Envestnet Inc (ENV) 2012 Q1 法說會逐字稿

Good day and welcome to the Envestnet first quarter 2012 earnings conference call. Today's call is being recorded. At this time, I'd 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, Chairman and Chief Executive Officer, and Pete D'Arrigo, Chief Financial Officer.

Our first quarter 2012 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 information, including adjusted EBITDA, adjusted net income and adjusted 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 helping advisors transform the wealth management industry to a transparent and conflict-free standard of care for investors. Our first quarter results show continued progress as a growing number of advisors adopted our wealth management solutions.

In the first quarter, we grew revenue from assets under management or administration to 21% and total revenue by 12% versus a year ago. This transformation was fully evident last week when hundreds of advisors attended our Advisor Summit, a three-day event for current and potential clients to gain perspective on how to better serve their investors and improve their practices.

Our core themes resonate with these advisors. One, that a transparent and conflict-free fiduciary standard of care is replacing the old practice standards. Second, that independence is proving to be a superior operating model for fee-based advisors. Three, that leading open architecture technology improves the advisor-client relationship and that advanced portfolio solutions, thoughtfully constructed across appropriate asset classes, continue to create value for investors.

Envestnet is both empowering and benefiting from these changes. We continue to add depth and richness to our advisor suite to ensure it meets the changing needs of advisors and their high-net-worth and affluent investors.

During the first quarter, we focused on completing our two recent acquisitions, Prima Capital and Tamarac, and maintaining our momentum in the organic growth of our business.

Gross sales of assets under management or administration totaled just over $10 billion, with net flows of $5.9 billion. Included in that amount was just over $4 billion in conversions, most of which came from new clients using our reporting solutions.

At the beginning of 2011, we identified as $12 billion to $14 billion conversion target over the subsequent 4 to 6 quarters. Including our most recent quarter, conversions have totaled more than $13 billion in that period of time.

Our pipeline of new business opportunities is very strong. We are confident that our conversion activity will continue to contribute meaningfully to our organic growth in the coming quarters. Based on our known opportunities at various stages of implementation and in our new business pipeline, we believe that conversions will increase during the next five to six quarters to levels above what we have achieved in the past five quarters.

On last quarter's call, I mentioned a large enterprise prospect in our pipeline that we believed could have converted by the end of this year. We continue to work with this firm to move to a full contract and expect to do significant business with them in the future. However, a full conversion of their business is not likely to occur this calendar year.

Our near-term priorities are -- one, to grow our core business by adding advisors, accounts, and assets; second, to integrate Prima and Tamarac into the Envestnet organization and product suite; and three, to implement large conversions as they work their way through our pipeline of new business opportunities.

I'll conclude with a few remarks in a moment, but first I would like 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. I will review our first quarter financial results and discuss our expectations for the second quarter.

Starting with the 2012 first quarter revenues from assets under management or administration grew 21% to $28.3 million compared to $23.3 million in the first quarter of 2011. Licensing and professional services revenue in the first quarter was $4.4 million versus $6 million a year ago, primarily due to the changes in licensing revenue we discussed on last quarter's call.

As a result, total revenues increased 12% to $32.6 million in the first quarter from $29.3 million in the first quarter of last year.

Growth in assets under management or administration was strong in the quarter with gross sales of $10.2 billion and net flows of $5.9 billion. Redemptions averaged 2% per month for the quarter, an improvement from what we've seen in recent quarters.

We ended the quarter with $80.4 billion in assets under management or administration, which is 15% higher than the end of December of 2011.

Our effective fee rate for assets under management or administration during the first quarter was 16.1 basis points.

On the expense side, our cost of revenues increased to $11.5 million for the quarter from $10.1 million last year. As a percentage of revenue from assets under management or administration, cost of revenues was 41% compared to 44% in the first quarter of 2011.

On a non-GAAP basis, adjusted EBITDA was $5.1 million versus $6.2 million for the first quarter a year ago. Adjusted earnings per share was $0.07 in the first quarter compared to $0.09 last year.

In the second quarter we closed the transactions with Prima Capital and Tamarac which were announced in February. Prima will be included in our results for all but four days of the second quarter and Tamarac will contribute beginning May 1st. The expected results from those businesses are included in the guidance I will be providing for the second quarter.

