Envestnet Inc (ENV) 2011 Q3 法說會逐字稿

Good day, everyone, and welcome to today's Envestnet Third Quarter 2011 Earnings Conference Call. Today's call is being recorded. At the end of today's presentation, you will have the opportunity to ask questions.

(Operator Instructions)

And now it is my pleasure to turn the call over to Mr. Chris Curtis, senior vice president and 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 third 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. 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. We are fulfilling our mission of empowering advisors to better serve their investors. Our third quarter results show continued progress as we grew revenue year-over-year by 30%. Adjusted cash flow increased 51% from a year ago, and we delivered $0.11 in adjusted earnings per share.

Today, I'd like to talk about three key themes. First, we are executing on our long-term growth strategy. Second, important industry trends, which we are both enabling and benefiting from or strengthening. And third, as many of you know, while we are affected by near-term capital market volatility, both positively and negatively, our business is built for consistent long-term growth.

First, on execution. Our mission is to empower advisors to better serve their investors. Our goal is to be the leading provider of integrated wealth management solutions. Our growth originates with establishing relationships with independent broker dealers and registered investment advisors or RIA firms. Over time, we add advisors to the platform who add accounts and assets. We also have periodic conversions of new client assets in which a client moves a significant amount of assets on to our platform at one time. And also, we look to accelerate our growth to strategic activity in the form of mergers or acquisitions.

The third quarter provided further solid evidence that we're delivering on our growth strategy. Gross sales, excluding conversions, were up to almost $6 billion. So far this year, we've added nearly $20 billion in gross sales, up more than 40% from the same period a year ago.

$5.4 billion in new client conversions were added during the third quarter. Year-to-date conversions totaled just over $7 billion. We expect to make more progress in the fourth quarter, and we expect to achieve our target of $12 billion to $14 billion by early to mid-2012.

Net flows for the quarter were a positive $2 billion. That's including the loss of a large reporting assets client that we mentioned in our last call, and also a redemption rate of 2.5% per month, which, in this continuing volatile environment, was up slightly from the previous quarter level.

Our pipeline of new client conversions is expanding. As mentioned, we were productive in the third quarter, moving clients through the implementation process. We were also successful in adding new prospects to the pipeline. We expect conversion activity will continue to contribute to our organic growth.

With respect to strategic activity, we're working on the FundQuest acquisition announced on last quarter's call. We expect to close that transaction by the end of the year. We're also in active exploration with several other potential consolidating strategic opportunities that could further accelerate our growth.

Also, we've made significant progress in contract renewal negotiations with Fidelity. During the past few months, we've worked towards agreement on the scope and economics of our overall relationship. We expect that Fidelity will continue to be an important and growing relationship for us in the future. We're in the process of finalizing the negotiations and the documentation, and I expect that we will be reaching a new multi-year agreement in the coming weeks.

Second, very favorable industry trends are strengthening. We believe that investment benefits from and enables several trends that support our long-term growth. First, high net worth and affluent investors are increasingly seeking advice. As baby boomers get older, as their investment decisions become more complex, as the largest cohort of near-retirement Americans near their retirement, investors are seeking the help of professional advisors.

Second, more of those advisors are becoming independent. Advisors are less inclined to work in a large, closed-architecture environment. They're instead choosing to work for independent broker dealers, independent RIA firms or independent advisor networks. Every day, more and more advisors are embracing the idea of independence, objectivity, and the fiduciary standard.

Also, there are economic benefits that can accrue to an advisor who becomes independent. Third, more advisors are choosing fee-based compensation over commission-based or transaction-based compensation. This aligns the interests of the advisor with their client, benefiting the investor and providing a better business model for the advisor.

And fourth, more advisors are outsourcing their wealth management software and support service requirements. Advisors want to run an efficient practice so they can spend more time gathering assets and meeting with their clients. Envestnet's integrated wealth management software and services enable advisors to do just that.

