Envestnet Inc (ENV) 2014 Q2 法說會逐字稿

Good day, everyone, and welcome to the Envestnet second-quarter 2014 earnings conference. As a reminder, today's presentation is being recorded.

At this time, I would like to turn the conference over to Mr. Chris Curtis, 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 second-quarter 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 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 1 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. Envestnet's Unified Wealth Management platform continues to enable and even accelerate a transformation in the financial advisory profession towards a more transparent, more objective, and a fee-based fiduciary practice model. Affluent and high-net-worth investors increasingly are using financial advisors. The movement to fee-based compensation and away from commission-based compensation continues and is a primary driver of our growth.

Also, advisors continue to move into independent practice centers, and the firms housing these advisors -- registered investment advisors, broker-dealers, banks, and insurers -- are increasingly pursuing outsourced technology solutions to help them leverage their business. These trends propel our growth and drive our developmental efforts as we empower advisors to achieve better portfolio outcomes for their clients and to reach higher standards in the management of their practices.

During the second quarter, we continued to drive growth on several fronts. We added more than 1,000 advisors to our platform, bringing the total number of advisors to more than 33,000. Nearly 25,000 of these advisors have assets under management or administration now totaling $210 billion as a result of advisors continuing to do more business with Envestnet.

Conversion activity was high in the quarter as we onboarded more than $21 billion in new client assets. Most of the conversions this past quarter were under licensing agreements. Of those, some $17 billion were with high-end RIA firms choosing our Envestnet Tamarac product offering.

Tamarac continues to attract larger firms for our rebalancing, reporting, and CRM solutions. In fact, seven of the firms converting in the quarter were RIAs managing more than $1 billion each. Envestnet Tamarac is a primary growth engine for licensing revenue. We are pleased with our performance during the past 2 years since acquiring the company and are enthusiastic about the growth opportunities we have going forward, attracting mid-sized and large registered investment advisory firms as well as larger enterprises like William Blair.

Our $2 billion of conversions in assets under management or administration are an example of the lumpiness of the conversion part of our organic growth. Our implementation teams are at full capacity, have never been busier, and are working diligently on converting several large enterprises in the broker-dealer, bank, and insurance channels. And several of these conversions are larger than we've seen recently. As a result, we expect conversions will continue to drive meaningful organic growth in advisors' accounts and assets in the coming quarters.

Beyond our organic growth, acquisitions remain a means for us to leverage our core competence of completing large-scale conversions and thereby accelerate our growth. With respect to WMS, several clients have converted from the legacy platform to Envestnet's unified, Web-based platform, and the remaining are in process. We expect most firms will convert this calendar year and expect a few to convert during 2015.

WMS should deliver approximately $12 million of annual adjusted EBITDA once fully integrated. Meanwhile, we are effectively managing WMS costs and are achieving more efficiencies in the near term than originally planned.

We recently announced another consolidating acquisition during the past quarter, Placemark Investments. Placemark delivers unified managed account, or UMA, programs and portfolio management solutions, including a patented overlay and tax optimization solution, and they deliver this for banks, full-service brokers, and RIA firms.

This acquisition solidifies Envestnet's leadership in UMA technology, strengthens our AUM and overlay portfolio management capabilities, and expands our presence in the full-service broker-dealer channel, giving us added resources to serve a broader spectrum of wealth management needs. Upon closing, Envestnet will support over $24 billion in UMA assets, a leading independent platform provider.

Included in the $66 million purchase price are certain financial assets, primarily cash and deferred tax assets, which we value at approximately $16 million. As a result, the net purchase price, net of these financial assets, is approximately $50 million. We expect that Placemark, which is modestly profitable today, will generate pre-tax returns at or above our target for consolidating acquisitions of 25% once the integration is complete.

Placemark's platform will initially operate in tandem with Envestnet's platform, and a full integration and full consolidation is expected to occur and be completed some time during 2016. We expect to close on the transaction during the fourth quarter of this year.

We also invested further in our retirement solutions effort through the acquisition of a small provider of personal participant advice solutions to retirement plans. This helps Envestnet Retirement Solutions round out our product offering to advisors who support the small and mid-sized retirement plan market.

To fund the purchase of Placemark and to provide access to capital for future strategic activity, we established a credit facility and filed a shelf registration. These actions provide us with balance sheet flexibility and ready access to capital as we selectively pursue further opportunities to accelerate our growth through disciplined and strategic activity.

