Envestnet Inc (ENV) 2013 Q1 法說會逐字稿

Good day everyone, and welcome to the Envestnet first-quarter 2013 earnings conference. Today's conference is being recorded. At this time, I would like to turn things 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 2013 earnings press release and associated Form 8-K 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.

With that, I will turn the call over to Jud.

Thank you, Chris. Good afternoon, I add my own welcome to everyone on today's call. Envestnet is leading the transformation of wealth management to a transparent, objective, independent and fully aligned standard of care for investors. We are doing this by empowering advisors to achieve higher standards in portfolio and practice management.

On our last earnings call in February, I outlined our priorities for 2013. To grow our existing business organically, by adding new advisors and enterprises, to continue to develop our platform and product offerings, and, to accelerate our growth with disciplined, merger or acquisition activity. I'm pleased to report that we are delivering on these priorities.

As a result of the continued strength in our business, in the first quarter, we grew our topline by over 40%. We grew adjusted EBITDA by more than 60% over the same period last year. Revenue, adjusted EBITDA, and adjusted earnings are all at record levels for the Company. Growth in our core business remains strong, as we focus on adding advisors, accounts, and assets to our wealth management platform. This has been a core organic growth driver for our Business, and we believe it will continue to drive our growth going forward.

During the quarter, we added 334 new advisors, ending March with more than 16,000 advisors who had fee-based assets under management or administration on our platform. That is up 14% year over year in an environment with declining advisors overall. Including licensing arrangements, we now serve more than 23,300 advisors on our wealth management platform. Accounts for advisor with assets under administration also grew in the quarter, up 15% from a year ago. The growth we've seen in advisors, and in accounts per advisor, compound out to overall account growth, which was 32% year over year.

Gross sales of assets under management or administration during the first quarter were $9.9 billion, excluding conversions, an increase of 17% over the prior year period. Redemptions averaged 1.8% per month during the quarter, slight improvement from what we experienced during 2012. And, as a result, net flows were significantly stronger than last year during the first quarter. We also continue to onboard significant assets through new client conversions. During the first quarter, we had about $2.5 billion of asset priced conversions, plus just over $5 billion in licensed conversions. We expect conversions will continue to contribute meaningfully to our organic growth in the coming quarters.

We've already completed second quarter conversions of more than $5 billion, which includes two large enterprise conversions, each with more than $2.5 billion in fee-based assets. License-based conversions are also strong. Our implementation teams remain fully utilized, as we expect conversion activity to remain a meaningful driver of our organic growth. All told, at the end of the quarter, we supported more than $100 billion in fee-based assets under management or administration, and more than $400 billion in total advisor assets that are supported.

We are making good strides in new product development, and designing new solutions to help our advisors achieve excellence in portfolio and practice management. Last quarter, I talked about our next-generation wealth management platform. We call it ENV 2. We officially launched it at our Advisor Summit just two weeks ago. Our platform's full capabilities are now available in a mobile environment, enabling advisors to serve clients as effectively in their clients living room as they can in the advisor's office. We believe ENV 2 is the first fully mobile, end-to-end wealth management platform available in the industry, and it includes a number of features and functionality enhancements which further fortify our offering.

The Advisor Summit, some of which I'm happy you attended, was a hugely successful event. Held at a larger location than last year, we doubled last year's attendance to almost 1200 participants, most of whom were advisors and industry partners. We also incorporated Tamarac's user conference into the Summit this year, making the three-day event a great opportunity for our clients and partners to learn more about the full power of Envestnet's wealth management solutions. At the Summit, we unveiled two additional capabilities that we believe will fundamentally change how advisors render advice to their clients, and how they manage their practices.

First, we introduced Envestnet Intelligence, which is our practice management and business intelligence offering for the advisor. Clients are already calling it a game changer. The value proposition here is that Envestnet has data on what 23 advisors are doing every day, servicing more than 1.5 million investor accounts. Other portfolios are allocated by asset class, which investments they are selecting, which they are not, other portfolios are performing, the list of our metrics are very long. We aggregate this information, scrub it, make it anonymous, but then deliver back intelligent feedback and benchmarking to the advisor so they can achieve better outcomes for their clients, and manage their practice more effectively.

