Envestnet Inc (ENV) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Envestnet First-Quarter 2015 Earnings conference call. As a reminder, today's presentation is being recorded.

At this time, I'd like to turn the conference over to Mr. Pete D'Arrigo, Chief Financial Officer. Please go ahead, sir.

Thank you, and good afternoon, everyone. Our first-quarter 2015 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 company's similarly titled non-GAAP information. Quantitative reconciliations of our non-GAAP financial information to the mostly 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.

Now I will introduce Jud Bergman, our Chairman and CEO.

Thank you, Pete. I add my own welcome to everyone this afternoon.

We're having a week that is busier than usual. While we are on the call with you, are Advisor Summit is taking place with over 1,500 in attendance here in Chicago.

Many of our top advisers and representatives from top financial firms across the industry are gathered to collaborate on finding ways to enhance their portfolio and practice management. Finding ways to better leverage their use of data analytics, and finding ways to better grow their practices profitably by leveraging Envestnet's unified wealth management technology.

This event is great for the dialogue that it brings, but also in the affirmation our clients give to us. First for our mission, which is to empower advisors to deliver better outcomes to their clients and for their practices. It also affirms our platform development strategy, which consists of tightly integrating the advisor and enterprise app stack and strengthening the engagement between advisors and their [eten] clients, and enhancing the advisor's level of profitability and productivity in their practice.

The feedback also has validated the steps we are taking to fulfill our mission and our strategy. To deliver on our multi-portal platform strategy we seek to unify and fortify the end-to-end app stack that advisors and their institutions use. Sometimes we do this by developing the applications, other times by acquiring applications, and still other times by integrating tightly with other providers all in an open architecture environment.

Turning to results. In the first quarter, we grew our top line by 23% when compared to a year ago. And we grew cash flow for adjusted EBITDA by 43% over the same period. Gross sales during the quarter were $22 billion, including almost $2 billion in assets under management or administration from new client conversions.

The Company on-boarded an additional $15 billion in licensing conversions during the first quarter. Bringing total conversion activity for the quarter to over $17 billion.

Advisors with assets under management or administration are up 19% from year ago. And we now serve more than 29,000 advisors with our fee-based offerings. Including licensing arrangements, more than 41,000 advisors use Envestnet to support their wealth management businesses.

We're also approaching 1 million fee-based accounts on the platform up 26% from a year ago, while total accounts on the platform are nearing $3 million.

We continue to see meaningful opportunities to convert large books of business to our platform from across all channels. Registered investment advisors, independent broker-dealers, insurance broker-dealers, insurers and banks, bank broker-dealers and bank trust departments.

Our on-boarding teams are fully engaged in some of the largest and most complex conversions in the Company's history. As these conversions are completed, we expect to see the benefits in the latter part of this year, and of course beyond that as well.

Turning to strategic activity. Yesterday, we announced the acquisition of Finance Logix, a financial planning software company. As we have previously discussed and indicated, advisors have been requesting for some time now for us to offer a tightly integrated platform where financial planning flows seamlessly in into the investment and portfolio management process.

This expanded capability, long requested, is now a core element of an industry trend towards goals-based wealth management. And this acquisition strengthens our ability to lead in this fundamental way.

Also we announced this morning as our summit that will be launching our next-generation digital advice portal called Advisor Now. Which fully leverages our investment in upside announced earlier, as well as the investments made in our enterprise wealth management platform.

Advisor Now combines our client portal with a fully integrated front, middle and back office platform. By platform, again we mean the app stack that includes CRM, data aggregation, investment solutions, proposal generation, portfolio analytics and accounting. Rebalancing, account servicing, and goals-based performance reporting.

By leveraging technology, we seek to strengthen the ways advisors engage with their clients, and help them deliver better outcomes. And also with Advisor Now, to help advisors form a new advisor client synapse. A new digital dimension of engagement.

We continue to evaluate merger and acquisition opportunities that can further add functionality or scale to our platform. Or add significant strategic benefit or capabilities that expand our network and expand our platform. We are actively evaluating opportunities in the market, and will remain both disciplined and appropriately opportunistic in our ongoing evaluation of these growth accelerators.

I will conclude with a few remarks in a moment. But first, I would like to turn it over to Pete to discuss our financial performance in greater detail.

Thank you, Jud. Turning to the first-quarter results, I will start with revenue.

Revenue from assets under management or administration grew 21% to $81.1 million, compared to $67.1 million in the first quarter of 2014. Licensing and professional services revenue in the first quarter was $15.4 million, up 34% from $11.5 million a year ago. The total adjusted revenue increased 22% to $96.5 million in the first quarter, from $78.5 million in the first quarter of last year.

