Envestnet Inc (ENV) 2016 Q4 法說會逐字稿

Good day, everyone, and welcome to this Envestnet fourth-quarter 2016 earnings conference call. Today's call is being recorded. At this time I'd I like to turn the conference over to Mr. Chris Curtis, Division CFO and Head of Investor Relations. Please go ahead, sir.

Thank you and good afternoon. With me on today's call are Jud Bergman, Chairman and Chief Executive Officer; Pete D'Arrigo, Chief Financial Officer; and Anil Arora, Vice Chairman and Chief Executive Envestnet Yodlee. Our fourth-quarter 2016 earnings press 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 similar non-GAAP information for other companies. Quantitative reconciliations of our non-GAAP financial information to the most directly comparable GAAP information appear in today's press release.

During the call we will also be discussing certain forward-looking information. These discussions are not guarantees of future performance and, therefore, you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause them to differ materially from what we expect. Please refer to our most recent SEC filings, as well as our earnings press release, which are available on our website, for more information on factors that could affect these matters.

This call is being webcast live and will be available for replay for one month on our website. All remarks made during the call are current at the time of the call and will not be updated to reflect subsequent material developments. We will take questions after our prepared remarks. With that, I'll turn the call over to Jud.

Thank you, Chris. I add my own welcome to everyone, and thank you for joining us on relatively short notice. Today we will review our results for 2016, including the fourth quarter, provide an update on the matters driving our delayed 10-K filing, and discuss our outlook going forward.

In 2016 we again delivered double-digit organic revenue growth and total revenue growth of 38% with a full year of Envestnet Yodlee included. Adjusted EBITDA increased 31% due to overall growth, increased margins at Envestnet Yodlee, and also contributions from the WMS and Placemark consolidating acquisitions. And while we saw slower than normal growth earlier in the year, during the fourth quarter operating metrics showed improvement, advisors with asset-based revenue increased 8% year over year, and accounts per advisor grew 10%, resulting in total account growth in the high teens.

We also faced some challenges in an otherwise solid year. Redemption rates were higher than expected, negatively impacting the net flows of assets onto our platform. Some of this may be attributable to the shifts underway in the asset management industry as assets migrate from active to more passive or rules-based strategies. Uncertainty related to the Department of Labor's fiduciary rule diverted the focus of many broker-dealer clients, resulting in a slowdown in advisor activity.

We also experienced some client-driven delays in large conversions. Over time we have shown that conversions are a reliable contributor to our organic growth, but proved in 2016 that they can be unpredictable in the short term.

And, finally, even though our sales pipeline was strong for Yodlee synergies, and we registered some important wins, translation into recognized revenue was slower than we had originally expected. On the other hand, market activity was beneficial for the year and we surpassed several important milestones, including $1 trillion in total platform assets.

With respect to our 10-K filing, we believe we will file our Form 10-K in the next few days. The cause of the delay relates to our evaluation of the potential exposure to sales and use tax in certain jurisdictions. Initial work on reserving for this exposure is complete and we have established a liability of $6.2 million related to 2016 and prior periods. On a go-forward basis we expect little to no impact on our financial results as such tax would generally be treated as a pass-through.

While the exposure is relatively modest, this is an important issue and we are devoting all the necessary resources to addressing it, both on a historical basis and moving forward. Additionally, pursuant to our obligations under Sarbanes-Oxley we have identified certain inadequacies in staffing and control processes in our accounting and finance organization which affected our control environment and ability to complete our 10-K on time. The control deficiencies, which will be reported in our 10-K as material weaknesses, primarily relate to non-routine transactions, our state and local tax compliance process, and documentation requirements.

Management, our Board and the audit committee take this very seriously, and remediating these deficiencies is a very high priority. Remediation efforts, primarily aimed at increasing, strengthening and better aligning our resources, are underway. Until we remediate these deficiencies we are scaling back any acquisition activity. 2017 will be a year of execution, including delivering solid organic growth, addressing our identified obligations under Sarbanes-Oxley, and delivering on the strategic and financial opportunities we see with Yodlee.