Envestnet Intelligence is part of a long-term strategy towards helping advisors achieve better outcomes for their clients. Envestnet, we believe, is uniquely positioned, unlike some other industry participants, to both enable and encourage a fiduciary approach to advising investor clients supported by this intelligence. There will be early adopters who immediately understand the value, and there will be other adopters who understand it over time. But we believe the trend of leveraging real data on the behavior and investment performance of advisors and their end client will be years in the making, and we look forward to industry leading it as this develops.

A second big launch for us is an innovative solution that we are calling quantitative portfolios or QPs. Offered by our PMC Group, this transformative product can add value beyond market performance. QPs will have many of the benefits of exchange-traded funds, or ETFs, but several very important other advantages. For example, like an ETF, QPs will provide low-cost access to market data, and like ETFs, QPs will have broad exposure to various asset classes. But unlike ETFs, they will be tax manageable, because the end client owns the basis in the underlying securities. And unlike ETFs, QPs are customizable around concentrated stock positions.

For years, we've had advisors from various parts of the country, let's take an advisor in the Bay Area, who, as they service and support their high net-worth client base, find that their client base is over invested or over allocated to high tech or software or even particular companies. QPs are a perfect solution for creating customized portfolios around concentrated holdings in single stocks or in sectors.

Another element is that these will be available only through the advisors. They are exclusively sourced through the advisor, unlike ETFs, which are available broadly in many market outlets. And finally, for a number of investors in taxable accounts, both the management fees and custody fees may very well be tax-deductible. All told, these quantitative portfolios, we believe, will be a very useful tool and will find a way into many of our advisor's portfolios.

Both Envestnet Intelligence and our quantitative portfolio offerings have already experienced strong receptivity from advisors, and we expect they will grow in importance to our business in the coming quarters. One last important item in my prepared comments, before handing this over to Pete, we last month announced the acquisition of Prudential's Wealth Management Solutions business, also known as WMS. This consolidating acquisition makes a lot of sense to us, both strategically and financially.

From a strategic perspective, WMS further solidifies our leadership in the bank and trust channel. Currently our primarily relationships, within this channel, are with the banks' broker/dealer divisions. In contrast, the WMS generally serves the banks' trust operations. So, the acquisition of WMS, expected to close sometime in the third quarter, offers at least four strategic benefits to Envestnet. One, it enables us to fully serve the wealth management needs of the bank channel in a more effective way. We will be able to unify the wealth management systems used by disparate parts of the bank.

Two, it strengthens our Canadian presence, expanding our North American footprint. Three, it deepens our practice management capabilities with a team of seasoned professionals who know how to build fee-based businesses. And four, it confirms our leadership as the largest independent managed account platform. Financially, we expect that this acquisition will exceed our hurdle rate of 25% return on investment once it is fully consolidated into Envestnet, which could be as soon as 12 months, it could be as long as 15 months to 18 months from closing.

This means that with an assumed purchase of $33 million, we expect to generate cash flow greater than $10 million on an annualized basis once we complete the integration. As people point out, because of the product mix profile for WMS, our margins will be negatively impacted in the short to intermediate time period. But, we regard the acquisition as likely to be highly accretive financially, and a benefit strategically to us as well.

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

Thank you, Jud, and thank you for dialing in this afternoon to everyone on the call.

For the 2013 first quarter, revenue from assets under management or administration grew 29% to $36.3 million, compared to $28.3 million in the first quarter of 2012. Licensing and professional services revenue in the first quarter was $10.4 million, up 138% from $4.4 million a year ago, on an adjusted basis. As a result, adjusted revenue increased 43% to $46.8 million in the first quarter, from $32.6 million in the first quarter of last year. Our cost of revenue increased to $16.8 million for the quarter from $11.5 million last year. As a percentage of revenue from assets under management or administration, cost of revenue was 46.3%.

We reported GAAP net income in the first quarter of just over $500,000, which is $0.02 per diluted share. Included in the GAAP results are ongoing non-cash items of approximately $1.4 million higher than the prior year on an after-tax basis. Included in this amount is the deferred revenue fair value adjustment, non-cash compensation, and amortization of acquired intangibles. This first quarter's GAAP net income also reflects approximately $800,000 after-tax of fees related to the re- audit of 2011 and 2010.

