Envestnet Inc (ENV) 2013 Q2 法說會逐字稿

Good day and welcome to the Envestnet second quarter 2013 earnings conference.

Today's call is being recorded.

At this time, I'd like to turn the conference over to Chris Curtis, Senior Vice President and Treasurer. Please go ahead.

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 2013 earnings press release and associated Form 8-K can be found at Envestnet.com under the investor relations section.

During this conference call 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 them 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. I add my own welcome to everyone on today's call.

Wealth management is undergoing significant changes, driven by powerful trends that Envestnet is enabling and benefiting from. We believe Envestnet will continue to lead the fundamental transformation of wealth management as we unify the process for advisors and empower them to deliver better outcomes for their clients.

The move toward advisor independence, the superiority of a fee-based fiduciary standard, and the accelerated use of outsourced technology solutions, these transformative trends are strong and have accelerated since we founded the business. We expect they will continue to change the wealth management landscape for years to come. Yet, while these powerful trends provide the baseline for our globe, they're not the whole story.

Today, platform mobility and business intelligence for advisors and innovative investment and portfolio solutions can accelerate the transforming trends of our Business. Some of these developments weren't even contemplated 13 years ago when we started the Business, but I believe they will have an impact as profound, and maybe even more so than the trends we identified very early on that set us on our mission more than a decade ago. Never before have so many positive forces aligned with our efforts to transform wealth management. A long-term outlook for growth is as clear as it's ever been and we continue to deliver on our near-term priorities to drive growth today.

In the second quarter, we grew our top line by 34% over a year ago and we grew adjusted cash flow or adjusted EBITDA by 75% over the same period. Gross sales during the quarter were more than $23 billion, including over $12 million in assets under management administration for new client conversions. In total, more than 25,000 advisors and $425 billion in assets are supported by Envestnet. These numbers grow significantly larger in the third quarter as a result of our acquisition and inclusion of WMS metrics, placing us in clear leadership on almost every lead table for wealth management platforms.

As we have emerged as the industry leader, we are motivated to accelerate the fundamental transformation of wealth management for the benefit of advisors and their investors. Maximum mobility, advisor intelligence, and investment innovations come in. Today, I'll outline what we're doing here and what it means for our advisor clients. We continue to roll out our next generation wealth management platform.

We believe that it is the industry's first fully mobile end-to-end wealth management platform. ENV2, as we call it, enables advisors to serve their clients whenever, wherever, and however they want to be served. And our important work continues on investment intelligent, which is our practice management, business intelligence offering for advisors and the enterprises who serve advisors. Envestnet Intelligence is part of a long-term strategy towards helping advisors achieve better outcomes for their clients.

Envestnet we believe is uniquely positioned to both enable and encourage a fiduciary approach to advising investor clients who are supported by this intelligence. We believe the opportunity to leverage real data on the behavior and investment performance of advisors and their end client outcomes will provide growth opportunities for the foreseeable future, and we look forward to leading the industry in advisor and intelligence and in transforming data and information to usable intelligence.

Later this year, we will be rolling out our quantitative portfolios, or QPs as we're calling them. Offered by our PMC group, this transformative investment product can add value beyond market performance. QPs will have many of the benefits of exchange traded funds, or ETFs, but several important advantages. For example, like the ETF, QPs will provide low-cost access to market data and like ETFs, QPs will have broad exposure to asset classes, but unlike ETFs, they will be tax manageable, because the end client owns the basis and underlying securities and tax managed (inaudible) is one of the most consistent ways sophisticated advisors can add value to high network portfolios. And unlike ETFs, QPs are customizable around concentrated acquisitions.

Mobility, investment intelligence, and innovative investment solutions like quantitative portfolios, should fuel continued growth for investment that surpasses the industry norms. We see this for the foreseeable future. These offerings should help us extend the runway of opportunities to add more advisors and to do more business with each of them as we offer a truly unified wealth management platform that helps them achieve better outcomes for their clients.