These trends of investors seeking advice, advisors going independent, advisors becoming fee-based in their compensation, and advisors outsourcing their wealth management needs are powerful, have been growing for some time, and we expect them to continue to accelerate. We're enabling it and benefiting it, and we see this as trends that are going to be many years in the coming.

Third, our business is built for long-term growth, regardless of the short-term market environment. The third quarter market decline was the most dramatic we've seen since late 2008 and early 2009. We will see the financial impact of that in the fourth quarter, as we bill on September 30 asset values in most cases.

Even so, we expect to continue adding advisors, accounts and assets, which further establishes the foundation from which we grow over time. If you look at our company over the mid to longer term, the capital markets have little to do with our financial performance. By way of illustration, in April of 2000, when we began the business, the S&P 500 was at 1,500, the NASDAQ was at over 4,000. Today, the S&P 500 is at 1250, the S&P 500 is at 2,700, down significantly after many ups and downs during the past 11 years.

During that time, we've grown the Company from zero assets and zero customers to $127 billion in platform assets with a run rate revenue of over $125 million. That's due to the trends we just discussed that fuel advisor demand for our software and our services and our portfolio solutions.

Also, it's a function of our ability to execute every day as we add advisors, and those advisors add accounts and assets to the platform. I'll wrap up with a few concluding remarks, but first I'm going to 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. Today, I'm going to review our quarter and year-to-date financial results and provide you with our expectations for the fourth quarter. Starting with our 2011 third quarter results, revenues from assets under management or administration grew 37% to $26 million, compared to $19 million in the third quarter of 2010. Licensing and professional services revenues increased 9% to $6.1 million, compared to $5.6 million in the same period a year ago, and total revenues increased 30% to $32 million in the third quarter, from $24.6 million in the third quarter of last year.

Growth and assets under management or administration was strong in the quarter, with gross sales of $10.3 billion and net flows of $2 billion. Those figures include $4.5 billion in AUM or A conversions. Most of which were new clients in our Reporting Solutions business.

The market was down significantly, reducing our assets by nearly 10% in the quarter, and we ended the quarter with $66.2 billion in assets under management and administration, which is 12% higher than September 2010.

On the expense side, our cost of revenues increased to $11.4 million for the quarter from $7.4 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 and brokerage costs. As a percentage of AUM/A revenue, cost of revenues was 44% in the third quarter, up from 39% a year ago, reflective of the increased mix toward AUM.

On a non-GAAP basis, adjusted EBITDA increased 51% to $7.6 million from $5 million for the third quarter a year ago. Our adjusted EBITDA margin for the third quarter of 2011 was 23.6%, compared to 20.4% in the third quarter of 2010.

Adjusted earnings per share increased 57% to $0.11 in the third quarter, versus $0.07 last year. For the nine months year-to-date, revenues from assets under management or administration grew 38% to $74.7 million, compared to $54.1 million for the same nine-month period in 2010. Total revenues increased 31% to $92.6 million year-to-date from $70.4 million last year.

Adjusted EBITDA increased 66% to $20.9 million year-to-date from $12.6 million in 2010. Our adjusted EBITDA margin on a year-to-date basis in 2011 was 22.6%, 4.8 percentage points higher than the 17.8% we reported for the same period last year. Adjusted earnings per share were $0.30 year-to-date, up 88% from the $0.16 we reported for the nine-month period last year.

Looking ahead to the fourth quarter, we expect our effective fee rate before the amortization of customer inducement payments to be in the range of 15.0 to 15.3 basis points on our September 30 asset base of $66.2 billion. That range would result in year-over-year growth in reported revenue from AUM/A of 8% to 11% for the fourth quarter.

We believe licensing and professional services revenue in the fourth quarter this year will be relatively flat, compared to the fourth quarter of 2010. As a result, total revenue for the fourth quarter should increase between 7% and 9% compared to the prior year.

We expect fourth quarter cost of revenues to be approximately 42%, a modest decline sequentially, due to the high level of reporting conversions we had in the third quarter, which have little if any direct costs associated with them. We don't expect any unusual changes in compensation or general and administrative expenses between the third and fourth quarter.

