/dealer.

The reporting business was consolidated on the installed incumbent reporting technology. Our SMA, or separate account program, was adopted throughout the organization, and we continue to enable this broker/dealer to deliver their separate account program to all of their advisors.

The licensing client also had a change of ownership, and the new owner had a stake in a provider of financial technology. On the expense side, our cost of revenues increased to $10.9 million for the quarter from $7.7 million last year.

Cost of revenues include the sub-advisory fees we pay the managers or funds that are included in PMC's investment solutions, as well as clearing custody of brokerage costs. As a percentage of AUMA revenue, cost of revenue was 42.9% in the second quarter, up from 39.5% a year ago, reflective of the increased mix toward AUM. We expect the third quarter cost of revenues to be slightly above 43% also reflective of an increasing mix toward AUM.

Compensation and benefits increased to $10.4 million from $9.2 million last year, primarily related to increasing headcount as the business is growing. Our GAAP second quarter results include $1.1 million in other income for proceeds from an insurance settlement related to prior litigation expenses. We have backed out this amount in calculating our non-GAAP financial measures.

On a non-GAAP basis, adjusted EBITDA increased 58% to approximately $7.1 million, from approximately $4.5 million for the second quarter a year ago. And our adjusted EBITDA margin for the second quarter of 2011 was 22.7% compared to 18.6% in the second quarter of 2010. Adjusted net income for the second quarter grew to $3.3 million or $0.10 per diluted share.

Moving on to the FundQuest acquisition, the purchase price of $24.4 million will be paid in cash from our balance sheet, which had a balance at June 30th of $78.6 million. Upon closing of the acquisition, our remaining payment obligations under the existing platform services agreement will terminate, as a result there are some additional accounting implications that I would like to explain.

On the balance sheet, we expect our customer inducement assets and liabilities related to FundQuest to be eliminated after we complete evaluation of FundQuest assets, we will allocate the purchase price to the fair value of the assets including identified intangibles and goodwill.

The income statement is going to change in two ways, we will consolidate results from the incremental FundQuest business we are acquiring and there will be changes due to the elimination of the customer inducement assets and liabilities. These changes will impact periods after closing which we expect to occur in the fourth quarter of this year, with the first quarter of 2012 being our first full quarter to show the full impact.

So the first part of the change relates to the consolidation of FundQuest into our financial statements and operating metrics, in other words what is that we're buying. After closing, we will report FundQuest's total revenue which includes the platform component we have been receiving since the effective date of the platform services agreement, as well as the revenue related to the FundQuest investment management and research activities.

While our total AUMA will be unchanged, approximately $6 billion will be reclassified from AUA to AUM. We believe this will add an incremental one to 1.3 basis points to the revenue fee rates we are already recognizing on our total AUM and AUA.

The second change relates to the platform services agreement. After closing, we will no longer recognize amortization of the FundQuest customer inducement asset. This is currently a non-cash contra revenue item of approximately $1.2 million per quarter. Eliminating this amortization will increase our reported revenue by the same $1.2 million. On the expense side, we've been recognizing non-cash interest expense related to the customer inducement liability, which is recorded at its estimated present value on the balance sheet.

Overtime, we are recognizing interest expense as we get closer to the due date of the liabilities. Both of these items, the amortization of the customer inducement asset and the imputed interest expense have previously been adjustments in our reconciliation, so their elimination will have no effect on our non-GAAP financial metrics. To the extent we have intangible assets, there will be amortization expense over the expected life of these assets.

Overall, we believe the FundQuest acquisition is a very good example of the type of accretive consolidating transactions that we have discussed. As we make progress toward closing the transaction, we will provide you with additional specifics on the impact to our business. That said, we believe this acquisition will provide shareholders with an attractive return on investment in the coming years.

And with that, I will turn it back to Jud for his closing comments. Thank you.

Thanks, Pete. Market volatility affects our business in several ways, higher redemption rates, potentially slower conversions and changes in product mix all in the near term. However, in the past, we have made significant market share advances during and following periods of market uncertainty.

We thought we saw this in our early years from 2000 to 2003 and again from 2007 to 2009. This is because these trends of markets point out that advisors need a flexible integrated open architecture platform that empowers them to quickly respond to changing market conditions.

In this kind of environment, we manage by focusing on those things we can control, adding enterprises, and adding more advisors, translate into continued strong gross sales. We implement conversions as efficiently as we can. We are prudent in managing our expenses, and we evaluate strategic activity with a high degree of financial discipline in order to deliver solid returns to our shareholders.