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

Thank you, Jud. Good afternoon, everyone, and thank you for joining our call today. In the second quarter of 2014, revenue from assets under management or administration grew 72%, to $70.7 million, compared to $41.2 million in the second quarter of 2013. Licensing and professional services revenue in the second quarter was $14.1 million, up 36% from $10.4 million a year ago. In total, adjusted revenue increased 64%, to $84.8 million in the second quarter, from $51.7 million last year.

During the second quarter of this year, we established Envestnet Institute to provide educational content to financial advisors as well as information on trending topics within the industry. This ongoing activity necessitates a change in the way our annual Advisor Summit, which takes place in May, is shown on the income statement.

Instead of revenue and expense being included in other income on a net basis, there is $1.6 million of revenue related to the Advisor Summit included in licensing and professional services. Excluding the Advisor Summit, licensing and professional services revenue would have increased 20% year over year, and adjusted revenue would have shown a 61% increase over last year.

Our cost of revenue increased to $38 million for the quarter from $19.6 million last year. This includes $1.6 million of costs related to the Advisor Summit. Excluding those costs as a percentage of revenue from assets under management or administration, our cost of revenue was 51%, consistent with the first quarter.

Adjusted EBITDA was $12.8 million for the second quarter, 38% higher than the 2013 second quarter. Adjusted earnings per share increased to $0.18 in the second quarter, up 38% from $0.13 last year.

During the second quarter, we recognized a pre-tax gain of $1.8 million, which is included in other income, reflecting a recovery from a vendor of certain expenses we incurred during 2013. This is a one-time benefit which we have adjusted out of our non-GAAP financial measures for the quarter.

Our diluted share count during the second quarter was 36.8 million shares, up 1.6 million shares from the second quarter of 2013, due primarily to the impact of a higher stock price on the calculation of diluted shares.

Looking forward to the third quarter of 2014, relative to last year we expect our revenue from assets under management or administration to be up 22% to 24%. This reflects an effective fee rate of approximately 13.9 to 14.1 basis points on our beginning AUMA asset base of approximately $210 billion. Licensing and professional services revenue should be up approximately 27% to 31%. We expect adjusted revenues to increase between 23% and 25%, and we expect cost of revenue to be between 51% and 52% of AUMA revenue. Our adjusted EBITDA is expected to increase 33% to 36%.

Regarding income taxes, we expect our effective tax rate for the third quarter to be approximately 40%. Diluted shares outstanding should be approximately 37 million shares based on the current stock price. These expectations translate to adjusted earnings per share of $0.19. Expectations specific to Placemark are not included in our guidance for the third quarter, as we expect to close that transaction during the fourth quarter.

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

Thank you, Pete. We believe Envestnet is well positioned to deliver meaningful organic growth in 2014 and beyond and to accelerate that growth through disciplined strategic activity such as the recently announced Placemark acquisition. 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 38% to 40% compared to 2013.

We expect continuing operating leverage in our core business while we integrate WMS and invest additional resources in the areas of onboarding for large enterprise clients as well as investing in new initiatives like retirement solutions. We expect adjusted EBITDA to grow between 37% and 40% compared to 2013, meaningfully above our long-term target of 25%. These expectations exclude any expected impact from Placemark.

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

Thank you. (Operator Instructions.) Alex Kramm, UBS.

So just coming back to the quarter for a second here, when I look at the flows, the net flows in the AUM/AUA business, if you can call it that, a little bit slower than what you've said in the last two quarters. So just curious, is it just the conversions that are lumpy that you saw this quarter, or are there other things that you would highlight, I think? In the second quarter you've got, obviously, tax season. A lot of money was made last year in stock markets. Maybe there's some other seasonality you would highlight. So just talk a little bit about what you're seeing there in terms of the flows that you're getting.

I think just even the way you framed the question shows a textured understanding of it, Alex. The first quarter was very high activity, above trend, above expectations. The second quarter was very strong from an organic same-store sales basis. But we did not have the organic conversion activity that we did in the first quarter on the AUMA side. And as I mentioned, that's lumpier, and there's going to be very strong quarters with respect to our AUMA conversion activity, and there's going to be quarters that aren't so strong. The second quarter was one that wasn't so strong.

