Envestnet Inc (ENV) 2013 Q4 法說會逐字稿

Good day everyone. Welcome to the Envestnet fourth quarter 2013 earnings conference. Today's call is being recorded. At this time I would like to turn the conference over to Mr. Chris Curtis, Senior Vice President and Treasurer. Please go ahead sir.

Thank you. 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 fourth quarter and full year 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 or 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. It 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. They 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. Hello everyone. I add my own welcome to you this afternoon. 2013 was a year of significant positive developments and strong results for our Company. We delivered record sales and asset flows, as well as record revenue and earnings. We also crossed a significant threshold of advisor adoption with over $500 billion of platform assets. We continue to see compelling evidence that the financial advisory profession is moving steadily towards a tipping point in an important and far-reaching transformation. This transformation will yield a financial advice model better matched to today's investing and market realities. Far more powerful and rewarding for investors and advisors alike.

Even as investment benefits from this important transformation, we are accelerating its progress with a wealth management solution directly supporting advisors who are aligned with this trend. And uniquely positioning us to attract those advisors and their assets. Our mission to unify and fortify the wealth management process and empower advisors to deliver better client outcomes, continues to drive our business strategy and resonate with advisors. We remain committed to these guiding principles.

First being advisor focused, by empowering advisors to compete and to be more productive and deliver better client outcomes. Second, being transformative. By helping to lead the wealth management process from an opaque at times conflicted and misaligned system, to one that is transparent, objective, and a fully-aligned fiduciary standard. Third, being technology empowered. By delivering a powerful and unified set of tools for advisors to deliver sophisticated investment strategies that benefit clients, while also providing their practices with operational lift.

We founded Envestnet with the belief that the financial advisory profession needed to move beyond its historic roots. A sales focused Wirehouse centric environment, vulnerable to conflicts of interest and inconsistent focus on the client's best interests. From that toward a more transparent, demonstrably objective and truly fiduciary-based service model, that empowers independent advisors to act as the industry's best resources. For both investors and advisors this transformation creates a context for financial advice, that supports genuine alignment of interest, and truest client centered advice for each client. This advice paradigmis enabled by innovative technology and open architecture access to the industry's best products and its best tools for portfolio design, reporting, research, monitoring, and overall reporting.

The transformation that we envisioned 14 years ago is now unfolding. Today affluent and high net worth investors increasingly are using financial advisors, and more advisors are moving into independent practice centers. More and more assets are being managed under a truly advisory fee-based service model, rather than the commission driven model of the past. Advisors are increasingly investing in sophisticated platform technology as a strategic priority to enhance their practices efficiency, and to scale up their ability to deliver the most customer-centered advice to each client.

This tranformation's tipping point is in sight. Maybe not this year or next, but inevitably and soon. More and more Envestnet is emerging an a key agent and an enabling utility of this transformation. We believe we effectively function as an efficient and powerful pipeline for moving advisors aligned with this new advisory paradigm, and the assets that they oversee into a close and hard-working partnership with Envestnet. As 2013 unfolded we took important steps in enhancing and strengthening our platform. We launched investment intelligence, a set of platform features that provides business intelligence to our advisor partners, and an unmatched ability to deploy practice management benchmarking and market information for more responsive customized portfolio design, execution, and communications.

We also introduced the next generation of our platform, featuring an enhanced advisor console, with access to macro risk analytical tools, via a fully mobile end-to-end wealth management platform. And we designed an innovative new investment offering, Quantitative Portfolios, which enable advisors to combine the benefits of low cost access to market data, like an ETF, with the benefits of separately managed accounts, including active tax management, and portfolio customization. We believe that QP will prove to be a smarter way to access market data. Today Envestnet serves more than 30,000 advisors representing over 2 million investor accounts,helping to unify and strengthen the wealth management process for both advisors and investors.

During 2013 our platform assets exceeded the $0.5 trillion mark, and now stand at $537 billion. That is a significant platform milestone that makes us the leading service provider to independent advisors. Investment clients added $74 billion in gross sales, and $42 billion in net flows of assets under management or administration during the year. Included in those numbers were $27 billion in conversions, plus another $31 billion in licensed assets,by far the most we have ever completed. That contributed to full year adjusted revenue of $243 million, up over 50% over the previous year. And adjusted EBITDA of nearly $39 million, up over 60% from the prior year. All record levels for the Company.