On a non-GAAP basis, adjusted EBITDA was $8.2 million for the first quarter, 61% higher than 2012's first quarter. Adjusted earnings-per-share was $0.12 in the first quarter, increasing 71% from $0.07 last year. Looking forward, we expect our revenue from assets under management or administration to be up 30% to 32% in the second quarter compared to the second quarter of last year. This reflects an effective fee rate of approximately 14.7 to 14.9 basis points on our March 31, AUMA asset-base of $109.7 billion. We believe licensing and professional services revenue in the second quarter this year, will be up approximately 50% year over year on a GAAP basis, reflecting a full quarter of revenue for each of last year's second quarter acquisitions.

Adjusted revenues for the second quarter should increase between 32% and 33% year over year. That includes a deferred revenue fair value adjustment of $23,000, which is the last such amount we will have from last year's acquisitions. We expect second quarter cost of revenues to increased to 47.3% to 47.5% of AUMA revenue. We have experienced rapid adoption to several new programs with relatively higher cost of revenue, compared to other AUM products. In particular programs which offer a third-party strategist have been successful with advisors, and this continues the trend we've experienced the last several quarters.

We expect our adjusted EBITDA to increase 73% to 76% in the second quarter, compared to the prior year period. We expect our effective tax rate in 2013 will be approximately 42%, which is a couple of percentage points higher than the rate we assumed in 2012. This change is driven by two items, an increase in our expected Federal tax rate, as we are generating greater taxable income, and the higher ongoing provision related to India. As it relates to India, we indicated in today's press release that we have assessed the potential exposure for 2012, and prior periods, that was disclosed (technical difficulties) tax department's audit of our transfer pricing assumptions, and we've determined that we will book a provision of approximately $850,000 to reflect this exposure.

This amount will be recognized in the fourth quarter of 2012, and will be included in our financial statements within our 2012 form 10-K. Regarding the filing of our 10-K, we continue to work toward completion of the re-audits of 2010 and '11, and the audit of 2012. We expect to file our 2012 10-K as well as our 10-Q for the first quarter of 2013 in the next several weeks. Finally, I'd like to provide some additional color on the expected financial impact of our acquisition of Prudential's Wealth Management Solutions business that John identified earlier. We expect the acquisition will close early in the third quarter. We will pay cash of $10 million upon closing, and up to an additional $23 million over the following three years depending on achievement of performance hurdles.

We expect revenue from WMS to be approximately $60 million to $70 million on an annualized basis, on their asset-base of approximately $22 billion. That amount includes fees paid to third-party managers which will be reflected as cost of revenue. The acquired business is expected to have cost of revenue of around 55% to 60% of the total revenue. Upon closing, we expect to bring on approximately 60 to 65 people. We also will need to continue supporting the WMS business on the legacy platform until we are able to completely migrate clients to the Envestnet platform. During this transition period, we will have a services agreement with Prudential.

We expect the adjusted EBITDA contribution to be neutral to slightly negative as we transition the business to the Envestnet platform, which could be as soon as 12 months, but could be 15 months to 18 months. During this time, the WMS acquisition will contribute to our revenue, but not to our adjusted EBITDA and earnings. As a result, we expect EBITDA margins will decline sequentially in the third quarter. However, once fully consolidated, we expect the financial benefits will be significant. At that point, we expect the WMS acquisition will exceed our hurdle rate for cash on cash returns from consolidating acquisitions of 25%. We will provide more specific details on the financial impact on our next call as we anticipate the closing in the first part of the third quarter. Thank you, again, for joining today and I will turn it back to Jud for his closing remarks.

Thank you, Pete. As I mentioned, we unified and fortified the wealth management process for advisors. And as we empower advisors to deliver better results for their clients, we believe Envestnet is well-positioned to deliver substantial revenue and cash flow growth in 2013 and beyond. Our long-term targets are to grow topline revenue at 20% per year, and to grow adjusted cash flow at 25% per year reflecting improving operating leverage in our business. Last quarter, we indicated that we expected to grow revenue by at least 25% this year, and adjusted EBITDA by at least 45%.

With business as strong as it has been, and assuming the backdrop of favorable capital markets remains, we now expect full-year revenue to be at least 30% higher than in 2012, and adjusted EBITDA to be at least 50% higher than last year, before any impact from Prudential's WMS acquisition.

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

(Operator Instructions) Alex Kramm, UBS.

So, maybe just to start with what Jud just said at the end, with raising the guidance to some degree. Maybe, you can just review a little bit how you are thinking about, maybe in the next couple of years all else equal, the EBITDA margin expansion, the growth trajectory? The reason why I am asking is basically, when I think back around over the last couple of years since your IPO, I think you had a really strong start where markets are very favorable, the business was hitting on all cylinders and people got very excited. But, then you went back and said like well, we are really running ahead here, let's actually try to capitalize on this and spend a little bit more, and try to really grow, accelerate growth over the next few years.