Okay, fair enough. So then maybe secondly, on Placemark -- this is more of an understanding question -- but I think you just talked about 2016 as the integration year and also the closing -- well, not the closing of the transaction -- obviously, it's the end of this year. But also closing of the integration. So just curious, why does it take a year between closing the transaction to actually starting the integration? And then -- obviously, you have a lot of other things going on -- but at the same time, does that preclude you from any sort of upselling or anything like that, that could also drive upside already in 2015?

So that's a great question. I'd just say several things about that. First of all, we are responsive in the marketplace to opportunities like Placemark. Placemark is a transaction -- it's a company that we believe exceeded all of our hurdle rate requirements. It is a very solid consolidation opportunity, but it brings strategic opportunity as well. It strengthens our overlay capabilities within ultimately the PMC part of our organization. It also strengthens our foothold, our presence, if you will, in the full-service regional broker-dealer marketplace.

Now, they have a very stable Web-based platform that we're not in any urgency to convert their client base off of. Now, part of that is we're trying to balance the business where we believe that the organic conversions and the organic growth are the most important part of our growth. And we're very cognizant that we've got the same conversion teams that are doing organic conversions as are doing the strategic conversions.

So what we're looking to do is to balance that workload. We don't want to do anything that would slow down our organic rate of growth. We're still working through the final stages of the WMS conversion. And so we see that the best approach is to take a little bit longer time to do the full conversion.

Now in the meantime, that does not in any way foreclose or slow down our efforts at doing some cross-sell and upsell opportunities to the Placemark client base. Now, we're not even closed on the transaction yet, but we reasonably expect that we will see some benefits from that much earlier than when the conversion is going to take place.

So we've got a high degree of enthusiasm about the revenue opportunities for this transaction. And the longer timeline for a complete conversion, I do not believe will eliminate or even slow down our ability to do some of those cross-sells. And there are reasons why, but I think I've given you enough of an answer without going into the details of how we would run the business and do some level of integration before we do the complete conversion.

No, that's great. It's very helpful color. Maybe just lastly, and it's somewhat following up on a comment you just made, because you said upselling and cross-selling. I think that's actually something that you haven't talked about on these earnings calls in a while, because it's been all about conversions and things like that.

But can you give us some updated stats in terms of where you see upsell and cross-sell activity? Because in the past, there's been opportunities to bring in, let's say, like reporting, for example, and then take that as a start and then over time get deeper penetrated with these advisory firms or advisors in and of itself. So any updated numbers or wins you can share on that end? And that's it for me. Thanks.

So, Alex, we monitor that. That's something that's important to our business. We do not disclose, and we do not track that externally. Part of it is just that we don't believe that that would be, in the long run, helpful to monitor that each quarter. But from an internal standpoint, we monitor it, we manage to it, and we have strategies in place to try to do that upselling and cross-selling.

The most recent experiences -- there's been anywhere from $200 million to $1 billion per quarter of upsell opportunities. And that's something that bounces around, and so it's something that's an important part of overall revenue enhancement. But it's not something that we're going to be reporting on a regular basis.

No, that's fine. Just looking for some color that you're still very much focused on it and it's moving in the right direction. So I think it helped. Thanks.

Peter Heckmann, Avondale Partners.

Nice results. I wanted to ask primarily as regards Placemark, understanding the deal is not done, but in terms of trying to pick a first path at modeling the deal, can you talk a little bit more about how you expect it to fold into the results? Maybe what type of fee rate you might expect on the $14 billion of assets? And then as well, maybe some early expectation of how that might fold in on the gross margin line?

Well, we're still going through the due diligence on our contract analysis and how that revenue should be treated, so I'm going to stay away from the basis-point impact. But I will say in the nearer term, we would expect around $500,000 or so per quarter incremental to adjusted EBITDA until the 2016 timeframe, when we should leave 2016 much closer to hitting that hurdle rate that Jud articulated earlier.

I see, okay. And when we talk about final conversion in 2016, I assume we're talking the second half? But is it too early to put a finer point on it?

I think it's still too early to put a finer point on that, Pete. I understand why you want it. I understand why the model needs it. But as we get closer to this, as we complete the acquisition, we'll give better guidance on that.

Sure, sure, fair enough. And then last question and I'll get back in the queue. On WMS, we were talking about potentially one or two or three, I think, is roughly the number of institutions we were talking about sneaking into 2015, and really trying to avoid a conversion in fourth quarter. Given the advancement of time, can you put a finer point on final conversion there? Is that something we would expect in maybe the March-April-May timeframe of 2015?