Our cost of revenue increased to $38.7 million for the quarter, from $34.4 million last year. As a percentage of revenue from assets under management and administration, cost of revenue was 47.7%.

Adjusted EBITDA was $16.8 million for the first quarter, 43% higher than the 2014 first quarter. Adjusted earnings-per-share was $0.22 in the first quarter, increasing 29% from $0.17 last year.

I will note that in the first quarter, our effective tax rate was 44% on a GAAP pretax basis. This higher than expected rate was driven by several factors, most notably related to limitations on the use of certain acquired net operating losses. Our diluted share count during the first quarter was 37.3 million shares, up 800,000 shares from the first quarter of last year.

Looking forward, we expect our revenue from assets under management or administration to be up 17% to 19% in the second quarter compared to the second quarter of last year. This reflects an effective fee rate of approximately 12.9 basis points to 13.2 basis points on our beginning AUMA asset base of $256 billion.

Licensing and professional services revenue for the second quarter of 2015 should be up approximately 29% to 31% year-over-year. This includes just over $500,000 from Finance Logix for the portion of the quarter that we owned the business.

Adjusted revenues for the second quarter should increase between 19% and 21% year-over-year. We expect second-quarter cost of revenues to be between 50% and 51% of AUMA revenue. And I'll point out that approximately $2 million of licensing and professional services revenue and the cost of revenues is related to the Advisor Summit.

We expect our adjusted EBITDA to increase 33% to 35% in the second quarter, compared to the second quarter of last year. Free cash tax interest expense is still expected to be approximately $800,000, with after-tax impact of approximately $500,000 on adjusted net income. We expect our effective tax rate in the second quarter to be approximately 40%.

Diluted shares outstanding should be approximately 37.7 million shares for the second quarter based on yesterday's closing stock price. And these expectations translate to adjusted earnings-per-share of $0.22 to $0.23.

I would also like to point out that deferred revenue has increased by over $4 million from December 31st. And we expect this to increase by another $1 million to $2 million over the rest of 2015.

As Jud referenced, our conversion pipeline is very full and includes some large complex enterprise clients. This deferred revenue reflects payments from new clients that we are in the process of on-boarding under multiple element contracts. While these clients are paying fees for implementation, the recognition of this revenue will not occur until the implementation of these clients is complete, then the amount will be amortized over the expected life of the client.

As we work with more larger clients, we are beginning to see the impact on our financial results -- we're beginning to see the impact of this dynamic on our financial results.

Thank you again for your interest and support of Envestnet. And with that, I'll hand it back to Jud for his closing remarks.

Thank you, Pete.

Envestnet is committed to empowering advisors to deliver better outcomes for their clients. And to do this by developing a truly unified end-to-end wealth management platform.

The developments we have highlighted today demonstrate our commitment to fulfill our mission to advisors, investors and our enterprise partners. As we continue our efforts to both lead and benefit from the far-reaching transformation that is happening in wealth management.

To update our guidance for 2015, we expect EBITDA to grow between 33% and 38% when compared to 2014. And we expect revenue growth of 20% to 22% compared to one year ago.

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

Thank you so much.

(Operator Instructions)

Chris Donat, Sandler O'Neill.

Good afternoon, gentlemen. Thanks for taking my call.

I just wanted to make sure I got from your guidance that you'd just issued there for 2015. So it's basically the same adjusted EBITDA growth, but a little lower revenue growth, so 20% to 22% down from 21% to 24% before. Can you tell me what is driving that, and is it basically what Pete just said, that you're seeing the revenue accumulate in deferred revenue rather than flowing down to the income statement now?

Yes. So there's several factors. I do think one thing that is a factor is that just core advisor activity did seem to ease on a per advisor amount in the first quarter.

Number of advisors are up, number of accounts per advisors are up. But they are not up as much as we have seen in the past. So that is one factor.

A second one is that the big conversions are going to be back-end loaded for the year. That's what we expect.

So last year the big ones were brought on more ratably. We now we expect that they're going to be a bit more back-ended this year. So that's a small -- these are both small factors.

A bigger factor is what Pete talked about. And that is that in these large complex conversions under contract going more or less according to plan, where we are receiving revenue for the actual conversion preliminary stages, as well work that we have customized, development work. This is a relatively new dynamic for us, because it comes from having these complex clients involved in multi-element contracts.

And so there's going to be $5 million or $6 million by the end of the year, is our expectation, that will not be a part of this year's recognized revenue. So that's another element. So that all goes to the top line.

We're continuing to make investments in Alpha Hedge Finance Logix, our retirement solutions business that is showing a lot of promise, but still is in and investment mode.