So, my question is, just because since you are running ahead so much, should we be thinking about you guys maybe bringing up investment spending again, doing some things that you maybe otherwise would have not done if the environment was not as favorable? Or do you really think you can see that operating leverage that we know your business model has?

So, this is the challenge of building a business, building it wisely and making sure that we get the full benefit of the growth opportunity that we have. It was three quarters ago when we outlined what we believed would be a sequential expansion in our margin over the coming quarters. And, if you go through the guidance that Pete has laid out for the second quarter and do the calculations, we will have developed in four quarters, beginning third quarter last year, fourth quarter, first quarter, and second quarter this year, between 400 and 450 basis points in operating margin expansion. And we've been able to do that while still growing the topline. Our backlog is at an acceptable level, but we do have our implementation teams fully engaged.

We are growing organically as fast as is prudently possible. And, there is inherent leverage in the business model, as we've been able to demonstrate. I think the one big setback that we had during 2012 was the renegotiated license arrangement with the large institutional client, which is now behind us. So, as we are looking forward, we've now got a very significant strategic opportunity, and WMS's over $20 billion of assets under administration is highly mixed or highly skewed towards separately managed account assets. They have more separate account assets than Envestnet does. And those are the products that the highest amount of cost of goods associated with it.

So, what we are signaling is that beginning in the third quarter this is going to have an adverse effect on margins. But, it will have a significantly accretive benefit, both revenue wise and cash flow wise, and I would add earnings wise, as we integrate all of that. So, we feel like we've made, over this past year, we've made the right decisions in terms of balancing investment in the future, and enabling us to grow very quickly. We see that that's going to continue. We do see that there are some elements of our product mix, that just over the last couple of quarters, have gone faster than what we had anticipated. Pete identified one, that is the third party strategist piece, which looks a bit like a separate account in that there is fairly high cost of goods sold with it, because there is a third-party manager involved.

And for the next quarter or two, we see that that's probably not going to abate. But over time, what we have been able to do is benefit from our scale, and achieve breakpoints in terms of the underlying strategists and managers. And, I expect that that process will be happening again on this. So, we are fortunate to be able to serve a number of different advisor preferences, and if everything were to stay stable in terms of mix and channel strategy, these sequential margin expansions would be easier to predict. What we are saying here is for the next quarter or two through this WMS acquisition, there is going to necessarily be a reset in terms of what the operating margin is.

Yes, no, that is helpful. So, just to sum it up. Excluding any acquisitions, so, just because things are running ahead and markets are favorable, you don't see yourself doing anything different anytime soon that would change the core expense base or anything like that?

We do not see any kind of upping the ongoing operating investment in our operations, like what we signaled an opportunity to do that in early 2011.

No, that is great. And then --

Again, expenses are going to continue to grow just as our footprint grows.

Right.

We have more people. We have more offices. We have more growth.

Yes, no, just wanted to make sure that there is nothing out of the ordinary that would surprise us, because things are really growing fastly, and you have cash flow and resources to do something new. But, okay, great, thanks. Let me move on. Just a couple of quick ones after that detailed answer, here. Stock-based comps, maybe I missed that, but it really jumped up a lot. Maybe you can just give us a little bit more color, but is that the range we should be thinking about for the remainder the year, here?

No, that was a little high. There was a true-up adjustment as we completed the first year after the Tamarac acquisition. And so, there was a certain amount of shares that reached their performance vesting requirements. And that amount exceeded the estimate we had been using prior and that was recognized in the first quarter.

So that should come down like $1 million or so again, next quarter, or a little bit less?

A little less than $1 million.

A little less than $1 million.

Yes, yes, no, I got it. And then just lastly, and again this is detail too, but thanks for giving us the early look in the second quarter on the conversions, I mean $5 billion, that is pretty impressive. Is that going to impact, I didn't do the math yet, is that going to impact revenue already in the second quarter too, given that we are only halfway through? Or is this not going to get priced until the end of the next quarter?

And then, while we are on the topic of conversions, maybe, you gave some color, but anything else you can add in terms of the outlook here? I mean, it seems like first and second quarter looked really strong, is looking really strong. I mean, anything else you can comment on in the pipeline here? And, in particular, when it comes to AUM and AUA, because I think last time you said a lot of it would be coming in licensing. It looks like it's actually a lot of it is fee-based now? Thanks.