So I think that -- again, we're getting closer to getting a better picture about it. I don't know if there's a lot that I would add from last time. I expect that one or two will get across the finish line by the end of the first quarter, and I think that one or two may go later into 2015. But I expect that we're going to be exiting 2015 with the full benefit of the post-conversion dividend.

Got it, got it. I appreciate the feedback.

Hugh Miller, Sidoti.

So one question just touching back on the upselling, and I completely understand that from quarter to quarter, it's extremely lumpy. You guys track it and aren't looking to give metrics on it. But as that being a huge long-term driver of additional growth, what's the feedback that you're hearing from advisors over time as to if they may be reluctant to move on to using additional services from you guys? And how have you adjusted things in order to make it more appealing to them? Is there something that's getting them to be more open to using more of the platform?

There is a high degree of openness, willingness to try, and even acceptance for more services from a trusted partner like Envestnet. But the differences by channel are very important. If we take the independent broker-dealer channel, many of those have their own in-house investment solutions. So upsell opportunities are limited from performance reporting to rebalancing and portfolio management software, and to a limited degree, third-party access to strategists and separate account managers. But there's limited opportunity, in many cases, to PMC portfolio solutions.

And so the opportunity and, over time, it reveals itself in higher revenue and higher assets per advisor in that channel. Over time, it's clear that we're making progress by doing more business at the account and the revenue level from each advisor.

On the RIA side, it's a bit different. They may start with a need for rebalancing software and then migrate to rebalancing plus performance reporting, and ultimately rebalancing plus performance reporting plus CRM. And so what we look at over time is metrics like accounts per advisor, revenue per advisor, contract value per practice. And all of those things are trending very favorably for us, and we're looking at that and finding, okay, there's a tremendous opportunity to do more business with our core advisor base.

Now, while that's happening, we are also benefiting from huge growth from organic conversions that are coming in in chunks, generally speaking, for one of two different product or service offerings. One is that base advisor as portfolio manager, that APM rebalancing offering. And the other one is the performance reporting offering. And so those come in, and because they come in in chunks, it sometimes crowds out or drowns out some of the very meaningful progress we're making with existing clients, existing advisors to migrate them.

But we're finding a key element of our message is resonating very well, and that key element was supported by the I case study that we had conducted last year, and I've cited it many times. And that's that advisor practices that use a fully integrated or a fully unified wealth management technology solution spend 40% less time with back-office and technology problems. That translates into 90% more face time with clients. And that translates into an astonishing 110% faster growth in their practices on a per-account level than practices that don't use a fully integrated suite.

That core message is resonating. Now, it doesn't resonate overnight; it resonates over time, over quarters and over years. And that's our fundamental value proposition, that when you use a unified solution, your practice gets lift. And that's resonating, and I expect that it will continue to be a core driver of our growth over the long term.

That's a very helpful insight. Thank you. And in some of the prepared remarks, you talked about the conversion pipeline and the candidate conversions that you're looking at and trying to get in the pipeline. It seems to be, from what you are saying, larger in average size than what you have seen in the past. Is that correct? And if so, is there a particular reason why these potential conversions are growing in size, aside from market appreciation and those types of things?

Yes. So yes, that is true; you heard me correctly. It's an encouraging aspect of our business if you look into the pipeline of enterprise conversion opportunities. And you asked the question, "Well, why is that?" And I think that there's several factors. One is that as Envestnet proves up its solutions, firms that might not have considered us 3, 4, 5, or 6 years ago are now taking a second, and even in some cases, a third look at us. And while they may have passed on the first, or in some cases, the second try, they are now signing up with us.

Now, why is that? Part of that is that we've grown, we've proved up the solution. That opens up new doors of opportunity for us. But I also think that's a positive sort of Envestnet-centric element.

But I think that there's a very powerful element that is beyond Envestnet that I think is accelerating some of this. And it's the development of mobile technology that enables advisors to run their business away from a desktop. And I believe that this is driving primary demand from advisors who want more flexibility in how they render their wealth management. And advisors that are with captive, legacy, mainframe systems are having a tough time getting those systems into a Web-based or a tablet-based environment.