Before I turn the call over to Pete, I'd like to say a few words about WMS, the Wealth Management Solutions business we acquired from Prudential just last month. From a strategic perspective, WMS further solidifies our leadership in the bank and trust channel. It also strengthens our Canadian presence and deepens our practice management capabilities, bringing on a team of seasoned professionals who know how to build fee-based businesses for advisors and portfolio managers.

Our teams are already hard at work with the integration efforts that will take anywhere from 12 to 18 months to complete. Once completed, we expect WMS will exceed our disciplined hurdle rate of at least 25% return on investment and this would equate to at least a $10 million annual cash flow with an assumed purchase price of $33 million.

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

Thank you, Jud.

For the 2013 second quarter, revenue from assets under management or administration grew 33% to $41.2 million compared to $31 million in the second quarter of 2012. Licensing and professional services revenue in the second quarter was $10.4 million, up 50% from $7 million a year ago on an adjusted basis. As a result, adjusted revenue increased 34% to $51.7 million in the second quarter from $38.6 million in the second quarter of last year. Our cost of revenue increased to $19.6 million for the quarter from $13.5 million last year. As a percentage of revenue from assets under management and administration, cost of revenue was 47.6%.

We reported GAAP net income in the second quarter of $1.1 million which is $0.03 per diluted share. This second quarter's GAAP net income includes approximately $900,000 of after-tax expense related to the auditor change. On a non-GAAP basis, adjusted EBITDA was $9.3 million for the second quarter, 75% higher than 2012 second quarter. Adjusted earnings-per-share was $0.13 in the second quarter, increasing 86% from $0.07 last year.

Looking forward, we expect our revenue from assets under management or administration to be up 76% to 78% in the third quarter compared to the third quarter of last year. This includes revenue from WMS which will be included for the entire quarter and reflects an effective fee rate of approximately 15.7 to 15.9 basis points on our effective beginning AUMA asset base of $149 billion which includes WMS.

Licensing and professional services revenue in the third quarter this year will be up approximately 15% year-over-year on a GAAP basis. Beginning in the third quarter of 2013, we will be accounting for implementation revenue for certain investment Tamarack clients differently than we have in the past. This revenue is included in our licensing and professional services line.

Beginning July 1, we have made a strategic decision to control all data migration and reconciliation related to client implementations. In the past, some implementation activities were performed by third parties. This change requires us to recognize implementation revenue over the term of the customers license agreement instead of when the implementation is completed. In the third quarter, we expect the impact will be around $350,000 to $400,000. There's no economic impact as the customer contracts will all have the same structure. It's a matter of when the revenue is recognized.

Adjusted revenues for the third quarter should increase between 61% and 63% year-over-year, again including a full quarter of WMS revenue in this year. We expect third quarter cost of revenues to be between 51.2% and 51.5% of AUMA revenue. This is up from previous quarters for two reasons. The first is due to the continued trend we've seen in the high rate of adoption by advisors of several new programs with relatively higher cost of revenue compared to other AUM products. The second reason is due to WMS which has a higher cost of revenue in percentage terms compared to our existing business.

We expect our adjusted EBITDA to increase 50% to 53% in the third quarter compared to the third quarter of last year. We expect our effective tax rate in the third quarter to be approximately 42%. I'll also remind everyone of our higher diluted share count which averaged 35.2 million shares in the second quarter. That's up about 2 million shares compared to a year ago primarily due to the increase in our stock price this year.

Thank you again for your interest and support of Envestnet and I will hand it back to Jud for his closing remarks.

Thank you, Pete.

Envestnet empowers advisors to deliver better outcomes for their clients as we unify and fortify the wealth management process. We believe Envestnet is well positioned to deliver substantial revenue and cash flow growth this year and beyond. Our long-term targets are to grow top-line revenue at 20% per year, to grow adjusted cash flow at 25% per year reflecting improving operating leverage in our Business.