Based on the revenue and cost expectations I've just outlined, we expect our adjusted EBITDA margin to be approximately 20% to 21% in the fourth quarter, up slightly from 2010. With that, I'll turn it back to Jud for his closing comments.

Thank you, Pete. In closing, we are executing on our growth strategy by adding advisors and assets. We're on boarding new clients and expanding the pipeline with new conversion opportunities. We're actively exploring additional opportunities to accelerate our growth with consolidating and strategic transactions, even as we near completion on the FundQuest transaction.

We are confident in our ability to execute on our strategy over the long run. We see continued benefit from several industry trends that fuel demand for what we do. Along the way, we are bound to come across markets like the one we experienced in third quarter. But the overarching trends and our ability to execute are what will enable us to grow consistently over the long term.

Our financial targets include long-term revenue growth of at least 20% per year and growth in adjusted cash flow of at least 25% per year. Our performance year-to-date in 2011 has exceeded these targets. We expect that this will be the case for the full year as well.

We also expect to expand our margins as we benefit from operating leverage with a long-term target of adjusted EBITDA margin of 30%. We believe we can achieve these results by empowering advisors to better serve their high net worth and affluent clients and by becoming the leading integrated wealth management solutions provider to these advisors. I thank you again for your time this afternoon and your support of Envestnet. With that, we're very happy to take your questions.

(Operator Instructions)

We'll take our first question from Alex Kramm with UBS.

Good evening, everyone. So Jud, just wanted to come back to your last comment and the comments you made earlier on building the business for the long-term. If I remember correctly, earlier this year, you made a comment -- well, I guess you had a nice tailwind from a good market, and then also I think you were running ahead in some other parts of your business, and you basically said we're going to invest a little bit more to take advantage of these opportunities ahead of us.

So given that the markets have been a little bit more challenging now, just wondering if some of those initiatives have been pared back a little bit, if you're doing anything to react, or if you're continuing to go full steam. And the reason I'm asking is if I look at your comp line, for example, they tick down sequentially if I adjust for the severance. So just wondering if there's anything you might have pared back or tighten up a little bit. Thanks.

That's a very good question, Alex. We did make investments in the business in the first half, even into August of this year ahead of what we had originally intended in terms of our 2011 plan as outlined in late 2010.

Those investments are making a difference in terms of how quickly we're able to on-board the large conversion clients. Those were good investments. As the market began to get more volatile and as the market began to go negative in that July, August, September time frame, we haven't pared back expenses, but we have slowed the addition of new resources, and we're managing the addition of new resources carefully at a time when market volatility turned up and market capitalizations turned down.

You know, in July, we had experienced a first month in a while of being below 2% in redemptions. Just as it comes down to more normal levels, it seems that the market picks up volatility again. So our expectation is that we will be prudent in hiring during this time, but we're not going to do anything that slows our ability to on-board new accounts and new enterprises.

Okay. And then just staying on that same theme, when you look at the volatility right now, is there anything in particular you're seeing in terms of maybe unwillingness for RIAs or independent brokers to go over the finish line when it comes to signing with you. Or is the pipeline getting delayed at all, or is it basically business as usual and the sales cycle hasn't really moved much?

There's a lot of things we could talk about on that. The pipeline is expanding. At times like this, advisory firms and independent broker dealers, their revenue is declining. Their expenses are not, and so a cost-effective solution is something that is very attractive to them.

So in the past, we've seen market share increase from these kind of markets, although never during the immediate time of these markets. So smaller firms, RIA firms are still able to work through the conversion process. The larger firms have faced significant reductions in terms of their IT staff, and there is some delay in some of these conversions with some of the larger firms.

Okay.

But that said, we were able to do some $5 billion of conversions in the third quarter, and that's a good number. But we're still seeing the pipeline expanding faster than we're pushing through these implementations. That's a good thing long-term.