Now, continuing our review of 2016, with respect to prior strategic activity, the WMS integration was completed in June 2016. We realized the full incremental benefit in the second half of the year as a result of cost savings, and expect those contributions to continue.

As part of our integration of Placemark we were able to accelerate the earnings contribution from Placemark throughout 2016. We expect to achieve on schedule the original return on invested capital target we established when we announced the transaction late in 2014.

Yodlee cross-sell activities continue to show great promise. Building on notable client wins in 2016 including Morgan Stanley and United Capital, our sales teams have been successful in signing several more blue-chip customers for the Yodlee data aggregation and integrated investment wealth management offerings, including RBC, Robert W Baird, and Principal Financial.

With data aggregation and analytics now available as part of our core wealth management offering to enterprises and advisors, and with the success we have seen selling integrated wealth management solutions, including financial planning and data aggregation, we remain confident that we will achieve the $55 million to $60 million revenue hurdle for synergies by 2020 to exceed our return on invested capital threshold for the Yodlee transaction. Looking forward, we believe we have all the pieces in place, and it's a matter of execution for us to achieve our mission of becoming the financial network that provides intelligent systems and data analytics that deliver better outcomes for our enterprise, advisors and the clients they serve.

We expect to achieve this through three broad offerings. Our integrated wealth management technology offering to enterprises, advisors and institutions improves productivity and helps deliver better outcomes. Second, our fiduciary solutions provide access to an array of investment offerings across asset classes and strategies, and include innovative solutions like active-passive portfolios and quantitative portfolios, as well as research and other fiduciary services. And, third, investment data aggregation in analytics offering provides actionable insights and intelligence to advisors, enterprises and investment managers.

Benefiting from tens of thousands of advisors, millions of investment accounts, over $1 trillion in advisor supported assets, and many trillions in aggregated consumer financial transactions, Envestnet is uniquely positioned to provide the data analytics that drive better outcomes for our clients. This capability in data analytics is still in the early stages of development and growth.

These three basic offerings -- software as a service, fiduciary solutions, and data analytics -- are the building blocks of the financial network we are enabling. This network is supported by more than 3,000 employees worldwide, providing expert service to our clients who themselves are experts in designing sophisticated financial plans and investment programs for their clients.

We have developed an expert-centric intelligent platform that mitigates human error and enables the expert advisor to focus on the things they are uniquely capable of doing -- client coaching, helping clients navigate a confusing world of information overload, estate planning, financial planning, tax management, and more sophisticated goals-based planning. We believe the winning paradigm in the future for wealth management is not humans or machines, we believe it is humans plus machines that can deliver the best outcomes. And this is our vision of the future -- expert-centric intelligent systems for financial wellness.

We believe Envestnet is going to be the leader in providing these solutions. With that, I'll turn it over to Pete to provide more detail on our fourth-quarter results and outlook for the first quarter.

Thank you, Jud, and good afternoon, everyone. Briefly summarizing Envestnet's fourth-quarter results comparing the fourth quarter of 2016 to 2015, revenue and adjusted revenue grew 31% to $156 million, asset-based revenue grew 12% to $93.5 million; Subscriptions and licensing revenue increased more than 86% to $55.8 million, up from $30.1 million in 2015; professional services and other revenue increased 20% to $6.1 million. Growth in our subscription and licensing revenue, as well as our professional services and other revenue, benefited from the inclusion of Yodlee's results this year for the full quarter compared to only a partial quarter in the prior year, with the acquisition having closed in November 2015.

In terms of composition, recurring revenue was 96% of total revenue during the quarter. I'd also highlight that revenue from subscriptions and licensing increased to 36% -- adjusted revenue -- from 16% in 2015.