Yes, the revenue that is related to some of those conversions are included in the guidance that we've given, as those came on earlier in the quarter. So, we are aware of them and we are billing on them now, so we know about them, we've included that. In terms of the pipeline, I'll let Jud elaborate.

Alex, it's a very strong pipeline. There are dependencies that we don't always control. And our insight, or whatever you want to call it, is that it's an important part of our long-term organic growth, but it is lumpier. It is harder to predict. It is probably, on an overall growth basis, it may add anywhere from 200 to 400 basis points per year in topline growth. But, it is lumpier and the pipeline is as strong as it's ever been. Maybe stronger than it's ever been.

Okay, no, that is very helpful. Thanks.

Chris Donat, Sandler O'Neill.

Just one quick detail question on the re-audit expenses. Can we expect something similar for the second quarter, or is this largely done, here?

Well, it is still ongoing. The amount is probably not quite as much, but I don't want to quantify the amount until we are done and we know what it all looks like.

Okay, and then just a geography question. Did that, which lines of the income statement did that hit?

That hits G&A.

Okay, it's all G&A, then, okay. And then just more strategically here on a competitive landscape. It seems like there is some relatively young firms coming out of California like Wealthfront, Addepar, that are more software focused. I'm just trying to understand how you see yourself competitively and what advantages you have against start ups, given the relationships you have now, and that a lot of growth comes from existing advisor relationships. I'm just trying to understand if there is something that can come from left field that would be disruptive to you? Or if that is a low probability event?

Well, we are paranoid about competition. We worry about it. It comes from a lot of different potential quarters or sectors. Our basic competitive position is that we provide a unified, end-to-end solution that can be deployed fully as an end-to-end solution. But the component parts are all best in class, in terms of their standards, their features, their functionality. So, we, in some cases, have to compete against a portfolio accounting system, or a portfolio rebalancing, or a performance reporting, or a research, or in some cases a portfolio analytics package. At other times, we compete against platform providers who are called TAMPs, turnkey asset management platforms. And, we are winning our share of business, I would say more than our share of business, whether we are going up against other platforms, or whether we are going up against single point applications.

Part of this is that when we started the business, we started it as a web-based solution. People now are calling that a cloud solution. When we started the business, it was very difficult to get enterprises to even consider using a young firm that hosted the solution, that did not put it on the enterprise's mainframes. We overcame that. We overcame that in the early part of the last decade. So, now there seems to be a new growth of a number of wealth management companies. A lot of them are essentially business to consumer plays, direct plays to investors. They've got their work cut out for them.

There is some very interesting technology, some very interesting approaches. Our research has consistently shown that while young people of modest means will use online resources, and affluent and high net worth individuals of substantial means will use online services for a sliver of their portfolio. While we have found that, what we have also found is that affluent and high net worth investors, by definition of substantial means, are growing in their dependence on advisors. And in particular, they are growing in their dependence on independent advisors. So, the trends that have fueled our growth are the trends that we are enabling, and we like those. So, a lot of the firms that are cropping up, out west, are looking to short circuit that advisor experience.

What we are investing in, is in ways of creating an electronic or a web-based storefront for advisors, and enable them over time to be more efficient in how they are rendering their advice to their target marketplace. And, maybe even enabling them to go down somewhat in terms of that target marketplace. So, that's where a lot of the activity is. We watch it. Neither of the firms that you identified have we come up against in any business setting. So, we have not come up against them, nor have we lost any business to the firms that you've identified.

Got it, thanks very much for that answer, Jud.

Chris Shutler, William Blair & Company.

So, first on WMS, it looks like a really nice deal. A couple of questions, first is I know that they had some pretty large bank clients in their mix. So, just curious if you've had any initial discussions with those clients yet, and if so how confident you are that they're going to remain with Envestnet? And then second, I know you've talked a lot in the past about seeing potential for consolidating transactions, and FundQuest was one of those, this is another. But, Jud, how many more of these kinds of sizable deals are there still out there potentially over the next two or three years?

So, Bill Crager, our President, and I have been working very closely. Lori Hardwick as well, with Kevin Osborn and his team, we've met with the majority of the clients. We have had very good meetings. We have a high degree of confidence that not only are we a better technology solution for these clients going forward. But by being able to leverage the practice management strengths of the WMS group, we believe that there will be both a feature and functionality lift, and they won't lose any of the benefits of the practice management capabilities.