All right, good. Thank you. Given that you just answered my next question during this one, so one more longer term. In terms of your outsource business in India, I think in the past, you've said that the compensation there was actually pretty attractive. So just given that we haven't had an update on that in a while, any changes there? Anything you're seeing there, or is it still a very attractive place to do business and hasn't really changed much? Thanks.

Our operating base in India is an important part of how we're able to deliver our services cost effectively. We've got some things going for us. The head of our product development, Babu Sivadasan, is really the person who established that office.

We're in Kerala, it's a little bit off the beaten path, extreme southern part of India. Highest literacy rates in the country. A very strong economy. But it's not the Chennai or the Mumbai pay scales. It's a market, a labor market that values the career paths that a firm like Envestnet is able to offer, versus simple outsourced services or call centers.

So we're finding very low turnover compared to the industry in terms of India back off the service providers and very cost effective and productive -- a very cost effective and productive work force. So it's an important part of our value proposition, and it's an important part of the operating stability that we can provide to our enterprise clients.

Okay. So no real change, then in terms of what you have to pay these people or anything like that?

No.

Okay. Very good. Thank you.

Thomas Allen with Morgan Stanley.

Good afternoon, guys. So on the long-term adjusted EBITDA margins of 30%, how long do you think it will take to get there? I mean, you've obviously been doing a very good job expanding your margins. I think you've grown them about 900 basis points over the past two years. That would imply at this ramp that you'd get there pretty quickly. Should we expect the up side to kind of slow a little bit? And then once you get to 30%, do you think that -- could you reset expectations, or do you think that with your gross margin, that's kind of the run rate from there? Thank you.

That's a good question, Thomas. Just some perspective. As we talked with investors in mid-2010 and through the third quarter of 2010, we had identified a 30% target for operating margin as defined by adjusted EBITDA as something that we achieve over the mid to longer term.

Then when pressed, we had said two and a half to three years to get to that long-term goal. When markets are stable, that measure is probably a good one. As markets go down, it puts pressure, because revenue drops and our expenses don't drop as much. So I would say that we're still probably two years in a stable market from getting to that level. Maybe as much as three years to get to that 30%. And then at that level, it would be appropriate for us to do a reset.

Okay. Thanks. And then in terms of the licensing revenue, you guys brought on a $900 million conversion. So slightly surprised that you're not expecting higher revenue this next quarter. What are the dynamics there? Thanks.

So for some of that, we charge kind of a one-time implementation fee, which shows up in the professional services line. For some of the implementations. And so we experience some of that. So that's kind of a one-time, which then converts to the ongoing license fee. So I think we've seen it in the first quarter at about the amount that -- or in the third quarter, excuse me. The first quarter we had the relationship. In the third quarter at about the rate that we'll experience on a quarterly basis going forward.

Okay. And then just a housekeeping question. Are the conversions -- I think I ask this every quarter. But it sounds like most of it -- was the whole $4.5 billion in AUA? And if it was, that would imply that the net flows were kind of evened themselves out. What are the dynamics of the kind of slowing net flows? Thanks.

Of the conversions in AUM/A, it was over 90% in reporting for AUA. So it was pretty substantially in that camp. So, right when you compare it to the July departure that we talked about, it's pretty comparable.

And then that would imply that the net flows on a kind of organic basis, ex-conversions are slowing a bit? Can you just talk about is that just the volatility in the market, or what --

I don't think you can draw conclusions from the third quarter, because of the volatility of the market. The redemptions go up. August is at best a bit of a slower time of year for advisors. When markets do experience difficulty, net new sales slow, and I don't think it would be reasonable or right to draw any broader conclusions or draw any implications from that.

Okay. Great. Thank you.

Peter Heckmann with Avondale Partners has our next question.

Good afternoon, gentlemen. Can you hear me all right?

Yes, we can, Peter.

Okay, great. I was wondering, have you seen any change in the competitive dynamics with the Advent Software acquisition of Black Diamond, or it seems as if there may be some relatively smaller entities that may be, you know, taking a page from your play book and may be winning a little bit of business. Do you feel like the competitive dynamics have changed in any substantial way, or are they substantially similar as they were maybe this time last year?

