Envestnet Inc (ENV) 2012 Q2 法說會逐字稿

Good day and welcome to the Envestnet second 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 second 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 revenues, 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.

And with that, I will turn the call over to Jud.

Thank you, Chris. Good afternoon. Welcome to everyone on today's call. Envestnet is helping fee-based advisors transform wealth management to a more transparent and an unconflicted standard of care for investors. We had a solid quarter where we achieved record levels of gross sales and net flows and conversion activity continued to be strong, reflecting growing support from fee-based advisors.

On last quarter's call, I discussed our near-term priorities, which were -- first, to grow our core business by adding advisors and assets; second, to integrate Prima and Tamarac into the Envestnet organization and product suite; and third, to implement conversions as they work their way through our pipeline of new business opportunities. During this past quarter, we delivered on all counts.

We achieved record gross sales of $8.5 billion and record net flows of $3.9 billion, excluding conversions. Conversions specifically contributed another $4.6 billion, primarily in reporting and other asset-under-administration business.

The operating environment was relatively supportive. Stock markets were down by about 2%, affecting our June 30 asset values, while redemptions averaged 1.9% per month, consistent with our recent experience.

All told, the investment platform, including Tamarac's rebalancing and practice management solutions, now support more than $315 billion in advisor assets.

Our revenue from assets under management or administration increased 22% over the prior year. We added 659 new advisors -- that's net -- with assets under management or administration on our platform, bringing the total to just over 15,000. With the addition of Tamarac and advisors that we serve through licensing arrangements, we now serve nearly 22,000 advisors.

And finally, we added more than 50,000 accounts in assets under management or administration during the quarter, representing a 14% increase from March 31, and a 25% increase over last June.

In total, we now support more than 1.5 million investor accounts on our wealth management platform.

Our integration efforts with Tamarac and Prima, both of which closed during the recent quarter, are very much on track, better enabling Envestnet to empower advisors to both improve client outcomes and to strengthen their practices.

I'll conclude with a few remarks in a moment, but I will first turn it over to Pete D'Arrigo, our Chief Financial Officer, to discuss our financial performance in greater detail. Pete?

Thank you, Jud. Good afternoon, everyone, and thank you for participating in our call today.

For the 2012 second quarter, revenues from assets under management or administration grew 22% to $31 million, compared to $25.4 million in the second quarter of 2011. Licensing and professional services revenue in the second quarter was $7.6 million on an adjusted basis, up 28% from $5.9 million a year ago, primarily due to the addition of Prima and Tamarac.

Both acquisitions closed in the second quarter, with Prima included for almost the entire quarter, and Tamarac for only the months of May and June. As a result, adjusted revenues increased 23% to $38.6 million in the second quarter, from $31.3 million in the second quarter of last year.

Our cost of revenues increased to $13.5 million for the quarter from $10.9 million last year. As a percentage of revenue from assets under management or administration, cost of revenues was 43.7% compared to 42.9% in the second quarter of 2011. Cost of revenues now includes some expense related to Prima and Tamarac.

We reported a GAAP loss in the second quarter of $700,000. Included in the GAAP results were $800,000 after tax in one-time transaction-related costs and $370,000 resulting from the valuation impact of purchase accounting on acquired deferred revenue. Adjusted revenues and our other non-GAAP measures exclude this amount.

Also included in the GAAP results are ongoing non-cash expenses, approximately $1 million higher than the prior year, for stock-based compensation and amortization of acquired intangibles.

On a non-GAAP basis, adjusted EBITDA was $5.3 million for the second quarter. Adjusted EBITDA margin came in at 13.8%. Adjusted earnings per share were $0.07 in the second quarter.

Looking forward, we expect our effective fee rate in the third quarter to be about 14.7 basis points on our June 30th AUM/A asset base of $87.3 billion. That's down from the 15.4 basis points we experienced in the second quarter due to the concentration of reporting and other AUA in our recent conversion activity.

We believe licensing and professional services revenue in the third quarter this year will be up 45% to 50% year over year on an adjusted basis, reflecting a full quarter of revenue for both Prima and Tamarac. Adjusted revenues should increase between 26% and 30% year over year.

We expect third quarter cost of revenues to be about 44% of AUM/A revenue. Total operating expenses that flow through to adjusted EBITDA, which includes costs of revenues, should increase 38% to 40% compared to the prior year period.