We expect our effective fee rate in the second quarter to be about 15.1 basis points on our March 31st AUM/A asset base of $80.4 billion. That compares to the 16.1 basis points we experienced in the first quarter and that change is large due to the concentration of reporting business in our recent conversions from the first quarter.

We believe licensing and professional services revenue in the second quarter this year will be up 26% to 30% year over year and that increase is driven primarily by the additions of Prima and Tamarac. Total revenue for the second quarter should increase between 20% and 22% compared to the second quarter of 2011.

We expect second quarter cost of revenues to be between 42% and 43% of AUM/A revenue. This line now includes some costs related to revenue from Prima and Tamarac. Total operating expense for the second quarter should increase 33% to 35% compared to the second quarter of 2011.

Based on the revenue and cost expectations I've just outlined, we expect our adjusted EBITDA margin to be between 12.5% and 13.5% in the second quarter of 2012, as we continue to integrate Prima and Tamarac.

As we mentioned in our last call, we expect Prima to be relatively neutral and Tamarac to be somewhat dilutive to cash flow in the near term. We expect the adjusted EBITDA margin to expand from this level going forward.

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

Thank you, Pete. Envestnet is positioned better than ever to empower advisors to improve client outcomes and strengthen their advisory practices. Today, Envestnet's Advisor Suite enables advisors to better advise, invest portfolios, manage their practice and those portfolios, and report on their clients' holdings.

We empower advisors to improve their research and advice through the institutional quality research we provide on investment managers, funds, and alternative investments, and asset allocation guidance. Envestnet Prima deepens this capability for us.

Advisors are better able to invest their clients' portfolios through Envestnet PMC's proven portfolio solutions and access to hundreds of investment managers and strategists.

Advisors are better able to manage their clients' portfolios and their practices with the addition of Envestnet Tamarac, which provides leading rebalancing, reporting, and practice management software, and is gaining rapid adoption among high-end Registered Investment Advisors.

And we are able to help advisors to better report on their clients' consolidated holdings through our Envestnet Vantage offering, which provides trade-ready, fully reconciled aggregated performance reporting to advisors and their end clients.

Through our integrated solutions we are enabling advisors to transform the wealth management industry, as well as transform their practices.

Our long-term growth targets remain -- long-term revenue growth of 20% per year; long-term adjusted cash flow growth of 25% per year; and a long-term margin in adjusted EBITDA of 30% of revenue.

I think you, again, for your time this afternoon. I thank you for your support of Envestnet and with the conclusion of these prepared remarks, we are very happy to take your questions.

(Operator Instructions). And we'll take a question from Peter Heckmann from Avondale Partners.

Hey, good morning. Can you hear -- or good afternoon. Can you hear me all right?

Yes, we can, Peter. Hi. Good afternoon.

Hey, good afternoon. Can you talk about taking the best pieces of Tamarac and Envestnet and how you combine those and the opportunity to cross sell between the two and if I'm correct, I believe that Tamarac was also investing to create some additional applications that you may already have? So, talk a little bit about both the revenue and cost synergies there from that acquisition, if you would.

Envestnet Tamarac is a practice management and rebalancing software that supports high-end Registered Investment Advisors. We have, through our own APM, or Advisor as Portfolio Manager, software trading and rebalancing software that supports the advisor who has adopted the Unified Managed Account as a core operating chassis for their business.

But a number of high-end RIAs have not adopted the UMA, the Unified Managed Account, as a chassis for their practices and have multiple brokerage accounts or multiple custodial accounts. And for those advisors who rebalance at a household level the Tamarac solution is ideal.

We're going to support both our APM solution and the Tamarac solution for the foreseeable future going forward because they support different practice patterns in this marketplace.

Already we are providing some significant expense savings for Tamarac in the way we reconcile the accounts that Tamarac is supporting with software. We also have identified a number of opportunities where Tamarac clients want access to a broader product suite, access to separate accounts managers and outside strategists that enable us to do some up-sell or some cross-sell in products.

Over time, we expect that the synergies with Tamarac are going to be heavily weighted towards revenue synergies as opposed to expense synergies. We've got -- prior to the Tamarac merger we had a senior and continue to have our senior engineering team based in Sunnyvale, California, with substantial resources in Trivandrum, India, to support our ongoing engineering and development effort.

