Envestnet Inc (ENV) 2011 Q4 法說會逐字稿

Good day and welcome to the Envestnet fourth-quarter 2011 earnings conference call. Today's call is being recorded. At this time, I would like to turn the conference 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 fourth-quarter and full-year 2011 earnings press release can be found at Envestnet.com under the Investor Relations section. We have also posted on our website some slides with supplemental information that you may find useful during the call. That is on the Presentation tab of our Investor Relations site.

During this conference call, we will be discussing certain non-GAAP 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 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 and welcome to everyone on today's call.

Envestnet is enabling a transformation in wealth management by powering advisors to offer a fully transparent, unconflicted, fiduciary standard of care. Our recent results show continued progress as we exceeded our long-term growth targets for revenue, adjusted cash flow and earnings.

In 2011 we grew revenue from assets under management toward administration over 30%, topline revenue by over 25%, adjusted cash flow by over 50% and adjusted earnings per share by over 55%.

We also expanded our adjusted EBITDA margins by almost 400 basis points. The transformation that we are empowering have several dimensions. We're seeing a more complex financial environment, and that is prompting more investors to seek help from investment advisors.

We're seeing an acceleration in the trend of advisors leaving captive and at times conflicted firms to become independent and grow a more fully transparent practice. Then there's the transformation on how these advisors are being paid, changing fundamentally from brokerage commissions to asset-based fees that place the advisor on the same side of the table as the investor.

And then there is also the transformation in how advisors are managing their practices. They are requiring much greater efficiency in this environment, and that is prompting a much greater degree of outsourcing that technology and the portfolio solutions they need to serve their clients better.

Our software and our services are extremely well-suited to this environment. Our goal is to be the leading provider of integrated wealth management solutions to investment advisors. Our organic growth comes from same-store increases with existing relationships also establishing new enterprise and advisor relationships, some of which result in conversions of significant assets. We are able to accelerate this organic growth in the current environment through selective strategic acquisitions, and we're executing on all components of our strategy.

During 2011 gross sales totaled nearly $33 billion in assets under management or administration with net flows of $9.3 billion. Included in that amount was $8.3 billion in conversions.

We also converted $1 billion in licensing assets, bringing our total conversions for the year to $9.3 billion. We are on target to achieve or even exceed the $12 billion to $14 billion conversion target by the second quarter of this coming year. We expect conversion activity to be very strong throughout this year and next year as our conversion pipeline has grown significantly over the past six months.

At year end we entered into a new five-year agreement with Fidelity. The negotiation of the new fidelity contract enables Envestnet to continue to serve important clients of ours, and while we will see a transition in the economics of the relationship, we believe we are in a position to grow this relationship in all the important metrics -- assets, advisors, accounts, revenue and profits well into the future. We have a strong relationship that was reaffirmed by this next stage, and we are working hard to help them grow.

As I indicated in last quarter's earnings call, we expect that revenue from Fidelity will be flat year over year as the license and professional services revenue, which had very little marginal cost associated with it, will be reduced and replaced with growing assets under management and administration and professional services revenue by year-end. This reduction in license revenue and professional services will affect both topline growth and bottom-line profitability for at least the first two quarters of 2012.

Regarding our acquisition strategy, during our investor meetings in preparation for a public offering, we indicated that we planned to make one or two consolidating acquisitions and one or two strategic acquisitions in the first six to eight quarters as a public company. A year and a half into this, we believe we are on track with this part of our strategy as well as we have completed one acquisition and recently announced two additional transactions.

In December we completed phase two of the FundQuest acquisition. This was a good example of a consolidating acquisition. FundQuest is financially accretive and moves us closer to a base of enterprises and advisors. This combination has been very well received by our clients, both enterprise and advisor.

On February 10, we announced the acquisition of Prima Capital. We expect Prima to be beneficial both strategically and financially in the short and long run. With Prima we enhance our research and due diligence capabilities and expand the retirement solutions we are able to offer advisors. Prima has a recurring subscription-based revenue model that we expect will generate at least $6.5 million of revenue in the first year under our ownership.