As previously indicated, we expect to exceed these targets significantly this year, and as we previously indicated we look to grow revenue by at least 30% this year and adjusted EBITDA by at least 50%. Following up on Pete's comments, now with the inclusion of WMS, full-year revenue should be at least 50% higher than it was in 2012, and we expect minimal impact from WMS from a cash flow perspective in the second half of this year and are still expecting adjusted EBITDA to be at least 50% higher than last year.

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 with UBS

Good evening, everyone. Maybe just to start on the WMS acquisition here, now that you've owned this for a month. I think you just said this is a 12- to 18-month integration. So, maybe you could give us a little bit more flavor about any milestones we should be watching out here. How is integration going to take place? What -- are there any cost synergies that should come over, over any time frame?

And then I know it's early, but what are the cross sell opportunities? Are you actually already seeing some of that stuff happening, or when we should be looking for incremental upside other than just scaling up from a very big acquisition here?

So, a lot to that question, Alex. I'll try to address what I can of it. First of all, we are very, very busy right now in building out the technology, the platform capabilities to support the trust business that has been the strength of WMS. And there a few modifications that we need to our core portfolio accounting system to fully support the Canadian client base that they have.

We expect that the integration will take place, as we have done in other cases, client by client with clients coming over in planned conversions, and we expect that those will take place beginning as early in the second quarter of next year. But more likely our best expectation on the middle point for all of them coming over would be a 15-month date. There is some distribution of outcomes that could come around that if everything is great. It could come in in the third quarter of next year. I don't expect that. I think it's more likely to come in around the end of the third quarter and through the fourth quarter of 2014.

So, with that said, that's the primary focus right now of us, with respect to the integration and conversion of WMS, the primary focus is an engineering focus and an operations focus, and then of course an intensive client management activity, as well. We're already seeing some very interesting opportunities to go deeper with some of these clients, and while we haven't identified that as something that's encouraging, I have to say that that's something that we're very encouraged about. The specific cross sells really can't begin to happen on the platform until the integration occurs, but there are some pockets of activity that we continue to look for, and I think we'll be able to do some additional business with some of these firms even, perhaps, before the conversion is complete.

The question on whether the synergies realized before, and while there very well may be, Alex, they would be marginal, they would be minimal. This is -- conversions are sort of a binary activity in that until all of the old systems are made obsolete because of the conversion, there still is an expense in maintaining all of those old systems.

So, while we will begin the conversion process in a very planned sense client by client until all clients are successfully converted, you will not see significant accretion in terms of our financial performance. However, once that does happen, we expect to see very significant financial accretion as a result of this consolidating acquisition. While it is a consolidating acquisition, I don't want to forget that there are several strategic value dimensions to it, as well.

That's very good color. Thank you. And then for Pete but also for you, you made the comment on the cost of goods sold ticking higher here. So, maybe you can just give us a little bit more detail.

I think you said certain products being sold, and that ties into just giving us a little bit more color in terms of where you are having success. Because, obviously, you have a pretty broad product spectrum now. So just a little bit of an update on when you see some of this AUM and AUA growing? Where is most of that coming from these days, so we can think about it in terms of the for fee rate and cost of goods sold in the future?

So, Alex, Pete's got the numbers. I'd like to give an example just so that you get a sense of what this is about. With ENV2, for example, we now are enabling not just the wealth advisor to access PMC and outside strategist products, we're allowing the portfolio manager or the advisor that has a core of their portfolio in a self-managed portfolio to using our unified managed account structure add sleeves of outside managers of products. This is relatively new for investment and what that's done is it's opened the door to managers that we may not have full scale, with for managers that have different cost structures.

So, while we're a mature company with respect to the unified management count or the UMA technology, and while our product lines, whether they're separate accounts or advisors' portfolio manager or rebalancing are all fairly mature, the next generation of the UMA capability has opened up capabilities that are fairly new on the product lifecycle and most of the sub advisors, the sub managers that are being chosen right now, we just don't have the scale yet that we expect to have at some point the scale that we have with more traditional existing managers.