Our financial targets include long-term organic revenue growth of over 20% per year and growth in adjusted cash flow of over 25% per year. In 2011, we continue to expect to deliver results above these levels. We expect to expand our margins as we progress towards the long-term adjusted EBITDA margin of 30%. And we believe we can achieve these results while we are empowering advisors to better serve their high net worth and affluent clients.

I thank you again for your time this afternoon, your support of Envestnet. And with that, we are happy to take your questions.

(Operator Instructions)

We'll move first to Alex Kramm with UBS

Hey, good evening, everyone.

Hi, Alex.

Hi, Alex.

So, I wanted to touch on FundQuest a little bit first. Pete obviously gave good overview on the accounting and financial benefits, but Jud, interested to hear your take on what attracted you to the business or attracted you to the full ownership and would you think the best or the biggest upside is going from here?

Is it things like ability to cross sell some of their management services? Is it offering some of their [advises] on the platform some of your services more? Where do you think this could of like incremental juice comes from when you look at this transaction in the new landscape? Thank you.

Well, as we mentioned, the channels they serve are complementary to us in that it's a very good fit with our independent broker/dealer and enterprise channel. Their client base consists of independent broker/dealers, insurance broker/dealers and bank broker/dealers. And their product set consists of mutual fund portfolio solutions, separately managed account solutions and advisors portfolio manager.

So, there is a high degree of -- there is congruence in the product offerings. That said, this enables us to not have an indirect relationship with those clients. In the platform services agreement we entered into with FundQuest, we entered into the agreement a year-and-a-half ago and we closed on that transaction in May of 2010.

It brought up to those clients the benefits of investments platform, technology and operating scale, but the relationships and the contract is still were with FundQuest and there were limited investment offerings -- investment offerings were limited to FundQuest's offerings.

So we believe that there would be -- and we were interested in going further with this transaction really almost from the time we closed on the platform services agreement. We saw that there would be ways to consolidate relationship management and have a more direct relationship with the end-client.

We're pleased that the parent of FundQuest came to the same conclusion over time. And so, that the opportunities that we see are the offerings the PMC has will supplement the offerings that FundQuest have. We also have over 30 outside strategists that comprise some of our assets under management offerings.

And this is all a part of the open architecture solution that advisors want for their clients in markets like this. So we expect that there is going to be an opportunity to go deeper with these advisors, offering them more solutions over time. And we think that this is going to be a win for the advisors, a win for the FundQuest organization, and a win for our investors.

Okay, good. Then just moving on, you made some comments about the redemptions and how this volatility is impacting, I guess the overall advisor pipeline and what advisors are doing. I guess, switching gears a little bit, can you talk a little bit -- I mean you have a lot of visibility in terms of what the advisors are doing with the clients.

I know it's early and markets have changed dramatically over the last couple of days, but can you comment a little bit of what you've seen people have done, like where they are maybe moving into other products, whether they are getting more defenses with positioning the portfolio?

Alex, it's a very good question and we do have good visibility to this. But you are asking me to synthesize and comment on something that's 24 hours old, or at the longest 72 hours old. So, what we've seen in the past is a variety of patterns.

Some advisors see this as buying opportunities, and they are very disciplined about their rebalancing and they on -- opportunities like this they are actually buying equities. There aren't many of them, but they are the ones that do the best job for their advisors.

Other advisors are weighing into proceed more defensive solutions. We've got a tactical series of exchange traded fund portfolios that's sub-advised by (inaudible) and those portfolios performed very well in this kind of environment.

And so, we are seeing some advisors who are increasing their exposure to these kinds of strategies. We also have dynamic allocation of portfolios that are sub-advised by Brian Singer, and so we are seeing some waiting there. Other advisors are looking to liquid and transparent non-core rated asset classes because while they may see value in equities they aren't ready with convictions to move there.

They understand that inherent contradiction of moving assets to treasury is even while one of the rating agencies has downgraded them or not comfortable with the high-grade corporates, although that they are maybe moving in some into the high-grade corporates.

But, do feel that with non-core assets [classes] in 40 [act] vehicles that there is some opportunity for preserving wealth in these kinds of environments. But, we've seen that in the past, there is certainly indications of that for the last few days, but we're still in the middle of that, Alex. And I'm going to be reluctant to give any kind of analysis on trends from this.