We are satisfied by the results we achieved during the year. At the same time we know that the transformation of the financial advisory business that is so central to our firm's mission remains an urgent work in progress. In 2014 we will continue our efforts to advance this transformation. The phenomenon that we are uniquely positioned to leverage on behalf of advisors, their clients, and their shareholders. We expect to gain further adoption of our next generation platform as well as investment intelligence. We will support broader utilization of new platform offerings, well matched to today's advisory demands, including our Quantitative Portfolios, and our newly-introduced Retirement Solutions offering.

We also expect to continue new onboarding enterprise relationships. We are particularly pleased about a new contract we signed earlier this month with William Blair and Company. Leveraging our advisor XI technology platform, William Blair will be able to deliver realtime transparent reporting, and other portfolio management efficiencies for their private wealth clients.

Turning to strategic activity, the integration of WMS is a critical undertaking throughout our organization in the upcoming year. The conversion process has already been completed for the first group of clients earlier this year. We expect to complete the implementation process for substantially all the clients by the end of 2014. I will conclude with a few remarks in a moment. I would like to turn it over to Pete D'Arrigo, our Chief Financial Officer, to discuss our financial performance in greater detail.

Thank you Jud. Good afternoon everyone. In the fourth quarter of 2013 revenue from assets under management or administration grew 83% to $63.4 million, compared to $34.7 million in the fourth quarter of 2012. Licensing and professional services in fourth quarter was $11 million,up 14% from $9.9 million a year ago. In total adjusted revenue increased 67% to $74.4 million in the fourth quarter, from $44.6 million in the fourth quarter of last year.

Our cost of revenue increased to $32.4 million for the quarter from $16 million last year, as the percentage of revenue from assets under management or administration cost of revenue was 51%. Adjusted EBITDA was $11 million for the fourth quarter,53% higher than the 2012 fourth quarter. Adjusted earnings per share was $0.15 in the fourth quarter, increasing 50% from $0.10 last year. We reported GAAP net income in the fourth quarter of $600,000, which is $0.02 per diluted share, this fourth quarter's GAAP net income includes approximately $1.5 million of after-tax expense, related to amortization of acquired intangibles, which has increased from prior period due to the acquisition of WMS. And it also includes approximately $2.7 million of after-tax expenses related to noncash compensation the secondary offering completed in October, and WMS transaction, costs related to the WMS transaction.

Our diluted share count during fourth quarter was 36.3 million shares,up 2.5 million sharesfrom the fourth quarter of 2012, due primarily to the impact of the higher stock price on the calculation of diluted shares. Looking forward we expect our revenue from assets under management or administration to up 81% to 85% in the first quarter, compared to the first quarter of 2013. This reflects an effective fee rate of approximately 14.8 to 15.1 basis points on our beginning AUMA asset base of approximately $178 billion.

Licensing and professional services revenue the first quarter 2014 should be up approximately 5% to 6% year-over-year on a GAAP basis. Growth in this line is going to be relatively slower throughout the year, with the number of new contracts coming for implementation. There is revenue that is going to be recognized over the estimated life of the client relationship.

Adjusted revenues for the first quarter should increase between 64% and 67% year-over-year. We expect first quarter costs of revenue to be between 51% and 52% of AUMA revenue, in line with the fourth quarter. We expect our adjusted EBITDA to increase 40% to 44% in the first quarter compared to the first quarter of last year.

Regarding income taxes in the fourth quarter our effective tax rate was approximately 51% on GAAP pre-tax earnings. The tax rate was notably higher than our statutory rates during the quarter, due largely to certain Safe Harbor elections made in foreign jurisdictions. We expect our effective tax rate for the first quarter of 2014 and the full year to be approximately 42%. Diluted shares outstanding should be approximately 36.6 million shares for the first quarter based on the current stock price, a meaningful increase from the first quarter of 2013. These expectations translate to adjusted earnings per share of approximately $0.15 in the first quarter of 2014.

Thank you again for your support of Envestnet. Jud has a few closing remarks.

Thank you Pete. We remain fully committed to taking advantage of our extraordinary opportunity to act as a powerful agent, a fundamental transformation across the financial advisory profession. In doing so we believe we are well-positioned to deliver substantial revenue and cash flow growth this year and beyond. Our long-term targets remain to grow top line revenue organically by 20% per year. And to grow adjusted cash flow 25% per year, reflecting improving operating leverage in our business. And to accelerate this organic growth over time by disciplined strategic merger and acquisition activity.

During 2014 we expect to exceed our long-term targets on both the top and bottom line, aided by a full year of revenue from the WMS acquisition. We expect revenue growth of 35% to 39% compared to 2013. We expect continued operating leverage in our core business while we integrate WMS and invest in onboarding resources for large enterprise clients, as well as new initiatives like Retirement Solutions. As a result, we expect adjusted EBITDA to grow between 32% to 39% compared to 2013,meaningfully above our long-term target of 25%. Beginning in 2015 we expect the financial accretion from WMS should be significant, generating at least $10 million of cash flow once fully consolidated.