Yes, I'll add to that, just on the numbers. At the middle to end of last year we were seeing that percentage cost of revenue as a percent of AUMA revenue in the mid 40s in the first quarter, and second quarter of this year we've seen it creep up into the 46%-47% range. That trend is anticipated to continue with the flows that we've seen. With the addition of WMS, which had a cost structure which probably had that number closer to the high 50s, we are looking at a jump in the third quarter that's going to be just over 51%.

Now, I do expect that a year from now or 18 months from now, or 24 months from now, that these newer products will begin to see some of the benefit of scale and will see some of the efficiencies. I will add that, but this is from a market and from a present standpoint the adoption of this next generation product is a very good thing for our franchise.

Certainly. You actually answered my next question I would have had on that. And just lastly, to move on here and give some other people some questions, but in terms of advisors in the pipeline there, just to add new advisors and firms to the platform, can you just give us an update where you've seen the most success in terms of what kind of IDBs or I remember you guys were talking about having even sales guys focused on the smallest RA's out there. Where are you in terms of where you're getting most of your new advisors from that are joining -- not joining you but that are utilizing your products? That's it for me. Thank you.

Alex, it's a good question. We get it all the time. We are growing our core markets in a very similar rate, but it's coming from very different strategies. So, our two core channels are the independent broker-dealer channel and the registered investment advisor channel. We are gaining significant new advisors in each, but the strategies are very different, and maybe off-line we can talk about that. But I think the short answer to your question, that we're gaining significant numbers of new advisors both in the independent book reviewer channel and the registered investment advisor channel.

That said, we think that there is tremendous opportunity to begin what we internally refer to as an S-curve opportunity within the bank and trust channel and eventually as we fully roll out our retirement solutions later this year and in 2014, we expect that we will see an increase in advisors who do advise on retirement plans. So, today it's coming very strong growth from the IVD and the IRA channels.

Okay. Good. So very consistent with the past, but maybe some other new channels in the future to be a little bit more optimistic I guess?

Exactly.

David Grossman with Stifel.

So, I wonder if I could go to just the gross sales numbers? If I back out conversions, it looks like it was up sequentially, and still well above the trend line last year, and perhaps even before that. I'm just curious what it is that you think that is driving that? Do you think that there's kind of a cyclical component where AUMA is up within your client base and they're feeling better about their business going ahead with capital expenditures? Or is there another phenomenon perhaps that applies? Because, again, I have the numbers right, it looks like we're up a different plateau than where we've been over the last two years.

Well, it's encouraging, the numbers are encouraging. We have not detected any game-changing trends. We are not ready to yet say that this is the new plateau or the new trend. We have benefited year-to-date with lower redemptions and while that's not directly appropriate or not directly apropos your question, I do think it reflects an environment where advisors, especially the advisors we serve, are gaining new clients at rates faster than their counterparts in the wire house channel.

And I think that this is an environment that's very conducive to the value proposition of the independent advisor who was unconflicted, who has a fee-based practice, and who always follows a fiduciary standard. So, I think these are all factors, David, but I'm not ready to say there's some new higher level that we can count on in the future.

Okay. Fair enough. And maybe along those same lines then, Jud, the conversion activity obviously had a big bump up this quarter. I guess a couple questions in that regard. Number one, does that bump up reflect perhaps some easing of the backlog in the bottleneck that you had in conversions. And, if not, or maybe in addition to that, should we think of the conversion activity this quarter as being one account, or were there several that make up that number?

Very good question. I'd like to be able to report that we have relieved the backlog on the conversion pipeline. We cannot report that yet. We're still managing with investing appropriately in the onboarding resources. I believe we basically tripled the headcount on implementation resources since we went public three years ago and we're expecting those resources to season and become even more productive.

I think one of the things that's happening is that there is a growing perception among our target market that we are the market leader, and so I think that that is benefiting us with respect to gaining at the other side of the pipeline. So as fast as we're able to bring them through the pipeline, other ones are queuing up at the other end. We think that this is a high-class problem to have. And so we're not overly concerned about it, but we are concerned when implementation timeline and the backlog, if you will, gets beyond a 7- to 8-month period.