So, we feel really good about the clients coming over. And, it's even, I would say, strengthened our sense of the attractiveness of this transaction, on Bill, and I, and Lori's and other's parts, as we have been meeting. So that is very, very positive. You would be surprised at how many of these kinds of opportunities are still out there. And, this will take some time for us to digest. So, I don't think that -- I think that the key is that I'd be very surprised if there is an announcement of another consolidating acquisition of this size, before the end of the year. That would be very surprising to me.

Okay, but just as we, maybe as we think about the number of potential consolidating or firms that maybe potential candidates for this type of transaction over the next few years, are there still a handful or how would you characterize the number of --

There is, one of our directors, independent director, Chip Roame, runs a firm, Tiburon Strategic Advisors.

Yes.

They do an annual review of the TAMP marketplace, a regular review, they update it fairly regularly. And, I can't remember the exact number, but I think the last count there were over 40 identified TAMPs in that study. Now, this ranges from TAMPs of as small as $1 billion to TAMPs as large as Envestnet. But, there are a number of attractive potential opportunities for Envestnet that I think will take years to fully -- I think it will take years for the industry to fully consolidate.

Okay, great. And then, Jud, we've heard some broker/dealers are maybe thinking about paring back the number of wealth management platforms they are going to work with going forward. Just curious to get a sense whether you do, in fact, think that that is going to become a trend? Because it would certainly seem that you would be a beneficiary of that from an adoption rate standpoint.

So, I think, these are questions that are coming from somebody that has done their homework in the space. We are seeing this, too. We are seeing it, and we are encouraged by it, but we are seeing it in a handful of instances where it's too early to be a trend. But, as these independent broker/dealers look to increase efficiency, to gain operational lift, to gain leverage with their partners, with their platform partners, there are compelling reasons why they may not want six or seven or eight TAMP offerings. And may want to consolidate that with one primary offering, and maybe one or two specialty offerings around that. So, that is something that we have seen and, in fact, in a couple of instances, it's a fundamental driver of our advisor and account growth at a couple of our larger enterprise broker/dealers.

Okay, thanks for the color. And then last one is on the quantitative portfolios, pretty interesting offering there. Just, how many of those have you rolled out so far, and can you give us some sense of what the revenue profile of those products looks like for Envestnet?

So, we are in soft launch right now, and what we mean by that is we've identified about a dozen advisors, and two enterprises that want to be during this first period of introduction of the QPs, the quantitative portfolios. And, the basic offering is seven different portfolios in the first phase; large cap core, large cap value, large cap growth, small cap core, emerging market, international, fixed income, and this is just the first phase.

We expect that we will be offering additional versions of this with introducing various factors. For example, a value tilt within the index-based approach, or perhaps a dividend income tilt towards the stock-based portfolio. And then, depending on whether these are passive and untax managed, or passive and tax managed, whether they are large cap core or whether they are specialty, the portfolio fee will be as low as 15 basis points and as high as 35 basis points. And then, there is a platform fee that goes along with that, as well, of somewhere in the 10 to 15 basis point range on average.

Okay, thanks a lot.

So, we have received very strong indications from our best clients about the fit with their portfolio strategies going forward. And, in some ways we are seeing this as the culmination of a lot of work, because we've got all of these systems and portfolio accounting systems, that are geared towards the managed account delivery infrastructure. We are able to do customizations and restrictions. We are able to do tax-loss harvesting with the software protecting against 30-day wash sale rule violations, all of that. And this now is being able to bring this to the marketplace for the benefit of advisors and their clients. It's a very, very valuable product. And the Tamarac piece, in particular their tax-aware rebalancing mechanism that addressed both risks and costs, was a final piece enabling us to bring this to market.

Okay, thanks again, Jud.

Hugh Miller, Sidoti.

I had a question about the Envestnet Intelligence data that you were commenting on. I was wondering, is that something that you guys plan to monetize in a way? Or is it just data that you will put out there that will just add to the attractiveness of the platform?

So, on Envestnet Intelligence, we see that there will be several ways of monetizing that. One is through licensing the findings or the benchmarkings to whoever wants it, home offices, enterprises, and advisors. There is tremendous value in the data, and in the dissemination of the data, we see that, that commercial, or that monetization will be in two primary forms. One will be in the form of licensing it, but a second will be, we see that there will be a higher perceived value in the marketplace for the Envestnet Wealth Management offerings.