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

(Operator Instructions). We will go to Peter Heckmann from Avondale Partners.

Good afternoon gentlemen. Nice results.

Thank you Peter. How are you?

Okay. Can you comment on the average basis point spread that you talked about for the first quarter 14.8 to 15.1. Is that a good number to use for the full year, or is it migrating slightly upward as we move throughout the year?

Well the trends that we have seen with the asset mix and the onboarding over the last few years have been to see actually the average fee rate declining in sequential quarters. Obviously it depends on asset mix of the new business that comes on. From the fourth quarter to the first quarter in the guidance, there is a drop as a significant portion of the AUMA conversions that we talked about came in at lower fee rates. That affected that average. Our trend over the past couple of years has been to see that dropping moderately. Again it will depend on the mix of new assets.

That is fair. When we look at those very large conversions of the fourth quarter, did you happen to comment what the mix was there, in terms of AUM versus AUA? I think it is in the press release.

It is pretty heavily toward AUA reporting in reporting in that fourth quarter. It was above our overall yearly results, and above what our long-term expectations are. It was about 90% AUA including reporting, to 10% AUM in that fourth quarter

That is very helpful. Last question. You have a very strong balance sheet $50 million in cash, no debt. You stated longer-term goal to make acquisitions. Is this something we should actively expect to see potentially something on the tape here in the next couple of quarters, or is the Company working to work to convert to the WMS financial institutions, and so maybe a transaction might be more likely in the back half?

Stepping back, when we went public we identified that disciplined merger and acquisition was a central part of our strategy. We believe that we can be the logical consolidating platform for wealth management technology. Part of the main reason for this is that we have a core competence of doing complex conversions well, because so much of our activity comes from doing large scale conversions from large enterprise clients, as well as large scale conversions from registered investment advisory firms. We see that disciplined merger and acquisition activity is a way of leveraging this core operational strength. We identified back in 2010 that we thought we would do one or two strategic transactions, and one or two consolidating transactions over the next three years, and that is about what we were able to do.

We have also indicated right now at least through the first two quarters of 2014, our conversion and integration teams are busy at work not only with WMS, but onboarding new clients. That doesn't rule out strategic activity. I would not certainly expect it within the next two quarters. Having said that, we expect that disciplined activity whether it is in acquiring consolidating opportunities, or in investing in strategic acquisitions, will be an important part of our strategy going forward, as it has been over the last three years.

Sure. That makes sense. Thanks for the call. I will get back in the queue.

Now to Chris Shutler from William Blair.

Good afternoon. So you guys thought you saw a 15% sequential increase in the number of AUA accounts in the quarter. That seems like a very strong number. I wonder what drove that?

Hi Chris. First of all, the organic flows were strong throughout the year including the fourth quarter, but we also had a particularly strong quarter for conversions from an asset level standpoint, although as indicated earlier they were heavily skewed towards the assets under administration and performance reporting type of service offering. That has an effect. It makes our flows very strong. It is an endorsement by the advisor of our platform, but it also has a slightly adverse effect on our going forward average yield for assets under management or administration.

Okay, thanks. Jud, on the QPs I know that it is still early, but can you talk about progress or any early feedback so far from advisors? How many of the advisors on your platform today actually have access to the QPs, versus maybe where that will go?

So as I have said, we think this is a transformative and valuable innovative new product. We think it is a smarter way to access beta for tax-sensitive advisors who cater to high network clients, we think it is really going to be, to have the potential of being a new category. Having said all of that, we have also said that new product launches especially in the financial services area, we expect that there will be a slow build at first. Today the advisor base that we service, I would say less than 20% today has access to the Quantitative Portfolios. We are working through that. That has beenvery promising. The feedback from home office gatekeepers on the research side has been uniformly strong, as has the response from the advisors who are already putting clients' assets into the product, into the portfolios.

Okay. Great. Last one for me. Maybe you can talk about the length of the implementation pipeline on both on the BD and RH sides of the business?

Again we try to build in a certain amount of capacity, so that we are able to accommodate break away advisors, and those break away advisors happen with a very short lead time. We are managing I think effectively our RIA pipeline, our registered investment advisor pipeline. Our enterprise pipeline is continuing to grow. Those are the larger and more complex conversions. They are lumpier, and they are far less predictable in terms of when they will be coming across the finish line. In part because we have dependencies with our partners of the enterprises. So we continue to invest in onboarding resources, and that investment is paying off.