And then in terms of the conversion activity, there were two fairly large conversions that accounted for -- the two in total were over $5.5 billion, but the balance was just a number of bread-and-butter conversions, $100 million to $200 million conversions, and then several fairly large ones, but there was not one gigantic conversion in the quarter. There was one late in the quarter for most $5 billion, but it was all reporting and that did not materially add to the revenue run rate in the quarter. That's probably more information than is useful.

So, that $5 billion is in the $12 billion then?

Yes, it is. It was not quite $5 billion but it was coming up close to that number.

Okay. And then just one last question I had was really just on the dynamic between the cost of goods increasing and the fee rate. And I don't know that I have any algorithm in mind, in terms of what the relationship should be, but it seems like you're taking up the cost of goods, roughly 500 basis points or so, and the fee rate we're taking from about 14.7, 14.8 up about a point -- not a point, well, I guess one basis point. So, how should we think about that, particularly with WMS, who I assume comes with a fairly high fee rate, given their mix of business?

So, I will tell you how we think about it. This next generation unified managed account platform will play out its own maturity. It is a new product, it has new economics. We think that there is a market clearing rate for it. We priced it at that level. We want to demonstrate price leadership in the market place. We may be able to test that a little bit going forward but I certainly wouldn't model it, I wouldn't expect that. But, as we've seen the underlying cost of separate account managers decline from somewhere in the low 50-basis point range 10 years ago to something in the high 30-basis point range today, we see the same kind of change with fixed income managers, traditional fixed income managers that were 10 years ago in the 40-basis point range and are now in the low to mid 20-basis point range.

And a number of these strategists they're new, they've got demonstrated track records. Our PMC group has approved them for inclusion and advisors are eager to work with them, but I will tell you that their economics in no way look like the traditional more mature economics of the separate account world. And I expect that it will take not years, but several quarters to begin to see the economies of scale that will be will to generate on those products, but they won't fully play out, I think, for several years.

So, I think it's -- how we think about it is, we get the business now, we make a meaningful impact on the advisor's practice by offering new strategists ability to round out in a core satellite approach around the advisor's business. We think that's a very good thing. We think it's good for our franchise and we are giving you more AUM business than there would otherwise be. I think over time we'll rationalize that. And it's a longer term opportunity to generate some additional margin, but right now we're focused on onboarding those advisors and opening up those new accounts.

Great. Got it. Thanks very much.

Chris Shutler with William Blair.

Just a couple more on the conversions if you don't mind. So, the first of the $12 billion of conversions and licensing in the quarter, can you just give us some general sense how much of that was RIAs?

We don't break it out like that, Chris, but let me take a look at that. We can get back to that, Chris. Of the three largest, one was a large broker dealer, one was a large RIA, and the second was a large broker dealer. And then on the conversions that happened on the license front, it's a heavy preponderance of RIA conversions. So, on the AUM/A side, I would say it skews maybe 60-40 towards IVDs and on the conversion on the licensing side it's almost 100% RIAs.

Great. That's very helpful. And then secondly on the decision to move away from the third parties that are helping you guys with implementation, just any more color you can provide there?

So, Tamarack, in particular, often used third parties for implementing, and it's not a business practice that the Envestnet PMC or the Envestnet APM side of the business has used for several years. We felt that from a quality control and from a speed of delivery it made sense for us to develop those resources internally and rely less on outside firms to do that. As a result, that revenue which we have been recognizing each quarter when it occurs because it's on-boarding, it's implementation revenue, we have not been utilizing outside parties any time in this calendar year as a result of the strategic decision earlier to bring that all in-house.

So, we think it's an important thing for business from a QC, from controlling the advisor experience. We think that it's very important to develop that core competency and develop it even deeper, because it is one of the things that we do, and it's a differentiating advantage. Because large complex conversions are something that no organization wants to go through a conversion, but they do want to rely on the expertise of the market leader to help them work through that process.