So that we're balancing the top line expectations with the expanded operating leverage or enhanced operating leverage. And that's why we are able to affirm, if you will, the EBITDA guidance along with the updated overall guidance.

Okay. And then just one follow-up here is on, with your full-year guidance, that now includes on the revenue side that incremental -- sorry was that $500,000 for the full-year?

No. That would be for -- the $500,000 is a portion of the second quarter from May whatever, May 6th on through June 30.

Okay. But then the full-year guidance now, because since you didn't have the Finance Logix before. That was not in the earlier part of the guidance. Right? So the guidance that you had a quarter ago.

That's correct, yes.

Okay. Thanks very much then. I'll our hop back in the queue here.

Peter Heckmann, Avondale.

Good afternoon, gentlemen. I just wanted to see if you could comment on WMS and the conversion of those remaining institutions. Do you have any better visibility into when you may be completed with that?

We do have better visibility. It's a little bit longer along the path. And our expectations there are unchanged from our last communication with you.

Okay. But higher confidence because you're closer to the goal?

Higher confidence, closer to it.

Okay, great. And then, Pete, the cost to goods as a percent of AUMA was a little bit higher than what I was looking for in your guidance. And I'm just trying to figure out, is a portion of that due to the acquisition of Finance Logix or is it mixed? Can you about that a little bit?

No. It's related to the Advisor Summit, which happens in the second quarter. So if you back about $2 million out of the cost of revenues, then you'll see a percentage that's a little more in line with last quarter.

Okay. And then last question and I'll get back in queue. Jud, during your Advisor Summit, clearly we've seen some activity on the acquisition front. What type of demand are you seeing from advisors and their clients for ROBO type solutions?

It seems like we're looking at trying to incorporate that capability. And I'm wondering if you're trying to get ahead of the market? If you're seeing demand from advisors, or you're seeing demand from end clients?

And just how should we think about ROBO advisors and more automated solutions? What does that do longer-term to the fee rate received by advisors?

Boy, there's a lot of points to that. That's like three or four questions, Pete. I'm going to try to respond to them, although I did not write it all down. So before you get back in line, you get a follow-up question just to make sure I'm getting everything.

So first of all, what we're getting on the advisor front. In general, most advisors I would say do not see an acute threat to their business from the so-called ROBO advisors.

Some see no threat at all. Some see a great threat. But the majority see not a significant threat from the ROBO advisors.

Having said that, we have already a number of very progressive or forward thinking, ahead of the curve if you will or whatever you want to describe it as. Advisors who are now running their business, or a major portion of their business on a predominantly, or exclusively digital advice offering that is powered by an Envestnet.

One of the things that I was a bit surprised by, is that if you look at the part of Envestnet's business that supports that type of the practice, it is a handful of firms. But it's about $15 billion of assets, and about 50,000 of accounts or so. So there's a fair number of business being done by advisors who have adopted this digital advice platform and are leveraging it to grow their business.

But they're the outliers. There are very few.

So our capability exists, we're ready to deploy it. But the bigger dynamic, I think, is trying to bring the advisor and enterprise community, the professional advice community to an understanding. That they can leverage their practice, they can reach new markets, let's call them affluent or high net worth millennials.

Ad they may even be able to better service in a more cost-effective way accounts that may be small or smaller than what they have done in the past. It comes back to that enter new markets piece.

Most advisors aren't there, but there's an increase in level of interest. And our booth has been filled with people around the Advisor Now offering. How can I deploy this, when can I deploy it, how does it work, what are the implications to my practice. So it's a long answer.

Some advisors -- there's a big spectrum here. Some advisors, a handful, are way ahead on this. Most are trying to figure what they need.

We're ready to help them. And we talked about helping them cross the digital divide. That digital divide is the difference between where they are running the practice now, and where it really needs to be, in terms of increased engagement with the end client. That's what it's all about.

And they're very good at the person-to-person and face-to-face, but they need a new synapse. And that new synapse is a digital dimension, where they extend their IP, their approach, their philosophy, but it's leveraged and it's extended using Envestnet technology. So it's a long answer. Did I leave anything out?

That was helpful. The only thing that I was looking for an initial comment on is, as they incorporate ROBO advisors, does that change the fee rate that they're getting supplied?

Fee rate, okay. So it impacts it, but not quite in the way that you might think. If you look at the average fee rate charged by the so-called ROBO advisors, it runs from 25 to 75 basis points. We think that the average is probably around 50 or 52 or 53 basis points.

But it is a commoditized advice. It does not include sophisticated tax, estate or financial planning. It does not include sophisticated tax management or tax alpha. It does not include sophisticated vehicle selection.