Tamarac brings a very accomplished team that's Seattle-based and we are -- we welcome that team and expect that we will continue to invest in not only the Envestnet Advisor Suite, but we will integrate Tamarac's Advisor X suite of offerings, which are a subset, its rebalancing, its CRM integration, its reporting and its rebalancing software. And that we have already done an initial stage of integration concurrent with our May release, and we're going to continue to integrate that more fully throughout the rest of this year in the August and November releases.

Okay. That's helpful. And, Pete, would -- did you fund the acquisitions entirely out of cash or did you do a little borrowing in the quarter?

There's no borrowing. It was all funded with internally generated cash and the cash we had on the balance sheet.

Okay. I'll get back in the queue. Thank you.

And next we'll go to Chris Donat from Sandler O'Neill.

Hi. Good afternoon, everyone.

Hi.

Hi.

I just want to make sure, Jud, with your comment that with this large enterprise client that full conversion was unlikely this year, you still would expect a full conversion next year, right? This doesn't mean you'd expect something less than a full conversion.

No, I would not say that we still expect a full conversion next year. We expect to do business and we expect that the business will grow in pieces rather than a full conversion this year. Next year is a long time away. These conversions are part of large and complex organizations. They take time. And what we've proven is that our ability to, over time, move clients from a part of business to a bigger piece of business.

We expect now that the business will grow in segments rather than in one initial full conversion. It is our hope that in the future there will be a full conversion, but that is uncertain.

Okay. I understand the future is always uncertain, but you guys seem to be doing a pretty good job of delivering here. And then just more on the number side, you'd said last quarter that you thought this large enterprise client could, in many ways, replace the lost licensing revenue coming from the Fidelity relationship. Is that still the case in terms of magnitude, even though I recognize timing might be a little bit different?

Yes, the overall scope of the opportunity is very large. It's one example of some very large opportunities that are in our pipeline and the size of the opportunity is as great as it's always been. The timing and our legging into the opportunity is what is less certain than I had indicated in our last call.

Got it. Okay. Thanks very much.

And next we'll go to Xiaowei Hargrove from William Blair.

Hi, guys. Could you give us, maybe, an update on how your marketing strategy may or may not be evolving, given that you do have a lot of new features and functionalities with these deals and that RIAs are a bigger focus for you?

Yes. That's a good question. I -- the supposition I would challenge, neither Prima nor Tamarac provides significantly broader capabilities for us. They provide significantly deeper capabilities for us.

So, if I could redirect that question, Prima enables us to go more deeply with institutional quality investment manager research, fund research, and research on liquid alternative investments. So, we're looking to make that capability available to both our enterprise clients and our RIA clients and we expect that that will be an important enhancement to revenue and our service offering to our core advisors over time.

Tamarac has a rebalancing capability that is really targeted towards a different segment of the market. And I would say that it enables us to go more deeply into the high-end RIA segment of the marketplace. Their average advisory practice is north of $500 million. So, they are larger Registered Investment Advisors. They tend to have rebalancing issues that happen across households with multiple accounts and so, this capability is something that we can enhance with our service offering and our product suite.

We also expect that certain of Envestnet's traditional will want to make themselves available to that Tamarac offering. But the overall channel focus is consistent where we are focusing on independent broker/dealers, insurance broker/dealers, and Registered Investment Advisors.

We're able to go a little bit more fully into their practices with these two acquisitions, but these represent fuller and richer capabilities as opposed to wider or broader capabilities.

Great, thank you. I have a follow-up question. Do you have any channel partners or referral arrangements today? And, if so, could you give us a couple of examples? Is that a -- it seems like an increasingly important source of your leads for you, given that RIAs historically have operated by cobbling together multiple technology solutions. So, it's been a different end market, I guess, and buying behavior versus your traditional BD clients?

You are right in concluding that the purchasing and buying behaviors of an independent broker dealer representative are different from an independent Registered Investment Advisor. Independent Registered Investment Advisors often assemble a solution up from multiple providers. Independent broker dealer reps oftentimes use a more fully bundled approach.

But these are buying patterns that we are very used to and have been improving on our ability to go deep within these channels over the last 10 years. We expect that the new capabilities will enable us to meet more elements, more segments of each of these primary channels.

We don't use referral sources to reach these advisors. Our best referral source are existing clients and exist clients, through study groups, through user groups, through word of mouth, provide a tremendous support for our existing product offerings and are the best referral source for existing -- for new clients.