We also see the Prima client base as receptive to cross-sells with some of the other solutions that comprise the Envestnet Advisor Suite. Prima should be modestly accretive in 2012 from a cash flow and earnings perspective. We expect a 17% to 20% cash return on investment achieved by the fourth quarter of 2012 and then growth from that point in 2013 and beyond.

Last week we announced the acquisition of Tamarac. Tamarac is a significant step forward for us strategically. Tamarac serves the high-end registered investment advisor market, a fast-growing segment of wealth management. With industry-leading portfolio management and rebalancing software, as well as practice management and performance reporting software and services, this acquisition brings both enhanced platform capabilities and is a spot-on accelerator of growth in a very important channel, large registered investment advisory firms.

Tamarac's capabilities complement our data management and reconciliation expertise, our expansive product set, and our front-end analytic and presentation tools, all of which will integrate over the coming quarters. Tamarac strengthens our capabilities and allows us to together better serve our advisors.

Tamarac also has a subscription-based revenue model. We expect Tamarac will generate over $15 million in revenue in the first 12 months following our combination. It will be dilutive initially, and we expect it will be cash flow positive by the end of the year, accretive to cash flow going forward and significantly value-accretive to our business beginning later this year. These acquisitions demonstrate our ongoing commitment to improving our technology and service offerings and to empower advisors to serve their clients better. We've included a few supplemental sides depicting how Prima's and Tamarac's offerings enhance our Advisor Suite.

I'll wrap up with a few concluding remarks, but I would now like to turn it over to Pete D'Arrigo, our Chief Financial Officer, to discuss our financial results in more detail.

Good afternoon. Thank you, Jud. I'm going to begin with highlights from our fourth-quarter financial results and move on to our expectations for the first quarter of 2012.

Starting with our 2011 fourth-quarter results, revenues from assets under management or administration grew 12% to $24.6 million compared to $21.8 million in the fourth quarter of 2010. Licensing and professional services revenues increased 4% to $6 million compared to $5.8 million in the same period a year ago. Total revenues increased 11% to $30.5 million in the fourth quarter from $27.6 million in the fourth quarter of last year. Growth in assets under management or administration was strong in the quarter with gross sales of [$7.2] billion (see press release) and net flows of $2.4 billion. Those figures include $2.1 billion in conversions, most of which were new clients in our reporting solutions business.

Redemptions averaged 2.4% per month for the quarter, consistent with what we experienced in the second and third quarters of 2011. We ended the quarter with $70.1 million in assets under management or administration, which is 10% higher than December of 2010.

Included in that year-end number are two changes related to FundQuest. When the acquisition closed, we reclassified $5.8 billion from assets under administration to assets under management. Additionally during the fourth quarter, one of FundQuest's clients with $1.5 billion in assets under administration transitioned to a licensing for a fixed licensing fee. Both of these items reduced assets under management, but had no net impact on total platform assets as one increased AUM and the other increased licensing assets.

Our effective fee rate for assets under management or administration during the fourth quarter was 15.4 basis points. We arrive at that rate by adding back non-cash amortization of customer inducement payments, which is an offset to our reported revenue.

On the expense side, our cost of revenues increased to $10.4 million for the quarter from $9.3 million last year. As a percentage of assets under management or administration revenue, cost of revenues was 42% down from 43% in the fourth quarter of 2010.

On a non-GAAP basis, adjusted EBITDA increased 18% to $6.5 million from $5.5 million for the fourth quarter a year ago. Our adjusted EBITDA margin for the fourth quarter of 2011 was 21.4%, up 1.3 percentage points from the 20.1% we reported for the fourth quarter of 2010.

In connection with the FundQuest acquisition, there were some changes to the balance sheet. Our platform services agreement with FundQuest terminated on the closing date of the acquisition, and that resulted in the elimination of the customer inducement asset and liability previously reflected on our balance sheet. And now the items appear in more traditional acquisition line items on the balance sheet. Adjusted earnings per share increased 38% to $0.11 in the fourth quarter versus $0.08 last year.

Looking ahead to the first quarter of 2012, we expect our effective fee rate to be in the range of 15.8 to 16 basis points on our December 31 AUM/A asset base of $70.1 billion.