And so I believe that that's a powerful external motivating factor at the home offices, at the very highest level, the CEO level, that the presidents that run the distribution arms of these firms need to be, want to be, responsive to their best advisors, who want that mobile solution now. And I think, increasingly, large firms are concluding that they're going to get a better solution faster and ultimately more cheaply by partnering with Envestnet than in developing it in-house.

Great color there. I do appreciate that. And another question, just with regards to as we take a look at the WMS acquisition and the time period between purchase and integration, and now Placemark and that kind of time period, given how busy you are at integrating those deals and also the organic conversion pipeline, does that make you guys more selective when you consider other consolidating or strategic transactions? Or is there the mindset that you just do more hiring in order to get something else to be a part of the system, if it makes sense to do so?

So that's a great question, and I was not prepared to answer that, so I'm going to answer that, but it may not be a fully thought-through answer with respect to how we exactly approach that.

I would like to first of all talk about consolidating transactions, and then I may have a little different approach on the strategic transaction. On the consolidating transactions, we've been very selective and very disciplined in making sure that they meet or exceed our required hurdle rates. I don't see those required hurdle rates either being lowered, nor do I seem them being increased. I think that we've got a core operating competence of doing large-scale and complex conversions, and we want to leverage that through disciplined strategic activity.

Now, having said that, we're trying to balance doing that activity in a way that it does not impede, slow down, or mitigate in any way our very strong organic growth, our organic conversion growth. And so from there, it would not be a bad conclusion to draw that over the next 6 months, there may be a decline of consolidating acquisition activity. That would not be a crazy conclusion to make.

Strategically, we continue to look for and are evaluating how best to round out our offering for advisors who depend on Envestnet. So I would say that there's a continued high level of discipline around strategic merger and acquisition activity. And, as we've said from when we first went public, we would expect to do more consolidating transactions than strategic transactions. And I expect that that's still the case, but would not rule out a strategic acquisition, and we're certainly not out of the market for doing a strategic acquisition.

Okay, and a great color there. And just a quick follow-up on that. Then as you think about the timeframe in doing these consolidations and integrating them, is there a challenge to hiring some more staff in order to accelerate that process? Given that it seems like you'll continue to have strong conversions and consolidating opportunities, is there any reason why you wouldn't just add some headcount? Is there a reason, either from a financial standpoint or finding the right people?

We have been, and I go back to that first outlook call back in February of 2011. And when I say the first outlook, it was our second or our third quarterly call, but it was the first call that we gave forward outlook and dimensionalized the opportunity in the coming four quarters. I think we have close to quadrupled our onboarding resources since that time, when we signaled we were going to invest in it.

I also signaled at the time that I did not think -- while I thought that our core platform was highly scalable, I was not certain that we would be able to scale the onboarding effort. And I expressed, I think a couple of times, that I thought that a twofold increase in headcount for onboarding would not, in the short run, necessarily lead to a two- or threefold increase in onboarding capabilities, because you have to bring them on and train them.

I think what we have found, and I'm pleasantly surprised, is that while we've nearly quadrupled the headcount, I believe we've very nearly and perhaps increased our onboarding capability by at least that and maybe more. So we're continuing to invest in that area. I see it now as more of a gradual investment. I do not believe that a step function investment in that area is warranted.

But you're right. We don't see any near-term let-up in these large-scale conversions, and we certainly don't want to be shorthanded in that core capability.

Great. I appreciate your insight into that. Thank you so much.

Chris Shutler, William Blair.

So first question just on the guidance, Pete. I don't know if I have my math right here, just poring through the numbers. But it looks like the implied guidance for Q4 on the EBITDA margins, it looks like they would be ramping fairly significantly from Q3 into Q4. So I just want to make sure that that's correct.

Well, I think where we are in Q3 is certainly what we've guided on. There are implied outcomes which are consistent with what you're saying. But again, I'm staying away from being specific about Q4 at this point.

Okay. But you did give the full-year guidance, so it would imply an acceleration, correct?

Yes.

Okay.

As long as things remain as they are right now, that's correct.

Okay.

You know, again, when we do these forecasts, it's in a market-neutral environment.

Right, okay. And then, Jud, just a question to follow up on some of these questions around upselling. And I -- just a question specific to PMC. So how do you see the PMC business evolving over the longer term? I guess what I'm wondering is do you see a much bigger opportunity on the asset management side of the business, longer term, both with BDs? It sounds like maybe a little bit less with BDs, but with BDs and RIAs? Thanks.