You can just, it is not hard to do the math in terms of the total number of conversions that we did in 2013, compare that to 2012, 2011 or 2010. You can see the significant ramp-up in capability that we are able to demonstrate. We continue to invest in it. The pipeline I think is evidence of the healthy amount of demand for our product, our platform, our services. I do not believe that we are running the risk of losing out on market share or promising new clients because we are not able to implement fast enough.

Good to hear. Thanks guys.

Now to Jeff Houston, Barrington Research.

Hi guys. Thank you for taking my questions. I was hoping to get an update on the number of sales people you had at the end of 2013, and perhaps get a sense of what you are targeting for the end of 2014? The third part of that question is, the mix between the four different groups,Enterprise, Advisory, Tamarac, and PMC? Thanks.

Those aren't metrics that we are accustomed to reporting on a quarterly basis. We put it in our 10-K once a year. We would expect that we are able to leverage our growth in terms of sales and marketing resources, but the actual head count we are trying to manage the growth in head count, and tie it basically to the growth in advisors that we are seeing. We target long-term growth in numbers of advisors in the single, in the mid-single to high-digit range targeting 5% to 8% per year. We have been growing faster than that lately, but that is our long term target. Of course, the real engine of growth comes from the same-store sales that we get. Advisors that utilize a fully-integrated end-to-end platform grow their practices at over 100% of the rate that advisors that don't use a fully-integrated platform. That is our largest engine of organic growth, but we target sales marketing head count to be at or below our long-term target of advisor growth.

Got it. That makes sense. Switching gears a bit into the competitive landscape. Could you talk about who you are seeing more of or less of within the TAMPs and custodians and perhaps some new entrants? Maybe how these other firms are reacting to Envestnet's disruptive technology?

There are a number of incumbents that we have seen ever since we started the business. There are not to my knowledge any new entrants over, that are effectively gaining share from advisors that we haven't already identified. We see that the competitive environment is a very dynamic one. Most of the investment into the wealth management technology space is being funded for companies that are trying to pull-off a business-to-consumer, or they used to called it B-to-C. Enabling technology, enabling aggregation, enabling portfolio management to the end client bypassing advisors. A lot has been written in the press about some of these new entrants to the space. I have not seen evidence or any facts that would support that they are having tremendous success in attracting affluent or high net worth clients. In our space I know of no new participants either as TAMPs, turnkey asset management platforms, or as single point application providers.

Alright. That is good color. Thank you.

Now to Chris Donat, Sandler O'Neill.

Good afternoon, gentlemen. One question on the cost of revenues, because that has been creeping up as a percentage of asset based revenues, 51% this quarter and maybe a little higher. When I look back two years ago it was 42%. Is this a function of the asset based revenue having more administrative assets in it, or is it perhaps a sign of like a great rotation and more equity-based fees for third-party managers rather than fixed income? If you could help me understand what is driving the trend?

Sure. It is a very good question. The cost of goods sold is almost exclusively a function of our assets under management. Not assets under administration, not licensed assets, not reporting assets. You will see a fairly large jump as a result of the WMS acquisition. That is a function of the type of asset that they had, which was skewed towards separately managed accounts. There also has been rapid growth which has been enabled by our unified managed account chassis. Our UMA platform, has enabled the rapid growth of a number of third-party strategists, who have now been available for advisors, to advisors for the first time using this unified managed account technology.

What you are seeing is I think the early stages of a new product life cycle. These third-party strategist UMAs. Over time we expect that we will be able to gain efficiencies, and generate some reduction in the basis point costs of those underlying strategists within the UMA. It is two primary things. The WMS acquisition, and then it is the market success of third-party strategists, and what we have been able to demonstrate in the past is that those strategists as they see the scale that is available, and the ease of doing business from a firm like Envestnet, typically we see reductions in their marginal costs going forward, as they gain scale in our platform.

This might be something where over time it creeps up, but you do have some, not necessarily leverage, but part of formula should mitigate any increases?

That is how we look at it. What would you add?

I think that is a fair summary.

Jud, I think it was your comment about you expect substantially all of the WMS assets converted by year end. Can you just remind us is it, as far as the expense base tied to WMS, can you reduce that once you move 100% of the assets, or substantially all is that the gating factor?