The increase in fee rate from the fourth quarter reflects the incremental revenue from FundQuest, partially offset by a higher amount of reporting assets from conversion activity in the fourth quarter. This fee rate range represents year-over-year growth in reported revenue from AUM/A of 18% to 20% for the first quarter of 2012. Our 2012 results will no longer have customer inducement amortization as a contra revenue item now that FundQuest is consolidated into our results.

We believe licensing and professional services revenue in the first quarter this year will be down approximately 30% year over year as we transition to the economics of the new Fidelity agreements. We expect continued growth in AUM/A revenue from our Fidelity relationship.

Total revenue for the first quarter should increase between 9% and 11% compared to the first quarter of 2011.

We expect first-quarter cost of revenues to be between 40% and 41% of revenue from assets under management or administration. Other GAAP operating expense in total in the first quarter should increase approximately 14% to 16% compared to the first quarter of 2011. Based on the revenue and cost expectations I've just outlined, we expect our adjusted EBITDA margin to be between 15% and 16% in the first quarter of 2012. We expect the adjusted EBITDA margin to expand from that level throughout 2012.

The acquisitions of both Prima Capital and Tamarac are expected to close during the next few months, so we won't see their full impact until the second quarter at the earliest, possibly the third quarter. We will provide further guidance on the impact of both acquisitions after they close.

With that, I will turn it back to Jud for his closing comments.

Thank you, Pete. We are executing on our core growth strategy by delivering on organic growth. We are on boarding new clients and expanding our pipeline of conversions. We're also working to complete the acquisitions of Prima Capital and Tamarac and integrate their people and products into our organization. We have targeted long-term organic growth and revenue of 20% per year and growth in adjusted cash flow of 25% per year. We exceeded those targets both in 2010 and in 2011. We also expanded margins as we made solid progress towards a long-term adjusted EBITDA margin target of 30%.

For 2012, we expect to exceed our long-term growth target to revenue as we grow organically and accelerate this growth through the integration of Prima and Tamarac. Our growth in adjusted cash flow and resulting margins will be impacted for at least the first two quarters in 2012 as we transition to the new economics of the Fidelity relationship.

That said, we expect that a large enterprise licensing arrangement currently well through our pipeline will more than make up for the Fidelity revenue and cash flow impact by the fourth quarter of this year on a run-rate basis.

This is a very important year for Envestnet. It's a year in which we expect the transformative trends to accelerate. Ultimately, we believe our success will be measured by the growing presence we have with investment advisors. We look forward to a year of strong organic growth and significant conversion activity leading to revenue growth above trend. We expect that growth and cash flow will be affected as we transition through the new economics with Fidelity. We look forward to integrate two companies that will significantly enhance our ability to execute on our strategy going forward.

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

(Operator instructions) Alex Kramm, UBS.

Just talking about the Fidelity, maybe just a little bit more detail on the numbers. I think you gave a lot here. If I just look at the first-quarter 2011 number, it was down 30%, and I annualized it. I think it comes down to like $7.2 million, which sounds kind of like it is in line with what we had estimated last quarter. Is there any other noise in there? I think, for example, that FundQuest $1.5 billion transfer I think will probably show up in licensing, or is that $7.2 billion really like a net number from Fidelity, or is there also maybe some costs coming out that you can talk about a little bit more? And then maybe some expectations throughout the year of some ramping there in terms of how that might show up in the income statement?

Alex, that total is it is net of everything that happens primarily. The primary driver overwhelmingly is Fidelity, though, to that. So we expect to be ramping in terms of professional services and licensing agreements throughout the course of the year from that baseline.

All right, pretty easy. Then I guess just secondly, that comment that Jud snuck in there at the end with the new enterprise clients, can you give us a little bit more color? Is that something that you had been working on for a while? You've been talking about new big enterprise clients for about since the IPO really. Now was that something you've been working on for a while? Are there signs, or are you just very confident coming? Is it coming in the fourth quarter, which it sounds like, and maybe just comment on the opportunities for additional enterprise clients over the next few months or years?