No, I absolutely I understand, but the color was helpful. So let me just -- one last one. Maybe you can give us a little bit of more of an overview of where you are actually having a lot of success. You are talking about the conversions, but I think in the past, you've started some efforts to maybe -- deepen penetrations to smaller [RIA] shops and things like that.

So, when you think about maybe a couple of different sectors or client types, where are you seeing a lot of success? Is it more the independent brokers? Is it the mid-size RIA shops? is it smaller RIA shops? Where are you doing the most I guess organic sales or conversions? And are you doing any new initiatives to maybe go deeper in one of the particular, I guess sectors here? Thanks.

Okay, again, I appreciate the question. It's insightful. It goes to the core of our business strategy. Our channel strategy is essentially to solidify and fortify the strength we have with enterprises, independent broker/dealers, insurance broker/dealers, and then go more deeply penetrate the -- what we call the high net worth advisor channel, which consists of registered investments advisors, and then certain institutions that serve more high net worth advisors. And we are making very good progress there.

Of the conversion activity that I've given some dimension to, we are seeing it with independent broker/dealers, regional broker/dealers and high-end registered investment advisors.

Now the high-end registered investment advisors don't have the clumps of assets that the larger regional firms do, but these conversions are coming in $200 million to $400 million chunks and it's very encouraging. So, we are making good progress there. We are seeing good results, and we are seeing that investment that we made in that additional channel earlier this year beginning to pay off.

All right, good to hear. Thank you.

Now, we'll move next to Thomas Allen with Morgan Stanley

Hi guys, can you hear me?

Yes, Thomas. How are you?

Great. I'm good, how are you?

Fine, thanks.

Can you give us - I'm sorry I'm on my BlackBerry -- but can you give us an update on the Fidelity contract? I think they've recently named a new head of financial advisor solutions. Do you expect that could impact you at all?

Fidelity is a very good partner. We've begun the negotiations for the continuation of the relationship. We have a high degree of certainty that the relationship will continue. We believe it will grow for us over time both in terms of assets and revenues.

But, we don't expect to finalize anything until sometime later this fall. So, I don't have anything else to say about it. But we've got strong relationships there and the business has grown for us very well over the years, and they are an excellent partner.

Okay, that's helpful. And then, you said last quarter that you expected two large conversions in late 3Q or 4Q. Is that most of the $4 billion to $6 billion that you talked about?

Okay, so we've got -- in my comments I identified a large independent broker/dealer with $1.8 billion that is already converted. In addition, I outlined or I described a large regional firm that we are expecting to complete the first phase of that over the coming 90 to 120 days.

Those two are a big chunk of the amounts right there. But there are a number of RIA and independent advisor conversions that are important to us, but they don't total add large chunks off assets. But that's how we get to the math of the $4 billion to $6 billion.

And at this point can you tell us who these contracts are with? And also, can you give us who the contracts that you lost are?

Thomas, it's not our practice to do that. First of all we would need authorization from the client to disclose their names. So, we are not prepared to do that. We have not received that. And, on the lost clients, again we are not going to disclose who they are, one of the large self-clearing firm has made acquisitions in the past. The other one is a large independent broker/dealer that recently went through an ownership change.

Okay. And then, final question. We recently named Chip Roame to your Board. Can you talk a little bit about what he should add?

Well, Chip is an individual with a tremendous amount of experience, insight, I would even say foresight with respect to the wealth management industry. He has run a consulting firm, Tiburon, for a number of years, formerly he was an executive at Schwab. And he has demonstrated a unique perspective on the industry. And our directors in looking to create the like complement of perspectives and foresight, thought that he would be an ideal complement. And we are just delighted to have him joined the Board.

Okay, that's great. Thanks a lot.

Next we'll move to Peter Heckmann with Avondale Partners.

Good afternoon, gentlemen. Nice quarter.

Hi, Pete.

Hey. Good afternoon. As regard to the customer on the licensing side, if I heard you correctly they started to convert some assets off in the second quarter and will continue into the third quarter. Can you talk a little bit about the total assets that they are involved there, and approximately how many accounts? And then just confirm for me -- I think you said, that licensing revenue in the third quarter should be about 6% to 10%, are we talking year-over-year there, not sequentially?

Yes, so, about $12 billion of the redemptions that you'll see on the licensing roll forward in the earnings release is related to this single client. They are in the process of transitioning. So, and again that is the bulk of what they have. There is a little more left which again they are transitioning probably through the end of the year.