Thanks for bringing that up again. We have tried to be very forthcoming on it. It is never quite forthcoming enough. Right? We have a services agreement with the organization that we acquired WMS from, Prudential, that legacy platform is a mainframe system. It is a fairly sophisticated system, but it is also a high cost system. We will not get full economies of scale until the conversion is 100% complete. So 75% of all of it coming across doesn't get us 75% of the efficiencies. It doesn't get us none of the efficiencies, but it doesn't get us 75% of the efficiencies. We have got to be 100% converted to achieve 100% of the efficiencies that we have dimensionalized for you.

Okay. But now that the timing is, you do think it will be substantially all by year end of this year?

Our expectation is that we will be substantially across the finish line with substantially all of the clients by the end of the year.

Any way you could provide some sort of quantification of that first group that has been converted? Is it 5% or 10% of the assets?

What I would like to just point out is that we have successfully begun the migration. We have satisfied clients on the other side of that migration.

Okay. That helps me get there. Thanks, Jud.

Thanks Chris.

We will now take a question from David Grossman.

Thanks, guys. This is Irvin Liu calling in for David Grossman. I just noticed that gross sales trends were strong yet again in the fourth quarter, especially in AUA assets. Can you elaborate how much of this is new advisors dipping their toes into the Envestnet product suite, with like one or two solutions, or if there are any indications that they are thinking of eventually adding more additional service offerings? What sort of incremental cross-sale opportunity once these new advisors are onboarded?

Again. Where we really get the leverage in our business model is as advisors move from trying an account here or there, with perhaps an end client that would be most suited by a fee-based solution. Moving from that testing it mode, trying it mode, to committing their practice towards transitioning from commission-based to fee-based, or with those advisors which have the majority of assets on our platform who already are virtually 100% fee-based, but are looking to move pieces of their business over to us, either all of their assets for reporting, or all of the assets for rebalancing and reporting, or all of their assets for CRM and rebalancing and reporting. Where we get our real growth organically is for the advisors that begin the process of moving most of their practice onto the Envestnet platform. That is where we have found that our value proposition is strongest. I have mentioned this a number of times.

We commissioned a study by the Aite group, and this study found that advisors who use a fully-integrated wealth management platform spend 40% less time with back office and technology problems. They spend 90% more face time with clients, and that translates into what I think is remarkable. It is nearly astonishing. It is 110% greater account growth. Our value proposition is that for the advisors on an end-to-end fully-integrated platform there is a substantial operational lift, and that will help them grow the practice faster. The advisors that are driving the growth, are the advisors that understand that and buy into that. Accounts per advisor, average accounts per advisor grew from 28 in December of 2012, to 32 in December of 2013. That is about 14% growth. That is while we are bringing on hundreds or perhaps even thousands of new advisors that are just sticking their toes in the water. We are able to grow average accounts per advisor at the same time we have been able to grow the number of advisors. I hope that is helpful to you to understand where our growth is coming from.

Indeed that is. Thanks.

(Operator Instructions). We will go to Jennifer Dugan from Sterne Agee.

Hello. Did you guys say the integration work for WMS is all done?

No. I said that we have completed it for several of their clients. The integration work has been completed for several of the WMS clients.

Okay. What I am trying to get at is the magnitude of integration work as well as conversion expenses in 2014 versus 2013, and than also how those should trend over the course of the year, are they going to be fairly even, or are they declining, or actually going up to closer to year end because you will be converting more clients at that time? I am just trying to get a little bit better sense on the cost side how that should play out over the course of the year?

I think it is going to be sort of an allocation of costs and how we spread that. We have really four demands on the implementation and conversation resources that we have, being existing clients, new clients, the conversion work with WMS right now, and then development for internal demands to improve the efficiency of the platform. As we work through the year as certain areas of the, certainly with WMS as we make progress there, that frees up resources to apply to other areas. I think the overall costs are pretty accurately reflected. It is going to be what areas can we apply those resources?

Okay. Great. Secondly, can you give us some color on what the new deal pipeline what it looks like right now, in terms of RFPs you have out there, and how competitive those are looking?

You mean what kind of sales pipeline?

Yes. Sales pipeline, sorry, yes.

We don't provide metrics on that. I will just say that we are filling the back end of the sales pipeline as rapidly as we are pulling new clients through the front end of the pipeline.

Okay. Great. Thank you.

It appears there are no further questions at this time. I will turn the conference back over to Mr. Bergman for any additional or closing remarks.

Thank you for these questions. I feel that there is a deepening understanding of the opportunity, as well as of the key metrics for our business, and we are very appreciative of that. We are also sincerely appreciative of your time, for dialing in this afternoon, and for your support of Envestnet. Thank you very much. Good afternoon.

This concludes today's presentation. Thank you for your participation.