Alex, I will be happy to give some additional color on that. First of all, it's a company with which we have an agreement in principle. It's a company that we've been working with for a very long period of time. It is a significant client, but why it is noteworthy is that it will have economics that are licensed based rather than asset-based. So it coming on as we are expecting later this year probably in the fourth quarter, possibly a little earlier is significant, and we think it's useful as a way of building a bridge in this transition year from having one important license arrangement being altered and another one coming on.

In terms of the pipeline there, sorry, just the second part of my question.

I'm sorry, Alex.

In terms of the enterprise pipeline in general, any comments there?

Yes. I indicated that we're on track to neither exceed the range that I had indicated a year ago that would come in the coming five to six quarters. I also indicated that the overall conversion pipeline has significantly strengthened over the last six months and is significantly stronger than it was a year ago.

All right. Fair enough. I would jump back in the queue.

Thomas Allen, Morgan Stanley.

I'm going to focus on the Prima and Tamarac acquisitions. Last quarter you guided to -- and you talked about this earlier -- adjusted EBITDA margins of 30%, and you hope to get there in two to three years. Now that you are starting to kind of go full speed on your acquisition pipeline, should we expect that to kind of take a little longer to flow through?

I think that's a good question, Thomas. There is a long-term target. Two to three years was our expectation when we last talked about it was 30%. This year we've got new contract economics to work through, and we have it with Tamarac. We have a business that is growing very rapidly, has very satisfied customers, but is currently not profitable.

We expect that they will grow to a cash flow positive position by the end of this year. It will be slightly dilutive to us, and we expect to be accretive financially starting in 2013, but value-accretive to us as we cross-sell and integrate their software and service offering into our advisor suite, value accretive with the advisor relationships that we have much sooner than that.

So I expect that this is a transition year for margin and cash flow growth. We're going to be back strongly on track. We expect to end the year north of 20% -- again, that would be ending 2012 -- and then growing strongly from that base in 2013 and 2014. So by the end of 2014, I think we're going to be very, very close to that long-term target.

And then I will touch on your cross-selling opportunities. Have you heard from many customers so far who have kind of come to you and said, well, great; we have seen your acquisitions, like we are really interested in what those guys do; how can we work with you?

We've had very good response from the vast majority of the clients. This is a quote, "Jud -- Envestnet's rebalancing tools were very good. Tamarac's are great. When can we get the integrated platform?"

Others have indicated that the Tamarac product offering with an alternative for data management and reconciliation services would be very, very welcome. We share a handful of clients both with Prima and Tamarac. And in some cases, with Prima it is going to be enhancing their very fine front-end tools for asset allocation and research with performance reporting.

In other cases, it is going to be enhancing it with access to the product suite that we have with PMC and with our full strategist network.

So, yes, we have very much enjoyed the early phases of the discussions that we've had with our advisor clients, both shared clients and now new potential clients.

Thanks and can I just squeeze another one in quickly? You guys have spent a lot of your cash? What are your thoughts around liquidity? Have you looked at raising debt and, you know, any idea on what kind of terms it would get? Thank you.

Strategic activity and a disciplined approach is a core component of what we're trying to do, and obviously we've used or expect to use cash in the next couple of months that we have on the balance sheet. We are still strongly cash flow positive and generating cash, so we will have that as a resource. We do have a variety of plans that we are working to ensure that capital resources are available for us to continue to be active in a disciplined way.

That said, though, I think organizationally the focus of our strategic activity will be more on integration over the next few quarters than it will be on agreeing to any new acquisitions. But we are mindful of the capital situation and actively moving forward to make sure that we're not preempted from anything opportunistic.

Okay. Very helpful answer. Thank you.

Chris Shutler, William Blair.

On the Prima acquisition first, beyond the clients that you gain in some of the customer channels that I think are fairly new to Envestnet, maybe just walk us through how Prima's strengths in the area of manager research differ from your own? And then if you could just talk about some of the cross-sell opportunities that you see with that acquisition, that would be helpful.