So, it was the right strategic decision, and I don't think you're going to see meaningful changes in on-boarding rates or tremendously shortening the timeline in the immediate future. Over time, we'll see some marginal improvement there, but the big impact, while it's very good for our Business, in the third quarter is a $350,000 to $400,000 revenue hit that ultimately we'll get back, because we'll be recognizing it ratably over the life of the contract. But for the next three, four quarters it will have some impact on the P&L. Pete, what would you add to that?

I think that covers it. I think economically we still get paid upon the implementation. So, there's no MPV change here. It's a matter of recognition and timing.

Understood. Okay. On redemption rates, I'm assuming you guys saw a little bit of a pickup in May and June like the rest of the industry, but I'm just curious if things have settled back down a little bit on that front more in line with Q1 levels as we moved into July?

We saw jump in April and May, but by June we're already seeing it settle down and it's a little too early to make any claims for the third quarter, but we're expecting conversions -- excuse me, we're expecting redemptions to be below the level that they were for the last year and with our recent experience. And we believe that's good for the business.

Yes, absolutely. And then just final question. This is a bigger picture question, Jud, but as you guys think about the advisory industry over the long term, one of the big themes that I certainly read a lot about is just the aging of the advisor population. So, I realize nobody has a crystal ball, and you guys have a number of secular tailwinds that are in your favor, but just wanted to get your perspective on that dynamic, the aging dynamic and how you think that actually plays out over time for the industry and the implications for investment, good or bad?

So, we've begun to do some research there, Chris. We have not completed anything meaningful, but we expect to provide some meaningful insight into this whole dynamic, which is a bit of a wild card. Some of the early findings that we are realizing is that particularly in the wire house environment, advisors who retire have a less likely capability of retaining the clients as they pass that on to the succession plans within the firm than registered investment advisors who have cleared transitions and retirement plans. We expect that this will be an important element as things go forward.

We were surprised by some of the data that we've discovered. For example, there are as many financial advisors in their 70s today as there are in their 20s and you would not expect that kind of thing to be the case. So, we think that this will be an opportunity for the right kind of firms who can mobilize to meet this opportunity and we expect we'll be able to comment on it more in the future.

All right thanks very much.

Chris Donat, Sandler O'Neill.

One quick question on just the number of advisors. You picked up 2000 advisors, which it's up 9% quarter on quarter. Was there anything lumpy just with the advisors, or any color there?

There's -- we did pick up a lot. We had strong organic growth above planned, organic growth of advisors, but we also picked up a chunk of advisors through one of those large conversions. And so as we convert, one was a lot of advisors that came up.

Okay. And then, should I think about the number of advisors as either a leading or lagging indicator for AUM, AUA or is it more coincident or is it just all over the map really?

Well, eventually it very much is a leading indicator, because our fundamental growth is primarily driven by organic growth and it is more advisors and then those advisors bringing on more accounts. Now, the advisor growth that we've targeted and have consistently been able to exceed in terms of our target is in the mid to high single digits per year. That doesn't sound like very many advisor headcount growth rates from an organic standpoint, but it actually is significantly higher than what the industry is experiencing in terms of headcount.

And then those advisors grow their accounts in the low double-digit rate, 10% to 12% per year. We have research that shows that advisors who use investment are growing their practices at significantly higher rates than the rest of the industry is. But it's those two things that compound out to that mid teens level of base organic growth ex-conversions that we talked about.

So, as we add more advisors, they provide the base on our AUM/A side of the business for growth of accounts. And as they ramp up and use the Envestnet wealth management platform, that's what enables the per account -- the per advisor account growth to be the steady piece that it is in terms of our growth. So, it's a leading indicator, but it's very hard to model and I would encourage you to think long and hard before you try to come up with a formula or an algorithm to try and capture that.

I will certainly think long and hard and probably pester Pete and Chris on that issue, but that might be another project for another day. I also wanted to ask one question on -- just looking at the market return for the AUM and AUA being negative. And if you could comment a little bit on the mix, on the asset mix, in terms of equity and mixed fixed income, and if there's any color you can give on the fixed income, in terms of if there is a lot of long duration assets in there? Particularly WMS, or is it going to change anything in the mix also?