We also have very good working relationships with a number of the leading custodians and work in tandem with the custodians to identify breakaway broker opportunities, Registered Investment Advisor opportunities, and independent broker dealer opportunities.

So, that's our marketing strategy.

Great. That's very helpful.

And if I could just ask one more question, it seems like your conversions have still been largely on the reporting asset side. Do you have any visibility on the upcoming conversions and kind of what the AUM versus AUA mix would be?

Of course, we have visibility, but we have learned that providing transparency on that visibility is premature. I think you can expect that over time the yield or the mix is going to be closer to our basic mix of business than it was in the past quarter. This past quarter was much more heavily reporting assets than assets under administration or assets under management.

However, that said, this is a core piece of our strategy, our channel strategy, is to gain a relationship with the investment advisor and then, over time, use the reporting assets to cross-sell into more valuable solutions, whether it's Advisor as Portfolio Manager, whether it's rebalancing solutions, or whether it's assets under management, either through PMC or through our outside strategist network.

And we're seeing, even since March 31st, we're seeing some very encouraging movement from last quarter's conversion activity and reporting assets.

Great. Thank you very much.

(Operator Instructions). And we'll take our next question from Thomas Allen from Morgan Stanley.

Good afternoon, guys. Last quarter you said that you expected adjusted EBITDA margins to come close to 20% by year end. Can you just give us an update on that?

And then, there were $644,000 of one-time restructuring charges. Obviously, that's backed out of adjusted EBITDA, but where does that hit the income statement? And should we expect additional one-time expenses in 2Q, given the purchases and integrations? Thank you.

Yes, Thomas. The guidance we had talked about previously, getting to the 20%, was before the transactions were integrated. We do think that the profitability of both Prima and Tamarac will be contributing by the end of this year. So, it's -- we're certainly trending in that direction for the rest of this year, above the level that we provided.

In terms of those costs, yes, the $644,000 were part of the G&A line, largely related to transaction costs and there will be some more in the second quarter as we closed both of the transactions in the second quarter.

Great. Thanks. And then, anything you can touch on from the Advisor Summit that would suggest any change in attitude or practice among advisors? And your redemption rates have started to normalize again, especially on the AUM side. Now that the market's taking a bit of a beating again, has that shifted at all? Thanks.

The market -- VIX is up. The actual redemption rates do follow the increase of VIX. So, we have not seen any indication, as of yet, of a significant increase in redemption activity. So, the -- really nothing to report on redemption activity other than what we got in the first quarter, which is somewhat encouraging.

We had a great meeting last week and a very high degree of enthusiasm about not only the core principles that we stand by, the principles of transparency, the fiduciary standard, enabling the independent advisor, bringing to them the best open architecture technology for their fee-based practice.

So, there were a number of newly broken-away advisors who have left the wire houses and their perspective is very valuable and very helpful to see. Also, we launched or we showed the new UI as a result that we're rolling out now, beginning with our May release and a spontaneous, very strong positive response from our best and longest-lasting advisors.

So, there's -- I think, to step back, there's a strong conviction from this group that how they render wealth management services, transparently, fee based, following a fiduciary standard in an unconflicted environment is a better way to render those services.

And I think what's happened, the big change since the last time we held a summit, which was some time ago on a national level. We had adopted regional advisor meetings over the past several years. But I think the big difference from the last national summit that we had with our advisor base is that they really do believe now that they have a superior product, a superior way of rendering the wealth management services, and you can tell that. And that's encouraging to all of them.

That's great. And then finally just a quick numbers question. Why did the fee rate come in slightly higher than your guidance and the cost of revenue slightly lower? Did -- was it a function of the market move or anything like that? Thank you.

Yes, Thomas, for the most part it was the impact of the minority of accounts that are billed in arrears that we did benefit from the market more significantly than we had forecast. And so, that's why it came out a little bit ahead of the high end of the range.

Okay, helpful. That's what I thought. Thank you.

(Operator Instructions). And we have no further questions in the queue and I'll turn it back over to you gentlemen for any closing or additional remarks.

I want to thank you for your time and I want to thank you for your support of Envestnet and we look forward to conversations in the future. Thank you very much.

That does conclude our conference for today. Thank you for your participation. You may now disconnect.