We've been looking to align ourselves with Prima for about a year and a half. They were a part of Broadridge. They didn't fit with Broadridge's long-term plan. We know the team in Denver. We have a presence in Denver. And there is a high degree of compatibility with the approaches, looking for separate account managers and fund managers who are able to deliver Alpha over the long period in their investment strategies.

They have done a significant amount of work in the area of liquid alternatives, 40 [YAC] vehicles that provide hedge type strategies and our roundout strategies for well-diversified portfolios. We liked that.

We also liked their expanded set of retirement solutions. Envestnet has two mutual funds through our PMC group that we offer to smaller accounts. The one that has a MorningStar rating has been rated either four stars or five stars since it has been out. Prima has several four and five star collective investment funds available to the retirement market that will be a nice enhancement to the package solutions that we offer to advisors that are offering portfolio solutions to their end retirement clients.

So that's the product roundout. When you turn to the software, they are able to deliver their asset allocation guide and their research in very good desktop fashion. So, again, our strategy is to offer the integrated Advisor Suite, but also offer components of that on an a la carte basis as some advisors just want one piece of the overall Advisor Suite. They have done that very well, but the cross-sell opportunity is to integrate Prima's research and capital market and asset allocation portfolio construction software to marry that or integrate that with an expanded set of products through PMC, the strategist network and through advisor as portfolio manager offerings, offer that and then enable the performance reporting, the aggregation and the practice management tools to be supplement what Prima is doing in the cases where their clients want it.

Okay. Thanks, Jud. That's helpful. And a strategic question, with custodians I know you are both competitors and partners, but talk to us about why you think down the road, two or three years down the road, an advisor might choose the combined Envestnet/Tamarac/Prima offering and another advisor might choose a custodial platform. Basically if you can compare and contrast the two options for us and just help us understand if you are an advisor both from a technology and an economics perspective, why would one solution make sense than another?

Well, what we have found is the advisors that are choosing us are choosing it for a combination. They like the feature set, they like the functionality, they like how the software works, but also there is a practice management aspect to this.

If an advisor says, I am comfortable custodying all my assets at one custodian, those advisors are probably more likely to look for additional solutions from that custodian. But our research is indicating that the high-end advisers have on average three custodial relationships, and they are looking for a software and a solutions provider that can provide a bridge for their practice when it spans beyond a single custodian.

So we're attracting advisors that are placing assets at one, two, three -- in some cases we have got one advisor that has advised or managed assets at seven different custodians. We're able to provide that bridge that enables the advisor to not only aggregate and consolidate those holdings for their client's benefit, but also it helps that advisor keep very good track of their book of business and enables them to have book of business capabilities.

So I could go on on this. Maybe we can follow-up on this on an after call.

That be great. And then can I sneak one more in for Pete? The $1.2 million contract supplement charge, as well as the tax benefit, just those were a couple of outliers in the quarter. I was just hoping you would give a little bit more color.

Yeah, sure. So let's talk through kind of the whole picture. There are a couple of things. So, again, this is all related to the termination of the platform services agreement we have with FundQuest.

There were -- and, again, to kind of be clear about this, this is all sort of a purchase price allocation mechanism, and there was no cash gains or losses related to any of that.

So let's start with the other expense item that is on there that is about $1.2 million is related to a true-up and evaluation of the value we were carrying on the books of the contract, which, again, was related to the payment stream that was agreed to by us to make to BNP under the platform services agreement. When that got trued up, the timing of that all got MPVed, and the difference was about $1.2 million.

Separately the tax question, again, was a timing difference. So there was an amount that was detectable for us for tax purposes, which needed to be spread for accounting purposes, and when the contract went away, that amount got accelerated for tax purposes, and that was about $1.2 million also, which went in the opposite direction. But it was an income tax benefit.

Now again, this is not a cash tax item. Our cash taxes effectively are about 5%. We still have $22 million of NOLs that we're carrying. So we don't expect to be in a position of being a full taxpayer anytime soon in the next couple of years. But that was an item.

So, again, if you go to the income tax reconciliation item and add that to the $700,000 or so income tax benefit, then you get a tax rate that is more in line with the 40% that we expect. That actually works both for the quarter and for the year.