We do. We see that our technology supports different practice patterns in different firms that are looking to outsource mission-critical elements of their business. Some firms just want to outsource trading and performance reporting technology. And for those kinds of firm that tend to see themselves as their own chief investment officer, we're going to continue to invest in our solutions.

Other firms want not only that -- that's the rebalancing and the reporting technology -- but also some front-end analytics, maybe some CRM. They also may want help on the back-office side -- account openings, reconciliation, trade administration. And for those firms, we're an outsourced technology provider, but we also do some back-office administration services, and we're going to continue to invest in that.

And the area that is growing very rapidly for us now, which is the PMC area, is for those firms that see themselves more as a wealth advisor, more as the quarterback, more as the CEO of their practice, and they want to outsource not only the wealth management technology and certain back-office services, but they also want a partner in picking funds, picking managers, doing overlay management on those portfolios to generate tax alpha, which in this environment has been an important source of value for a number of advisors. And for that type of advisor, they're going to be looking to a more complete, more holistic solution. We see that that's a growth area as well, and it's a certain kind of practice pattern.

Now, we're not trying to force that solution to the advisor that was in practice pattern A, the one that I started with. But it's all about market segmentation and understanding which advisors are open and actually welcoming of the ability to partner as either a technology platform provider or as a provider of that technology platform plus some value-added services. So we see it as core to our ongoing strategy.

All right, thanks a lot. And just one last one. With the independent advisor networks that I know are an increasingly important source of assets for you guys, just any trends that you'd call out there or any anecdotal evidence that you're taking share, particularly within the IANs that don't use you exclusively, like a Hightower or Focus? Thanks.

So we continue to get a strong, regular source of organic conversion from these independent advisory networks. I believe that in all the relevant cases, our share is increasing at this point, not decreasing.

But just as we are a big believer in open architecture, many of our best clients and best partners are also believers in open architecture. And we like those environments, and we do well in them, because we believe that we've got a better solution, and advisors that have choice will over time gravitate to the better solution that is the most cost effective.

All right, thank you.

(Operator Instructions.) Chris Donat, Sandler O'Neill.

I just wanted a little more color on the conversions. Jud, you had mentioned that this quarter, it was more conversions from larger RIAs, and then you just made a comment, too, about the independent advisor networks being a decent source of conversions. As you look back over the last year or two, are there any trends you'd generalize about the conversions, or are there really a lot of different trends at play here driving your organic conversion activity?

We're seeing strength in all of our channels, and that's independent broker-dealer, RIA, bank, insurance. And the dynamics are different driving each. Some are fairly mature markets with respect to the commission-based to fee-based movement. That is, they're almost all fee-based already. Some still are being driven by that fundamental dynamic of moving from commission-based to fee-based. Some are being driven by trying to consolidate multiple platforms onto a single primary platform, in which case we're benefiting from that in a number of cases.

So we're seeing opportunity in all of our core channels. We're seeing growth at near at or above our long-term targets in all of our channels. And then that's the real story. The timing on any one quarter in some of those channels is going to be lumpy, and sometimes it's going to be strong in one; other times it's going to be strong in another. But I don't believe there is meaningful insight that I can give you that one channel or several of these channels are growing faster than others.

Okay. And then I thought you said -- just looking through my notes here --that you didn't feel any need for a step function --that was it, yes -- no need for a step function in your capacity for onboarding. Can you give us some color on how long of a look you have into future organic conversions? I guess I'm wondering if -- it seems like if you've got a pipeline that stretches as far as the eye can see, maybe you should. Anyway, I could play my role as Monday-morning quarterback as an analyst, just want to get your thoughts, just (inaudible) down a little.

Isn't that one of the things you do best, Chris? All analysts?

Well, yes. Stock-picking, I think there's some doubts, but yes, Monday morning quarterbacking, yes.

No, I'm not saying you personally. I'm just saying analysts in general, right?

Oh, yes, that's what we're here for, right? Just like newspaper columnists and people like that. We don't do anything except pontificate.

No, that's not true.

Right.

So we look at conversions this way. We have to keep dry powder for the breakaway broker that leaves on a Thursday and shows up at the new office at XYZ investment advisory firm on Monday. Because if we don't have that capacity built in, we're going to lose a $300 million or a $700 million or a $150 million advisor that's leaving the wirehouse and showing up at one of our partner firms. So that's one set that we have to keep capacity ready to go and jump in at really a moment's notice.