And today, when there was a question about competition, we are able to sustain good pricing from a technology standpoint versus our competition in virtually all cases. Particularly, when you take the full costs of ownership into account, which includes the service lift that the firm gets, either by administering the software themself, or relying on Envestnet to do so. So, a second important element over time is that we see this as a way of maintaining the pricing that we have enjoyed in the wealth management solution space.

Got you, that is very helpful. And a follow-up question on the QPs. I know you talked about the customization aspect for concentrated positions. Is that tailored? I assume, I think that is tailored to the individual client, but how does that then change the liquidity aspect, and someone's ability to buy and sell the portfolio relative to that's a very easy way to do it with an ETF? How does that compare?

See, this is the beauty of the underlying technology. It is not the underlying portfolio that will be sold, it is the underlying holdings. If somebody wants to liquidate some or all of the portfolio, our software will liquidate shares within the underlying portfolio.

Okay, interesting. And then, just a question or two about the pipeline. You guys had mentioned, I think you, at one point, said that it was very acceptable, another point you said it was very strong. Would you say that in the first half of the year, given some of the strength that you guys have seen, are you guys drawing down on the pipeline that you had at year end, or is that not the case?

Well, we are drawing down on the front end of the pipeline, but fortunately the backend of the pipeline is a little fuller than it was when we began the year.

Right, right. So on a net basis, I mean, would you say that you are drawing down on it or have you been able to replenish?

Our backlog is a little bit longer now than it was at the start of the year.

Okay, great. And then, one other question, I think I may have just missed it. When you're talking about the composition of the enterprise conversions that we should see in the second quarter that you've mentioned, about the roughly $5 billion. What is that comprised of, what types of assets?

So, we are not prepared to give guidance for that today. You do have the net effect of that in Pete's guidance for the quarter.

Right, okay. All right, very helpful, thank you very much.

David Grossman, Stifel.

Good afternoon. I'm wondering, I got cut off the call so I apologize if this was covered earlier, but it looks like you had a fairly healthy uptick in gross sales in both AUM and AUA. Is there some fundamental change in the marketplace in terms of just the market going up and people just feeling more comfortable making cash outlays? Or, is there some other factors at play?

I don't know if there is a fundamental change or not. It feels as if advisors are gaining new assets. It is interesting, the amount of our overall mix of fee-based assets, or assets under management or administration, the allocation to domestic equities is down to around 45% to 46%, which is as low as it's ever been. So, it's not as if we are seeing the end investors stream into domestic equities. We are seeing these portfolios being structured, and offered to the end investor and there are diversified across asset classes. Larger portions in alternative, or in some cases tactical or dynamic strategies that I think advisors sometimes use as an alternative.

I think, if there is anything that gives us a certain amount of comfort for the business, it's that those redemption rates are continuing to trend down. But, they are still not down to where the long-term averages would be, which would be down more in that 1.5% to 1.6% per month range. So, I think it is strong, we will take it while it comes. And certainly, the first six weeks or so of Q2 nothing has really changed on that front. But, I'm not sure I am ready to say there is a sea change here, David.

So, Jud, since we haven't been through a full cycle with you as a public company, and also your mix has changed a little bit since you've been public, are there any other things that we should look to that in a sustained up market that impact the model, other than the obvious ones that we talk about every quarter?

Well, we haven't intentionally gone about this, but the mix of our business has changed, it has evolved since we went public. We are up to, I don't know, 27% license-based professional services non-asset based, or somewhere around that. The license part of our business is growing faster than the asset-base part of our business. RIAs, high-end portfolio managers, prefer buying services in a licensed basis. The wealth advisors tend to like to buy it bundled with services and trade protection and those sorts of things. But, our business has evolved and it is less dependent, and the negative way of saying this, is there is less upside in a raging bull market than there would have been two or three years ago. But, I think that the competitive dynamic is again, slowly, inexorably, coming our way, and that is the benefits we have been talking about from the start.

More high network clients using advisors, more of those advisors are independent, and more of the advice is being rendered using fees and a fiduciary approach, rather than the commissioned and the closed architecture approach. I think that the more that people return to equities, as they maybe move away from fixed income, there is, certainly, on the gross margin side, there is a lot more lift. Depending on how they work that through, in the short run that can lead to faster cost of goods increases than bottom line increases. But, then as we get scale and get our arms around that, we address that, and we start to get some of the efficiencies, there, so. That is a long way of saying, I didn't really say anything insightful, I'm sorry about that, David.