Okay. Great. Thanks, gentlemen.

Chris Donat, Sandler O'Neill.

I wanted to make sure I understand this. When I look at the cash on your balance sheet and you guys talk about the total of $68 million of acquisitions in the first half of this year, how much cash do you really need to have to run your business? And I know with your 5% effective tax rate, you are generating a fair amount of it. But you really don't have any regulatory -- because everything is custodied away, you don't have any requirements there, right?

Yes, that is all accurate. So, again, we will use this up again. I think part of where the benefit of the cash flow structure where we bill in advance and the fact that we're profitable means that most of our cash comes in to pay our expenses for the quarter in advance of that quarter coming on. So we generally have the business model and cash flow model set up to work with very little cash. We've talked about carrying a buffer. But, as a practical matter, the fact that we have that billing in advance item allows us to be -- to work through the quarters pretty effectively.

Okay. And one for Jud. Now that you've got Fidelity done, Tamarac negotiated, Prima done, FundQuest on your books, do you feel like you've got a lot behind you, or what are you looking forward to at this stage?

We're looking forward to a big year of executing -- advisors, big, big conversion pipeline, integrating these companies, offering an expanded solution set not only to our advisor base, but to the advisor bases of the two organizations that we're bringing into ours.

We've been pretty clear about what we've been looking for going forward. We identified that we'd be looking for consolidating transactions and also strategic transactions, and what we were looking for in strategic was we identified practice management applications. We also identified things that would help our portfolio solutions gain an attractiveness.

So Prima is clearly an enhancement to our portfolio solutions. Tamarac is a very big enhancement on the practice management side.

As Pete indicated, the next two to three quarters are going to be very heads down on our core business growing that and integrating this. We're going to stay open to opportunistic consolidating opportunities, but for the next two to three quarters, we are about executing on what we've got in front of us.

Got it. Thanks very much.

Eric Bertrand, Barclays Capital.

Following up on Chris's question there, Jud, you definitely have a lot of great acquisitions in the pipeline to get done and have executed on a tremendous amount seemingly over the last couple of quarters here. But beyond that execution pipeline, basically for the next two or three quarters, are there other products out there beyond just consolidating acquisitions that you could build out your product suite more? Is there more that you would want, or is this kind of the product set that you are looking at?

Well, if you look at the Advisor Suite and the supplemental material, there are things that we've done since our inception 11 or 12 years ago, and there are things that we have added or improved on over the years.

From the start, we've done pretty much everything in each of the quadrants, but it has been a process of improving. In some cases we've got best-in-class capabilities, and I believe that there are going to be opportunities to enhance. There are no holes or gaps in our wealth management offering at this point, at least none that our advisors are strongly encouraging us to fill. But we have got a 15-person Advisory Council that consists of very high-end RIAs, multifamily office managers, independent broker-dealer advisors and some enterprise representatives. And I can tell you that the Tamarac acquisition was strongly nominated by several of the Advisory Council members and that's not unusual.

And so right now I just want to affirm that we've got a lot of work in front of us in '12 to grow our business organically and to integrate these. Consolidating transactions are interesting and valuable because they expand the advisor base, and they are very accretive financially. So those will be something that we would continue to look at, and those are really from an operational and a technology standpoint are no different than just large conversions for us. So -- and that is a core competence. We're converting essentially billions of dollars of assets every year onto the platform.

So consolidating transactions we will continue to be looking for and open to. Strategic ones, I don't expect a strategic acquisition in the next two to three quarters.

Okay. That is very helpful. It does seem like you've got quite the product set at this point, and that is to be congratulated.

On maybe my follow-up would be on the near-term environment, we've seen a very robust market rally. Have you seen any change in behavior in your customer base across AUM and AUM/A in terms of getting engaged with the market, maybe a pickup in gross sales, reduction redemptions, anything along those lines that has been a change from the more muted second half of last year?

Not yet. Some moderation in redemptions, but to the movement into equities, surprisingly resistance at the advisor or the investor level still have not seen that yet.

Okay. That's helpful. Let's hope that changes. Great. Thanks, guys.