So, I think you hit the second quarter pretty accurately. The fixed income index is down during the second quarter as we've seen interest rates come up and that had a negative impact. We are still thinking that the overall mix is mid-50s for equities and mid-40s or so for fixed income. So, that's a big driver.

Also, the equity mix that we've seen, again this is prior to the acquisition, is more likely to reflect world indices that we've seen lately than some of the domestic indices. And as there's been a bigger gap between world stock performance with domestic, we've seen a little bit more of a difference from the beta that we had talked about previously. So, those two factors kind of drove us down about 1% for the quarter.

We don't see a big shift in that going forward with WMS, but as we get further into that mix, we will see how that impacts. We expect a similar type of market reaction going forward and products and managers that we have are all -- there's a high degree of overlap.

Okay. And then just one last one to follow up on the earlier question about redemptions. Just curious with the fixed income volatility that your world stabilized in June when for a lot of fixed income investors it was getting pretty scary. Just any thoughts there on trends or if you're ultimately -- the end customers are sort of agnostic to fixed income volatility?

It's very interesting you mention that and I don't know if this -- I mean it's been a while. I can't remember the last time the bond market fell off as much as it did in June. What's interesting is that -- Go ahead, Chris.

I was just going to say 1994 comes to mind, but --.

Okay. Yes, it's been a while. And so, we're dealing with a situation where the number of events are few, and so I certainly don't want to draw any conclusions from this. But it was very interesting to us to see the response of end investors as the bond market experienced a lot of disruption and compare what we were seeing with what the end investors do, because most redemptions in volatile times are investor driven, not advisor driven. The best advisors are in times of volatility doing systematic rebalancing, they may be doing some tactical adjustments here and there, but the best advisors aren't getting out of stocks after the stocks have taken a hit.

So, it is interesting to see and again we serve advisors, advisors serve investors, but the volatility in the bond market in June so far has not led to increased redemption rates in such a highly correlated manner as what we've seen in equities in the past. So, again, we're not going to draw any trends. That may change, but that was what the experience was through the end of the second quarter.

Okay thanks. That's interesting to know.

(Operator instructions)

Peter Heckmann, Avondale.

A question for Pete. I missed a little bit of your commentary on the third quarter guidance. Could you just restate the commentary as regards to gross margins or cost of goods, as well as some of the commentary you had on operating expense? My phone clicked out a little bit there.

You know what, since we did it already, why don't we do it on a follow-up call?

Okay, great. And then as regards to the way that I'm perceiving it with WMS, we take a little bit of a step back in EBITDA margins, we've got institution by institution conversions. But certainly to the extent that these strong conversions continue, we continue to leverage the base and granted we have some additional new product costs, we should continue to see somewhat of a one--time reset for WMS, continue to see that steady EBITDA margin progression expansion as we go through the next several quarters?

I think what we want to focus on there, Peter, is given the noise that the WMS transaction is going to require, the fact that we are supporting an additional large platform, we want to emphasize -- for at least the next two or three or four quarters, we want to emphasize growth in cash flow and growth in revenue. I think that will be the tone and the focus of what our guidance is.

Okay, that helps. And then remind me, you talked about the diluted share count for the second quarter. Did the exercise of the warrant, was that going to add some additional shares to the third quarter count, or are those already contemplated in the second quarter?

That was already contemplated based on the way that diluted calculation works, that it's assumed that they're exercised and a certain number are repurchased. Basically, we just netted that out with exercise happened and fixed that number. So, the exercise of the warrant itself does not have a major impact.

Got it. All right. Helpful. Thank you.

I have no further questions. I'd like to turn it over to Jud Bergman for any additional or closing remarks.

I would like to just thank everyone for their participation today. We have a tremendous opportunity to continue to transform wealth management and it's been a very strong quarter and we expect that these results will continue for the foreseeable future. We very much want to thank you for your time. Thank you.

Again, this does conclude today's conference. Thank you all for your participation.