No, that's helpful. And let me just ask, maybe, just a couple of quick financial questions. I assume that the count number went up as a percentage of revenue as a result of the Tamarac stock based comp comment you made earlier, is that correct?

Yes, that is a big driver of it.

That is the primary driver of it, David.

And then, there were a couple of other expense lines that seemed to pop up, like the litigation number and the restructuring. Does the litigation adjustment include the audit fees or is there something else that drove that number up a lot?

We added a line item called re-audit fees, which had that number in it.

Okay, so any sense for what was in that litigation number? Or maybe that is the other as well, maybe it is combining --

I think that's combined, David.

Litigation was only $7000.

Oh, I'm sorry. Okay. It combines three numbers, I'm sorry. It's just the aggregate other category that we used -- (Multiple Speakers)

The two (multiple speakers) ones, David, were the re-audit related expenses, and then restructuring charges and transaction costs which would have been mostly transaction-related costs due to the WMS acquisition.

Got it. Okay, great, thanks very much.

Peter Heckmann, Avondale.

Is there a way to quantify the standalone growth of Tamarac, and potentially Prima, maybe for the first half of '13? Obviously, there is some cross-sale effort going on, but about how much, can you isolate how much revenue grew year over year?

We haven't. I will turn it over to Pete to see what kind of help he can give on that.

On the whole, we are seeing quarter to quarter, I think that incremental revenue largely is related to both Tamarac and Prima. And so, as we are estimating it combined, it's about 10% sequentially, in terms of the contract value of the licenses, there. So, that would imply something on the order of about 40% annually.

But that is just on a look-back basis.

Sure, sure, that is fair. (Multiple Speakers)

And that is 1Q, and that should not be inferred or rolled forward.

And then, I had a follow-up question on the acquisition of Prudential WMS. And I know that some of these comments are somewhat preliminary, as the deal hasn't closed yet, but did I infer correctly that you would be receiving all of that revenue immediately when the deal closes?

We would begin accruing all of that revenue once the deal closes, yes.

Okay, and then as regards costs, I understand that the system is going to be maintained on Prudential's mainframe for a period of time. Would we expect, then, costs to step up over a period of three to four quarters as you are beginning to run duplicate systems? Or would they step down as you do the individual institution conversions?

There is a third option there, Pete. I think for the first two to three quarters, all of that will probably blend out. I think that what we are indicating that our expectation is, is that expenses for both purchase services and what we do here to ramp up, will be about what revenue is. It may be slightly to the negative over the first couple of quarters. It will take us, at least, it could be as early as 12 months from the closing, and as long as 15 months to 18 months to get the full benefit of the financial accretion, and that is where we expect it to exceed our stated hurdle rates.

And that will come more like a giant step at the end. (Multiple Speakers)

Closer to a big step, although that last quarter or two, there would certainly be some benefits we would expect.

Okay. Okay, that is helpful. And so, I assume that you will provide some additional comments on the next conference call that help refine that data, but --

Absolutely, absolutely, we haven't closed yet. We haven't really gotten the final confirmations from all the clients, which we are expecting. We have rolled up our sleeves and done a lot of planning. There is a very good team on the WMS side, but we honestly haven't started to implement yet. We can't. We won't until we have completed the transaction.

Sure, that is fair. And then, Pete, is there a way to talk about CapEx for the year, including Prudential WMS? Would it require a step up?

The incremental CapEx for Prudential's WMS is almost nonexistent. There are some programming and development costs that we will be expensing, and a little bit that we will probably be capitalizing, but it is not very much, Pete. Essentially, when we talk about a consolidating transaction this is an existing legacy system mainframe COBOL based, that they've been supporting with very good people. And in a consolidating transaction, we bring the clients, the revenue, the product support over to the Envestnet platform, and eventually all that technology and operating support there is no longer necessary.

Okay, that is helpful. Thanks.

And, with that we have no further questions. Mr. Bergman, I will turn the conference back to you for any additional or closing remarks.

I just would like to, again, thank you for your time today. Thank you for the questions. And we look forward to speaking with you throughout the quarter, and again next quarter. Thanks, bye.

Ladies and gentlemen, that does conclude today's conference. Again, we do thank you all for joining us.