You know, there is competition in this space. We see it from single point application providers, some of the smaller single point application providers. We see it from workstations. It's a competitive environment. We certainly haven't seen an increase in that competitive environment. We believe we're winning more than our share of business, and we haven't found any significant new competitors to arrive on the scene in the last year.

Okay. That's helpful. And then as regards some of the mergers and acquisitions, seems like we continue to see some firms trading assets. Are there any blocks of assets that we should be thinking about that may have been subject to a merger or sale here in the last couple months in terms of potential changes in blocks of assets over the next couple quarters?

I don't quite understand your question, Peter.

Just, you know, we've seen a couple of the kind of advisory firms sell out to a larger competitors, and so perhaps similar to the dynamic you saw on the second quarter --

Peter, okay. So the question is do we know of any -- is there any acquisition activity that we know of that may affect books of business or blocks of assets that we currently are servicing?

Correct.

None that I know of. We generally get a heads-up on that, you know, weeks or months before it happens. But there aren't any that I know of in the works.

Okay. That's helpful. And then lastly, if I could just ask, I may have missed this earlier, but has there been any change in the timing of the closing of the FundQuest acquisition? Are we still looking for maybe some time later this month?

Not later this month. We expect by year-end.

Okay, by year-end. All right. Thank you very much.

Eric Bertrand with Barclays Capital.

Hi, guys. Thanks for taking my question. On acquisitions, last quarter, you commented that you expected to do another one beyond FundQuest over the next two to three quarters. Are you closer today to a particular target, or are you still actually on the hunt?

We've got a very active short list of companies that we believe would be either consolidating in financially accretive or strategic and significantly improving a part of our platform's functionality or feature set. And the conversations, the exploration continues, and we expect that this will be an important part of our growth in the coming quarters and years.

Okay. Perhaps I'll come at it from a somewhat different way. Are you expecting to consume much of your outstanding cash balance to get those done, or are they smaller in size that you would still have a war chest afterwards if you were to execute on that small list?

So seems like you're asking a financing question. Are the ones that we're looking at going to take the capital resources that we have. Is that what you're asking, Eric?

I'm generally trying to size the opportunity of your acquisition pipeline, whether it's big or small relative to your cash resources or not.

Anything that we are actively looking at, we have the financial wherewithal to complete.

Okay. And then probably a couple housekeeping questions. Maybe I missed it in the prepared remarks, but could you eliminate why the advisor account declined sequentially? Looks like about 400 it came down?

Yeah, so that picks up the advisors related to the reporting client that went away in the July time frame. Fewer advisors came on in the business that was brought on.

Okay. And perhaps I also missed it earlier. Do you give the breakdown of the AUM and AUA account counts each, or do you have that that you could provide?

The number of accounts, Eric, in AUM and AUA?

Yes.

It's on the last page of the earnings release.

Okay. Looks like I missed that, sorry. And then my last question, hopefully this wasn't already answered as well, is the tax rate declined a fair amount in the quarter. Was that a true up, or were there some one-timers as you had lower pre-tax income?

It was kind of both. It was a one-time true up related to some state returns that we filed this quarter, last quarter.

Okay. So get back to closer to 40% next quarter?

That's what we think, yes.

Okay, fair enough, thank you.

Chris Shutler with William Blair.

Hi, guys, good afternoon. I was hoping you could give a little bit of color on what you saw in the month of October as far as redemption rates.

We're not prepared to do that. October, there's still a lag from the increase of Vick's in the September period of time. I think that you're going to see, as long as Vick's stays down, redemption rate's coming down. But August started the month pretty much in keeping with where we were in September. We ended the month below that.

Okay. Thanks. And then kind of a housekeeping question, but what was the driver behind the licensing assets in the quarter declining?

Yeah, again, so that was one larger client that started moving their assets off in the second quarter and it continued into the third quarter.

Okay. Got you. And then the last question --

Also, there was a market impact in there also.