Again a portion of that business is going to be retained through a related company, but the significant amount of this is going. From a revenue perspective, though, yes it was a year-over-year comparison and we have been adding business. So, all else equal with the new business we are going to be kind of flat to slightly up if you look at it on a sequential basis.

I would add to that, that you can see the assets coming off. We iterate, that -- Pete, that there is a portion of this business that we are retaining. There is a -- again, we believe the loss is almost exclusively related to an ownership change. If you will, if the equivalent of Cablevision owning the Knicks, gets the cable TV contract. And so we are sorry to see it go but we believe there is another factor that works here.

Sure. Sure, there is extending circumstance. That's fair. And then as regards FundQuest -- I thought it was interesting, it really seems like a great deal from a purchase price perspective given that net of the cancellation in the platform services agreement the cash consideration here is fairly modest for something that generates a lot of value.

I don't want you to speak for the seller, but were there again extending circumstances on the sale that accounted for what appears to be a very attractive purchase price from your perspective?

I think the way we look at this is that, this was part of an overall relationship that began a year-and-a-half ago. And, when you look at the whole thing in total, there is I think there is value for everybody involved. There is value for the sellers.

There is value for the advisors and there is value for our shareholders. And so, I think you can look at the net increase and you can say wow. But I think that that's not looking at the whole -- the whole perspective I think is a -- I think it's a better perspective, and there is certainly value for the sellers here. There is value for us and our shareholders. And just as importantly, maybe most importantly there is value for the advisors.

Okay, it looks like a great deal. Last question, as regard to the average fee rates on AUMA, so we expect it to tick-up sequential little bit given the mix with a loss of that $3.4 billion in reporting assets. And then as we close that FundQuest transaction we expect it to tick-up sequentially then for two quarters in a row.

And maybe can you talk about what we should kind of expect maybe preliminarily for '12 in terms of a good fee mix to use?

Without looking to what the overall ray will look like in '12 because again we've got, we anticipate a fair amount of conversion business that'll come on -- that is going to kind of have a shifting impact which will -- again update you on periodically. The 1 to 1.3 basis point kind of fee rate shift, we won't feel the full quarterly impact until the first quarter of 2012. We don't anticipate to get more of than maybe a month or two of the revenue in the fourth quarter from FundQuest.

Right. Right, okay. All right, that's helpful. I appreciate it.

Thank you.

And next, we'll move to Hugh Miller with Sidoti & Company.

Hi, there.

Hi, Hugh.

I had a question -- I believe you alluded to your thoughts or M&A go forward and that they are going to focused - or that you see more value in looking and consolidation. I assume looking at other camps as opposed to kind of looking at things to add functionality enhance the platform. Can you just talk about why that is, and then why you are seeing more value in that approach to acquisitions?

I think the key moderating or modifying phrase was that, in this kind of market. The trade-off is that consolidating transactions give access to advisors. They tend to be advisors in channels that are similar to where we are or identical.

They are beneficial to the advisors because they get a lift in platform functionality or features or in product offerings, a more open architecture environment, and they accrete value to shareholders. So, whether they are immediately financially accretive or very shortly financially accretive consolidating transactions give all that.

The problem with that is, is that they rarely provide any kind of enhancement to the power or the feature set of the functionality of the investment wealth management platform. And so, the kinds of firms that could do that are smaller firms.

Generally speaking, if you could create some overall insight, they are generally speaking newer firms and they do something, one particular thing well. It maybe something we are already doing, or it may be doing something that's right next to what we are doing but our advisors are asking for it.

The challenge there is that those kinds of firms have very high value expectations. And those high value expectations often times persist even after markets reprice similarly -- similar asset plays or companies.

So what we see -- both are important to us, long-term, intermediate-term. But in the near-term, with volatility what it is, until -- or if and until price expectations on strategic acquisitions come down, which very well may happen because has a way of following market volatility, pricing falls in the line -- in the near term, we see that consolidating transactions are likely to be more attractive than strategic ones.

Okay, that's great color there. And I realize that the [buy all] accounts agreement is recent happening in mid-July. I wanted to get kind of the feedback that you guys are hearing from the advisors that were participating in the presentation, and how we should be thinking about kind of the fee generation from those types of agreements?

Because I believe that the advisors aren't charging the full amount to their clients. So how does that kind of influence, the fee generation that you guys might receive and what type of influence you would expect for a consolidation of assets under that type of a program?