In many cases, it's a good offering. But it is algorithmically-derived after class selection and allocation, portfolio construction, and maybe rebalancing. So I look at it, one of the benefits of the ROBO advisor is that they're setting a market clearing rate for commoditized digital advice of 50 basis points.

And the vast majority of advisors believe that they at add lot of value beyond that, in financial planning and tax and estate planning, and tax management. And to some extent, in vehicle selection, investment selection. So this is new, it's too early.

Obviously, no one has a crystal ball. But we expect that this will have an affect on some advisors' fee rates. But it will have a confirming effect on the best advisors' fee rates.

That's helpful. Thank you.

(Operator Instructions)

Chris Shutler, William Blair.

Good afternoon. First, I just wanted it touch on the Finance Logix deal, and what is implied in the guidance. So I think you said $500,000 for two months. So would that imply $2 million for the full year?

No. So $500,000 for a little less than two months gets you closer to $900,000 for a quarter.

Okay.

So it will probably be $2.5 million for 2015. But annualized, it is closer to $3.6 million or so.

Okay, that makes sense. And the EBITDA impact is meaningless? Or is there one?

It is incorporated. Right now it's give or take a little bit. It is not meaningful either way.

Okay. And then just one more on the same topic. Placemark revenue in the quarter. Can you give us that?

Placemark was about $6 million.

Okay, great. And then on the conversion commentary, Jud, sounds continued positive commentary there. So just a few. One, just wondering is it more skewed towards AUMA, AUA or licensing?

And then, I know that you are saying you're working on some of the largest and most complex conversions in your history. Maybe just give us a sense what types of firms are in that mix, and what technologies you are hoping to displace.

So there's two that pop to mind. One is a wealth management firm that currently has essentially a homegrown platform with the one of the incumbents in the portfolio accounting system is there. So there is going to be a change in the portfolio accounting system and the resulted portfolio management systems.

There's some customization work and it's a significant conversion for the Company. Another profile would be a large insurer that has not only a wealth management business, but also a brokerage business. And they are looking to incorporate meaningful elements of their insurance business, not their insurance broker-dealer, but insurance business in the reporting, analytics and paperwork automation, new account automation workflow into this new platform.

And this platform again is a combination of stitched together single-point applications from -- you could say they're competitors, but they're competitors in one area. And in that case, there's a couple of people we consider competitors to be displaced. Again, one is a core operating system, and the other is a unified management account provider.

In the former, it's going to be more of a licensed conversion, although there is some AUA involved. In the case of the insurance, again, if you follow somewhat predictable patterns based on the channel that they are, it's more of an AUM/A mix that is not unlike what our current book of business for AUM/A. So, I don't know if any more would be helpful, I don't even know it that's helpful.

That's definitely helpful, Jud. And then just one more, if you don't mind me sneaking it in. I'm just curious on the Finance Logix deal.

Just how the level of integration if you are an advisor, how the level of integration now that own a financial planning company. How that is going to feel different for the advisor, versus some of the other integrations you have with the competitors like eMoney or Money Guide Pro, et cetera? Just how that's going to feel different, and why somebody might want that versus what you had before.

That's a very good question. From the advisor look and feel, I expect no meaningful difference. We expect to have deep integration, let's say use eMoney as an example, we have an integration and we expect to have a deep and seamless integration with eMoney.

eMoney, it's got a lot of very satisfied users, and it is a great software package, platform and practice management. What we do with Finance Logix will also be deeply and seamlessly integrated.

Our vision, which is open architecture, sometimes we'll develop the application, and that is our preferred way of doing it. Because we've got, I don't know, 150, 170 engineers. That is our preferred way of doing it. Sometimes we will acquire the application, sometimes we'll partner and integrate deeply with a third-party provider.

The advantage long-term for us in developing it or acquiring it, which always takes some additional development. Is that when you own the resources and the domain knowledge, and the code base, you can do things that might work better in tandem or in harmony.

So we'll do a deep integration. But their business is going to -- if it's a third-party, we're just going to adapt and evolve in the ways beyond the investment. Because investment, while we're the largest platform provider in this independent space, we're not the only one.

In contrast with the Finance Logix over time, the kinds of features and functionality are going to evolve more in keeping with the Envestnet user base. And I think that that's an advantage for advisors that use Envestnet over time. Either one is great. And that's how we look at it.

All right, thanks a lot.

Thank you. And at this time, with no further questions in queue. I'll turn the conference back over to Mr. Bergman for any additional or closing remarks.

I thank you for your time and your support. Thank you for you for the very insightful questions, and look forward to talking with you soon. Thank you, good afternoon.

Thank you. And again, ladies and gentlemen, that does conclude our conference for today. We thank you for your participation.