We expect our adjusted EBITDA margin to be between 14% and 14.5% in the third quarter of 2012, and we expect that this margin will continue to expand at the rate of 100 to 200 basis points per quarter sequentially in subsequent quarters in a market-neutral environment.

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

Thank you, Pete. With the completed acquisitions of Tamarac and Prima, Envestnet is even better positioned now to empower advisors to improve client outcomes and build their practices. Our expanded advisor suite enables advisors to better manage wealth for their clients.

We are delivering on the core elements of our growth strategy, achieving organic growth with more assets from more advisors, as well as consistent, but less predictable, conversion activity. We are also supplementing our growth through consolidating and strategic acquisitions that are enabling us to integrate important features and functionality into our product suite and bring us closer to more advisors.

Our long-term growth targets are as follows -- top-line revenue growth of 20% per year, long-term growth in adjusted cash flow of 25% per year, and a long-term adjusted EBITDA margin of 30% of revenue.

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

Thank you. (Operator Instructions). We'll go first to Chris Donat with Sandler O'Neill.

Hi. Good afternoon, Jud. Good afternoon, Pete.

Hi, Chris.

First question is for Pete. I'm not sure I caught it right. So, talking about the EBITDA margin expanding 100 to 200 basis points per quarter, did you say, at any point, when you expect that to -- that expansion to stop, or does that sort of get to the long-term 30% EBITDA margin that you guys have had for a long-term goal for a while?

Yes, that's what we think gets us to that long-term margin.

Okay. And then just what is it that is driving that expansion in the near term? Is that-- are you going to be able to pull out some costs from the acquisitions or is it the expected revenue growth, more operating leverage, now that you've got Tamarac and Prima in there?

Well, we're always mindful of managing our costs, but I think, in addition to that, the revenue growth is really the driver of that scale.

Okay. And then, Jud, just more philosophically here, if you think about the last, really year or so that you've had your acquisitions, and then away from you, you've got Advent acquiring Black Diamond, and SEI has started rolling out their global wealth platform to US advisors. How do you feel you are positioned in the competitive landscape, relative to a year ago, and do you think anything's really changed or is it pretty much where it was a year ago?

Well, this is a space that attracts a fair amount of interest because the independent advice space is growing faster than the rest of financial services and particularly faster than brokerage or commission-based revenue. And we've been able to grow consistently faster than the fastest segment of that space.

And we've been able to do that by offering an integrated suite of products that go from the front end, which is the analytics, the proposal generation, the presentation tools, to the access of the product, whether that's the unified management account, traditional separate accounts, mutual funds or ETFs or securities. And then do the rebalancing and the advisor tools that enable for effective portfolio management, also doing the billing administration, the performance reporting, and all of the integrated service requests.

So, we think that the market, which is looking for ways to improve the fee-based advisory business, is going to continue to move our way and we think that we're very well positioned in this.

Now, what we have done is we have improved the separate account research, the fund research, and the liquid alternatives research that we're doing at PMC with the acquisition of Prima, and we've improved the portfolio management and the rebalancing tools we offer by integrating the offerings of Tamarac.

So, we're looking to strengthen where we can and we think we've done a very good job of that.

Tamarac also serves a very high-end advisor. The average assets under management for advisors that use the Tamarac suite of products are a significant multiple of the average assets under management for a Registered Investment Advisor.

So, we like the space. We think that we have a very proven product offering that offers, really, an end-to-end solution for the fee-based advisor that wants an integrated platform.

Now we've deepened and strengthened the capabilities with these two most recent acquisitions in two important areas -- research and practice management applications. So, the space is changing. We're changing, we believe, ahead of that space and we're doing this so that we can continue to grow faster than the segment itself is growing.

Okay, thanks very much, Jud.

(Operator Instructions). We'll go next to Chris Shutler with William Blair.

Hi, guys. Good afternoon.

Hi, Chris.

Hi, Chris.

You, obviously, brought on a lot of the conversion assets over the last year and most of that has been on the reporting side of the business. So, just curious if you're seeing much momentum yet in terms of that reporting business moving to more a holistic AUA type of solution?

We are seeing some trends in that direction. We are actively tracking that more in the second quarter as we're starting to see that activity. Again, that activity doesn't show up, necessarily, in the sales metrics that we report, but the changes to the fee rates that we are anticipating and projecting are reflected in the guidance that we've provided.