Makes sense. Jud, I want to get your perspective, I guess a bigger picture question, just on the mixed shift that seems to be taking place between UMAs and SMAs and just how that actually impacts Envestnet, how you're positioned relative to that trend.

So from a product standpoint, we are big believers in UMAs as fulfilling the original promise, if you will, of separately managed accounts. You'll find that our service time frameworks are far more responsive with the unified managed account technology as the enabling chassis.

The advisor and the end client is able to still get the customization and the institutional investment management from the separate account managers within the UMA, but rebalancing, tax loss harvesting, tax overlay management are all infinitely more easy to effect and achieve using the UMA chassis if you will, technology, enabling technology than the traditional individually brokered account, separately managed account structure.

So we're finding that that technology is very appealing to advisors and they're able to then balance maybe a sleeve of an actively managed specialty manager, emerging market or a small cap manager and then blend that with an ETF for the core of the large cap piece.

So we are big believers in the UMA technology being a facilitator of the separate account business. The traditional separate account is a part of the business that will be around for a long time. You know, maybe like a CD player is. But we think that there's a preferred and a better technology to service these accounts and we've been fully operational on there for a year and a half, and we expect that we're going to continue to grow well as that market evolves from being a traditional single manager in a single brokerage account to multiple managers within a single brokerage account utilizing the unified managed account technology.

Okay. Thank you.

David Grossman with Stifel Nicolaus.

Thank you very much. I may have missed this in your prepared remarks, but could you perhaps give us an update on, I think you had said in the last quarter that you had anticipated $4 billion to $6 billion of conversions in the second half of the year, and you obviously had a very strong third quarter. Any insights you could give in terms of whether you think, you know, that $4 billion to $6 billion is still the right range or perhaps even if you could exceed it, given the 3Q activity?

Again, you know, we understand that it makes a big difference to investors when the actual conversions take place. And there's so many moving parts. Repapering, many times there's a change in the custodian. There is dependencies on the enterprise or the registered investment advisor's firm.

So we think that the conversion pipeline is strong. We expect that we'll continue to make progress in the current quarter, in the fourth quarter. The extent to which, we just don't know. We know eventually how many there are going to be. But how many actually get done this quarter, you know, we'll know at the quarter's end.

Fair enough, Jud. Can you at least help us understand or just remind us of the revenue flow on the conversion? Does it essentially have to be fully completed before the revenue starts to flow, or does it kind of flow gradually as the conversion takes place?

So for us to realize revenue, the assets have to be on the platform. We have to be doing the billing administration on them. And a large broker dealer, for example, may have a staged conversion, and this is often the case. During the third quarter, a large broker dealer did phase one of their conversion. And in phase I, there was about $1.8 billion that were converted. They were AUA. The product was an APM, what we call the advisor's portfolio manager.

Subsequently, there's been another $300 million or $400 million from that same client, also AUA based. And over the next one or two quarters, we are expecting a fairly sizable amount of AUM, assets under management in the magnitude of $300 million or $400 million from that same client.

So they look at a platform provider like Envestnet. They select us because of the breadth of our capabilities, and then there's a tiering of products, and it rarely goes all at once. It is all of the APM or the advisor as portfolio manager accounts that came over at once in August, but they have many different programs. It's typical that an RIA or independent broker dealer may have three or four or five different kinds of advisory programs, fee-based advisory programs.

So it can easily be a year to a year and a half from the time that we are contracted to the time that the final asset comes across. And it's a good part of our business. It's a big part of our organic growth. But it's a less predictable part. And so I know that's an anecdotal response to your question, David, but that's how it works.

No, I got that. Thanks very much for that overview. So just one other question, Jud, and I know you're in a tough spot, you know, particularly in a public forum here with Fidelity. But can you give us a sense for at least kind of where you stand now? Would the new agreement in any way change the growth profile of that account, given where you stand right now?

So again, I appreciate the question. I understand the importance of getting insight into this. So let me take a crack at it, David, okay?