Hugh Miller, Sidoti & Company.

I was wondering, I guess, if you could just give us a touch of color on what is driving the reduction in the cost of revenue with the guidance of first quarter of '12. I guess with the growth in the AUM relative to AUA, I guess normally expected a little bit of a rise in that figure and kind of how should we be thinking about that ratio trending in the following quarters?

So, Hugh, there are a couple of things at work there. One is the customer inducement costs going away. So with that reflected for much of the fourth quarter, that gives you the 42% cost of revenue as a percentage AUM/A revenue. So that will come down when you add back the cost of revenue. That is one component.

The other part is the shift in the mix more toward reporting where we've had larger conversions coming in with reporting type business, and those would not carry as much costs associated with direct costs for cost of revenue.

Okay. Then I guess as a follow-up --

As far as a trend, if you look at the recent history, we've seen that coming down a little bit. But, again, as we ramp up with our expectation toward more investment solutions sales and a product mix with PMC incorporating Prima, we think that may pick back up with those types of sales. But those are the two drivers of what we have seen so far.

I appreciate that. Thank you.

[Nicole Conway], Stifel Nicolaus.

Just a quick question on the conversion breakout on the AUM, AUA. I don't know if you mentioned that.

All we mentioned was that it is for the most part reporting type business in the conversions for the fourth quarter.

Okay, great. Thank you. Then, also in terms of margins, should we expect the adjusted EBITDA margin to be down year over year in 2012, excluding the acquisitions, as well as the large license client that might come on in the back half of the year?

Well, we're certainly going to start down -- by the end of the year, we think we'll be getting closer, but for the full year, it's likely that we'll be kind of around that 20% or maybe slightly below range. So I would guess it will be down year over year.

Got it. And then if you were to get that large license client, would it be more flattish or --?

Not relative to 2011. I think, again, assuming that we get that client that Jud referenced, that will help us get over 20%, but it will be toward the end of the year and won't have much impact in the earlier parts of the year.

Got it. And then for the 20%, that long-term growth rate that you are expected to meet or exceed for 2012 for revenue, that is not including acquisitions, correct?

Correct. Our long-term target is 20% for organic growth, and the strategic activity is accelerating, or we see those as growth and margin accelerators eventually -- growth accelerators in the current period and margin accelerators over time.

Great. Thank you very much.

(Operator instructions). Alex Kramm.

Just a couple of little tidbits here. On the advisor growth number, I mean I think the advisors this quarter and also the last quarter were kind of impacted by some of the shifts in licensing. So I wondering if you had like a net -- unless you gave it already and I missed it -- like a net advisor growth number for the year, just so we can compare that to like overall RIAs trends and things like that? And I think we can probably calculate that, but maybe like a net new asset growth for last year ex-conversions, again just to see how you guys are tracking relative to the industry?

Well, there are multiple parts. I would say on the advisor front, if you take out the shift to licensing that we had in addition to some of the other shifts that we had throughout the course of the year, we're probably closer to high single digit percentage growth in total advisors. Again, we're targeting 8% to 10% longer-term or 10% or more even for advisor growth.

I think I would ask that maybe we take that assets under management or other question off-line and try to get into the details of it, instead of trying to do it here.

I would add to that though, too, that the core growth same-store growth component is a function of both advisor growth and account growth. So, if we've got 8% to 10% or more percent for advisor growth over time stabilized environment and then 10% to 12% or maybe even 14% account growth per advisor, that drives our long-term organic activity. And account growth per advisor this past year ended up at around that 11% range.

So there's two dimensions to that, Alex, and it's easy to focus on the advisor and forget the account growth. But the account growth is just as important or maybe even more.

All right. Thanks for pointing that out. That's all I had. Thanks.

And it appears there are no further questions at this time. Mr. Bergman, I would like to turn the conference back over to you for any additional or closing remarks.

Okay. Thank you. I know that we're coming up on the hour here, so I do want to thank you for your very good questions and for the diligent effort in following our Company. Thank you for your interest, and we look forward to talking to you in the coming days, weeks and quarters. Thank you.

That does conclude today's presentation. Thank you for your participation.