On the licensing on the RIA side, we've worked hard to get to a point by adding capacity so that, really, for the last 2 or 2-plus years, every quarter has ended with a pipeline that's larger than how it began. And what that resulted in is a lengthening of the backlog. So the backlog, which had been at 5 months, then 6, then 8, then 9, I think that we had signaled a couple of quarters ago that some backlog is healthy; too much of a backlog would have us lose business. So we've been investing on the onboarding capabilities, and we've seen that that backlog now is not getting any longer, and that's a good thing. So the backlog period of time has, for the standard RIA licensing implementation, is not getting longer, and that's a positive thing.

With respect to the third type of conversion -- this is the large, complex enterprise conversion -- we're seeing a lengthening of the implementation periods. I believe this is less because we're under-resourced and more because we have, on the other side of the transaction, our counterparties are larger, more sophisticated organizations that have more elements of quality control, testing, retesting, and they have bigger and gnarlier conversions with longer transaction histories and performance histories. And so I think that that's an element that we're confronting and we're getting on top of.

But that's a dynamic that I don't believe that accelerating into a step function higher is going to help us there. I think what we've got there is we just go deeper with our best teams, flesh it out more, and these will take longer. And then when they land, they're bigger.

So I don't believe it's the right thing, the prudent thing to do, to accelerate hiring in this area. We signaled that we were going to do that in early 2011. It was the right thing to do, and I think that we're benefiting from that investment now. And we're going to continue to make that investment, but it's not going to be a step function.

Got it, okay. That's very helpful, Jud. I appreciate the color, and I appreciate someone using the word gnarlier on an earnings conference call.

I got a few raised eyebrows about that one.

David Grossman, Stifel Financial.

I just have a couple of very quick questions, and I had to hop off for a minute, so if you hit these already, just let me know and I'll circle back offline. But I have two questions. One is related to the cost of revenue line. I know it's been trending down. Some of that had to do with the WMS acquisition that started midyear in 2013. But it continues to go up as a percentage of AUMA revenue. Can you help us better understand what dynamic is going on there, and at what point does that stabilize?

Well, again, I don't know if you missed the comments earlier about the Advisor Summit. But the costs related to the Advisor Summit are in that cost of revenue line. And if you take that out for the second quarter, then the line is really pretty stable.

So flat sequentially, Pete?

Yes.

Okay. So should we expect it to remain now -- the current range, I guess, would be just around 44%, which is where it was in the first quarter?

44% would be total revenue. If you look at it in terms of just AUMA --

Oh, I'm sorry, yes. 51%. I'm sorry.

It will be closer to 51% or 52%, yes.

Right, I'm sorry, yes.

We've been there the last couple of quarters. So again, it looks like it's stabilizing, but product flows will impact that.

Right, product flows impact that. We worked hard. It rose fairly rapidly over the three or four quarters previous to the last two, or last three -- last two or three. And a lot of that was, we believe, just putting that UMA, that unified management account technology, in the hands of advisors. They're picking managers and strategists that weren't necessarily at scale, had different costs -- in many cases, higher costs. And we've worked hard to get ahead of that, and I think we've, rather than getting ahead of it, we've worked hard to stabilize it. And I think we've had some results.

I don't see, in the near term, that that reversing itself. But I do see it as stabilizing, and I think we're going to see it be fairly stable here for the foreseeable future. But that's dependent on the product choices that advisors are making that go into the managed programs.

Right. And just a quick financial cleanup question. Pete, I know you gave some information on the third quarter. But could you help us with what the pro forma adjustments should be in the back half of the year for stock comp and other things like that?

Excluding anything related to Placemark, we had about $3.2 million in this quarter for non-cash comp, which is pretty much stock and options. And that level is pretty close and may level off a little bit into the fourth quarter -- third and fourth quarter.

Okay, so flat for the balance of the year. And how about amortization?

Flat or maybe slightly down.

Okay. Was that stock-based comp?

Stock-based comp, yes.

Okay, okay.

And at this time there are no further questions in the queue. Mr. Bergman, I'll turn the call back to you for any final or closing remarks.

Well, thank you. I do appreciate everyone's participation. I see we're on the top of the hour, and we look forward to talking with you in about 3 months' time. Thank you.

And ladies and gentlemen, that does conclude today's presentation. We thank you for your participation.