So, we are seeing that activity happen, but we're seeing new assets coming on at a faster rate than the ones that are converting to -- I shouldn't say converting, but sort of upselling to higher fee-rate products.

Okay. And then it looked like the redemption rate, particularly on the AUA side of the business, continues to gradually improve. So, just curious, the markets are, obviously, volatile. To what extent is that under your control and just maybe a little bit more color on what the drivers are there?

So, we try to influence redemptions, but we have very little control over redemption rates. We believe that there are things that we can do with our product offering to make it much more attractive to stay within the Envestnet platform as an advisor or an investor-led rebalancing takes a portfolio, perhaps, weighting out of one asset class and into another asset class.

But over time, the highest correlation to redemption activity is just volatility. You can use VIX as a measure for that.

So, as volatility increases, redemption rates increase, although what we've also found is that redemption rates go up very quickly as volatility goes up and they come down much less quickly, or they come down more slowly than VIX does. So, there's a tail on the redemption front.

And our experience is not dissimilar to what you'll find in the separate account business or the mutual fund business, more broadly.

Okay. And then do you have a sense at this point what redemptions were trending in July?

It's -- Chris, it's too early to even get a good sense on that, but I think you could -- I think you could infer that with the market not being significantly changed in terms of volatility that we're not expecting a significant change in redemption rates.

Okay, thanks. And then just one more, Jud. I mean, obviously, on the AUM side of the house you're earning different levels of fees, depending on whether it's an equity SMA, fixed-income SMA, mutual fund wrap, or an ETF type of solution. So, I was just wondering what type of underlying product trend you're seeing, and really wondering, I guess, to what extent you're seeing any kind of mix shift to ETFs?

That's a good question, Chris. We do have a bird's-eye view on advisor preferences from just seeing the very large flows that we have in the various product categories. And we are seeing continued interest in fixed-income solutions from advisors, not necessarily long-only, but fixed-income-type solutions.

We are also seeing some weighting towards exchange traded funds. They're growing faster than, say, mutual fund portfolios are.

But we had positive flows on all major product categories within our asset under management product offering, which, I believe, really speaks more to the power of the platform than it does to any particular trends in mix.

But we're certainly seeing more interest in the exchange traded fund area, continued strong interest in fixed-income solutions, dividend-paying solutions, and also an increased interest in non-correlated assets, with a preference toward 40 Act vehicles, 1940 Act mutual funds. Liquid alternatives or liquid non-correlated asset classes are also of gaining interest.

Okay. That makes sense. Thanks a lot, guys.

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

Good afternoon. I was just wondering if Tamarac had been in for the whole quarter, what would your -- how much would that have added to revenue? In other words, what was their revenue generation in April?

It would have been a little over another $1 million.

Another million? Okay. So, what I'm trying to get at is that would have given you pro forma $8.5 million in license revenue for the quarter, including the add-back on the deferred portion in the acquired deferred revenue. And you're guiding to $9 million. So is your license -- I mean, should we think, going forward, that your license revenue can grow roughly $0.5 million a quarter? I mean, is that the underlying growth rate for these combined businesses now?

I think that as we bring on Tamarac, we're going to give guidance quarter by quarter. I'd be reluctant to make an inference of more than one quarter out on what the growth rate for the license business is. And we see tremendous opportunity with Tamarac and their installed base of high-end RIAs.

Okay.

And so we've given you two months of activity with Tamarac, a basic estimation of what a third month would be, and we've given you guidance as to where we think Q3 is going to be. But we're -- we have -- we're very strongly positive about the synergies with Tamarac's advisor base and with the gaining traction they have in the marketplace.

Okay. That's fair enough. Maybe, as we think about your top-line growth kind of being a 20% grower, would it be fair to say that with Tamarac that your licensing fees should be on the higher end of your various businesses for growth for next year?

I think that's a very fair inference to make. Obviously, it's off of a smaller base, but that's a logical conclusion to make.

Okay, thank you.

(Operator Instructions). And it appears we have no other questions at this time.

Well, I want to thank you, again, for you time this afternoon, and thank you for your continued support of Envestnet, and we look forward to talking with you again soon. 'Bye.

That does conclude today's call. We thank you for your participation.