The buy all accounts enhancement to our reporting services is something that at the margin is a nice improvement. We have point-to-point interfaces with some 60 custodians and that's where the vast majority of the aggregated. And consolidated performance reporting that we do comes through the pipes that we've built and that we reconcile with these risk custodians.

What buy all accounts does is it enables us to expand that by several hundred other facilities. Now they are not the most often used custodians, when we use buy all accounts, but they are custodians that it makes it more cost-effective for us to expand our reach via by all accounts than by doing it ourselves.

So this part of our business is growing nicely -- the reporting solutions part of our business; we continue to have growth. But this is a product enhancement, which enables us to offer our reach for consolidated aggregated performance reporting to go a little bit more broadly. And we don't expect it's going to have a significant effect on the growth of that part of our business or that product offering.

Okay. Also I had a question with regards to, I'm not sure if you guys have ever made this public or talked about it, but when you look at the $12 billion to $14 billion that you had mentioned in the past conversions that you are expecting, have you talked about how those assets stand in relation to kind of the overall potential assets at the firm to come over at some point down the road and on a percentage basis, or given any color as to how much you can go deeper into those relationships and work deeper -- bring over more assets as opposed to just growing with those organizations?

Yes. The conversions are important because they have a stair step function of growth, but then what has been our experience in the past, is that, these enterprises or these advisor firms grow their own practices, and so we grow their own practice alongside of them.

Over the last five year, we have grown on average our number of advisors by about 12% to 13% per year. And we've grown the number of accounts with those advisors around 18% per year. When that compounds up to about a 30% per year annual growth in accounts from firms that we have contracts with. So I don't know if that's -- if that's a good number going into the future or not. Let's discount that back to 20% to 25%. But as we bring on these conversions, whether they are enterprises or advisors, we expect that these enterprises and advisors will grow their practices in the future.

Okay, thank you.

(Operator Instructions)

We'll move next to Eric Pearson with Barclays Capital.

Hi, guys. Could you provide some additional comments on the volatile market's impact on the pace of conversion activity? It's my impression that most of the conversion work is mostly operational technology, that shouldn't be particularly market-sensitive, unless maybe there is conflict of demand for resources or proactive slowdown from management or what not? Could you illuminate us a little bit?

It's something of an X factor in the number of these cases with enterprises. They are dealing with downsized IT and operation staffs, trading revenue, brokerage revenue. A lot of things are challenged at a number of these independent broker/dealers or regional broker/dealers. And when there is a lot of displacements in the marketplace, the same people who are processing accounts are also often times working on these conversions.

So, it's a factor although it's not a factor that we can say it's going to -- these number of days the volatility will translate into these number of days of delay. It's a factor that we identify and it varies from firm-to-firm depending on how strong their resources are to help implement these conversions on the other side of these firms.

Okay, that's pretty helpful. And back to the balance sheet, I think we've talked about this couple times before, so I believe Pete mentioned that you need about $10 million to $15 million of cushion at the bottom of your balance sheet for day-to-day needs and less the $24 million that you've got set aside at this point for FundQuest -- fair to say that you've $40 million more or less untapped firepower that you are looking to deploy over the X number of quarters?

Yes, that's the approach. I'd say $40 million to $50 million that we would have to use in additional investments.

Okay. Any thought as to the pace of how you would look to put that to work? During your IPO, you had commented that you would want to be reasonably aggressive. And we've now done $24 million here with FundQuest, but any thought as to taking advantage of the environment here and really getting something done soon?

When we had denoted on the original investor presentation for our IPO, we had talked about consolidating in strategic transactions. And we had identified that we shortly would do one or possibly two of either over the coming -- we had originally said four to six quarters. And I think that that was -- I mean, it happened to be very good guidance at that time. We still expect that there would maybe be another one in the coming two to three quarters.

Okay, great. That would be a good use of cash considering it's going to be zero forever now in interest rate.

That's what I said. I hope it's not forever.

I can't count that high, so mid-2013 is well beyond my horizon. So thank you for your help there.

Fair enough. Thank you.

That does conclude our question and answer session. At this time, I'll turn the call back over for any final or additional comments to Mr. Bergman for final remarks.

Appreciate the questions, the insights that this obviously conveys about the business that we're in. And we appreciate the support and the callers on our earnings call this afternoon. I don't have anything else. I thank you for your time, and I wish us markets more like today than yesterday.

That does conclude our conference call, everyone. We do thank you all for your participation.