Today, we provide Fidelity with a branded managed account, a Fidelity branded managed account platform for their correspondent clearing activity through National Financial and also for the RIAs that they serve through Institutional Wealth Services, IWS.

Around 30% of our revenue today is related to the Fidelity, the clearing, the correspondent and the RIA firms. Now, about 75% of that revenue comes from three-party contracts, where Envestnet is a named party and part of the contractual services agreement.

So it's misleading to talk about just Fidelity. A better way of thinking about that is the 200 broker dealer and RIA firms that have contracted with Fidelity and Envestnet to have their wealth management software and services met.

Yet, this is all subject to a master agreement between us and Fidelity. So going forward, we expect a multi-year agreement. We expect that the mix of revenue will change. Going forward, it will include asset-based pricing for AUM and AUA, assets under management, assets under administration. It will include a license fee for technology maintenance and support. It will include some professional services.

We expect that the mix will be weighted more towards the fee-based or the AUM and AUA side and less towards fixed fees, and at this point, we expect that revenue for all of 2012 will essentially be flat when compared to all of 2011 for Fidelity for all of those 200 agreements.

So, you know, to say more than that would be going further than where we're able to at this point. And I expect that we're going to get -- you know, we're working hard on it. We're making progress on really all elements of it, and we expect that we'll have an agreement in the next few weeks.

Thanks. Actually, that's very helpful. Can I ask you just one mechanical question? Maybe I'm just missing the obvious. Should we look at the software, the licensing component as a subsidy to their customers, or is that really not the way to think about it?

I don't think that that's the way to look at it. I think that Fidelity looks to the overall arrangement as something that they want to provide the best service and the best software solutions to their correspondent clearing firms and their registered investment advisor clients.

And five years ago, we entered into a fairly complicated multi-pronged, multi-year arrangement. And it had these different elements to it. And it solved purposes for Fidelity and for Envestnet at that point. Five years later, four years later, whatever the -- is it four or five years later?

Four.

Four years later, it's a different environment and there's a different mix of services that is going to benefit Fidelity, their clients and our mutual clients. So I don't think that that's an accurate way of looking at it, David.

Great. That's very helpful. Thanks a lot.

And Sidoti's Hugh Miller has our next question.

I had I guess a follow-up question on I guess the Fidelity situation that you guys were describing. I was wondering, you know, that mix shift that you were talking about where it will be more based on AUM and AUA and less on kind of fixed-rate fees and so forth, is that something that you guys really desired more or something that was more initiated by Fidelity?

I don't know if I can answer that, to identify one variable from a fairly complicated negotiation. I think what we're focused on is the long-term growth opportunity with Fidelity as a partner, and we think that that's what we're trying to get to a point of enabling that so that we'll be able to do that over the next four or five years.

Sure. I certainly understand that. And I certainly appreciate also the color that you'd anticipate, given that mixture of that revenue to be flat in '12. As we think about the costs associated with providing those services and seeing it shift more towards AUM/A and so forth and less on service fees, is there a disparity there to think about between the margins and the costs associated with delivering that service?

I think that's an insightful question, and the answer to that is yes. And as we are able to gain greater clarity about the specifics of the agreement, we'll be able to give some color on that, but it's premature for us to do that today. But that's a very good question, because obviously a strict licensing arrangement has relatively no cost associated with it. AUA has very little cost associated with it. AUM as significant costs associated with it.

Yeah, it's more like AUA in that regard.

Okay. So little cost which would be a little bit above where you're servicing now. But at the same time, obviously, as the relationship grows, it should be a positive.

Okay. And then as you think about, you know, I know you mentioned looking at both consolidated and strategic M&A. As you look at the platform right now and the services you provide and you think about kind of expanding those services and consider doing it via either organic or acquisitions, what are the areas right now that you view over the coming years that you need to enhance or, you know, build out in order to kind of maintain your advantage competitively?

Well, we've got a very broad wealth management platform. We have chosen not to do certain things. While we have a sophisticated portfolio analytic tools and investment outcome analysis tools, we have not done financial planning or full-blown financial planning applications which would include estate planning.

Rather, we've chosen to integrate with leading providers of that. We've also chosen not to develop our own CRM. Instead, we've chosen to integrate with leading providers of CRM. What we have focused on is front-end analytic tools for portfolio analytics, for presentations, for product access, for portfolio management and rebalancing, for portfolio accounting, for billing administration and performance measurement.

We believe we've got very competitive offerings in every one of those things. The market's changing very quickly. So while we are investing well, I think, and smartly in our core platform, improving the features and the functionality set, there may be newer companies that are doing something that's a little different than how we're doing it. They may be appealing to a different market segment than what we've developed our product set or our capabilities for.

So it's less how you framed it, which is what gaps are there in the platform. It's more about what segments of the market would we be better able to serve with a strategic acquisition. Obviously, the consolidating acquisitions are for firms that are going to come over to the platform. And consolidating transactions, for the most part, won't give us a service lift or a feature and functionality lift.

The strategic transactions will -- the ones that we are looking at enable us to compete in a particular segment of this broad universe of independent advisors market and to do that more effectively than the ones that the platform is servicing now.

Okay. Appreciate that. That's very good insight there. Then just two housekeeping questions which relate to the reporting client that had left in July. You mentioned how the reduction in [FA] head count was attributable to that. But do you have a sense of what that figure was for us to get a sense of what the organic change was, excluding that adjustment?

It was about 21,000 advisors.

Accounts.

Accounts, excuse me, yes, and about 900 advisors.

Okay, great. And then had you given the figure on the redemption in assets related to the reporting client?

About $3.4 billion.

Okay. Perfect. Thank you very much.

Moving on, we'll hear from Chris Donat with Sandler O'Neill.

Good afternoon, Jud. Good afternoon, Pete. Just one quick one here on Fidelity relationship. When you say few weeks, is it safe to say by year end, and then how will you tell the world when the contract is -- assuming the contract is signed what the status is? Are you going to do some sort of conference call or press release or what?

So I think by year end is good guidance. I don't expect a press release. I do expect a filing, because it's material, and I don't expect a conference call. You know, I think that we expect that we'll be able to, in future calls, whether it's the fourth quarter earnings call or a 2012 outlook call, we'll be able to give analysts the wherewithal to make a good prognostication of what the effects of this new contract will be.

Okay. And then on the tax rate, just I think we already talked about what happened in the third quarter. But given what the state of Illinois has done, any thoughts on how to think about tax rate in 2012 as far as a run rate?

Yeah, I think the tax rate is still going to be right around 40% or maybe slightly above that. We've seen states taking various stands on the use of NOLs. But again, I don't think that will necessarily affect our reported effective tax rate. That will have more effect as to how quickly we're able to run through certain items like that.

Okay. Thanks.

Justin Hughes with Philadelphia Financial.

Good afternoon. Actually, all my questions have been answered. Thank you.

We have a follow-up from Alex Kramm.

Hello again. Just one very quick one, since we're talking about Fidelity now. But can you -- and you mentioned the flat revenue expectations for next year. Can you just maybe remind us how that business growth has compared over the last few years to the rest of the business? I mean, I assume we can just go to the [case] and look at the disclosures. But has this been faster than the rest of the business? Has this been kind of like other new business has actually been faster because it's growing off a smaller base, or how could you characterize it in terms of your revenue impact over the last few years?

Alex, we haven't broken that out, but I would characterize it as consistent and comparable with seasoned clients. And that base of advisors and the accounts they're adding has been consistent with the rest of our business.

Okay. That's all I had as a follow-up. Thanks.

And there are no further questions. I'll turn the call back over to Mr. Bergman for closing remarks.

Thank you. I believe my closing remarks were delivered. I thank you for the time. I thank you for the very good questions. And mindful of the hour, I will say thank you and farewell.

Ladies and gentlemen that does conclude our conference call for today. Again, thank you for your participation.