GAAP net loss was $32.6 million compared to a net loss of $3.9 million a year ago due in part to the large increase in intangible asset amortization related to the Yodlee acquisition. Two other items I will point out affecting our GAAP results in the quarter. First, within general and administration expense is a net charge of $6.2 million to establish a reserve for potential sales and use tax exposure. This liability is an estimate based on current information and assumptions, and we will make updates in future quarters based on new information.

The second item relates to our net operating loss carryforwards. From an economic and practical perspective we continue to believe we will fully utilize our NOLs and other deferred tax assets. However, among other factors, given the cumulative pretax GAAP loss over the past three years we booked a full allowance against our deferred tax assets. Accordingly, our income tax provision in the fourth quarter includes expense of $26.3 million to establish that allowance.

We are still in a position to utilize net operating losses for federal taxes over the next several years, making our effective cash tax rate virtually zero. However, we will have cash obligations still for foreign and state taxes. For adjusted purposes for adjusted net income and adjusted earnings per share we continue to assume a tax rate of 40%.

Adjusted EBITDA for the fourth quarter was $30.4 million, a 35% increase over the $22.5 million we reported last year. Adjusted earnings per share was $0.32 in the fourth quarter, $0.04 or 14% higher than the fourth quarter for last year of $0.28.

During the fourth quarter we benefited from an additional $500,000 contribution from Placemark. Throughout 2016 we achieved an incremental $6 million of run rate EBITDA at Placemark through cost savings, which adds to the $2 million of EBITDA the business was generating annually when the acquisition closed back in 2014.

Moving to our outlook for the first quarter of 2017, which is also included in our earnings release, in the first quarter we expect total revenue to be between $153.8 million and $156.3 million for the quarter, up 17% to 19% compared to the prior year. This comprises asset-based revenue of between $93 million and $93.5 million, or a 12% to 13% increase compared to last year, reflecting an effective fee rate of approximate 10.7 to 10.8 basis points on our December 31, 2016 AUM/A asset base of $347 billion. Keep in mind that market appreciation within a quarter, if any, does not have a meaningful impact on our revenue until the following quarter because we bill in advance for the majority of our asset-based revenue.

Subscription and licensing revenue should be between $55.8 million and $56.8 million, or 28% to 30% higher than last year. Professional services and other revenue should be between $5 million and $6 million. Cost of revenue should be between $48.5 million and $49.5 million.

Similar to last year, we expect operating expenses to increase sequentially from the fourth quarter due to the seasonal nature of certain items, particularly personnel expenses, mainly payroll taxes and other benefits, all of which are significantly higher in the first quarter compared to the fourth quarter. As a result, adjusted EBITDA should be between $24 million and $25 million in the first quarter, which is 25% to 30% higher than last year. The percentage growth in adjusted EBITDA is expected to exceed our revenue growth rate due to continued operating leverage, as well as year-over-year contributions in 2017 from WMS and Placemark.

Using a normalized GAAP tax rate of 40%, and assuming approximately 45.6 million diluted shares outstanding, this translates into adjusted earnings per share of $0.24. Thank you again for your interest and support of Envestnet. And with that I will hand it back to Jud.

As discussed in previous calls, we target organic revenue growth over the intermediate to longer term to be in the mid teens. In any given quarter or year we may be higher or lower due to a variety of factors but this is our targeted growth rate. Targeted levels of growth assume normalized conversion activity -- stable but not increasing capital markets, ongoing realization of synergies, contributions from subscription-based revenue, growth at or above the high end of the given range, and asset-based revenue growth at or below the low end of the target range.

Specific guidance for this year, for 2017, incorporates these factors. Risk adjusts certain growth drivers to reflect the less predictable aspects of the timing and amount of their impact over the shorter term.

For the full year we are establishing guidance of 12% to 14% growth in adjusted revenue compared to 2016, or a range of $650 million to $660 million. This range balances risks with opportunities in our plan. In particular, with respect to contributions from conversions and synergy revenue, we have factored in the potential for some slippage in terms of timing from our target growth rates.

From an earnings perspective we target growth in adjusted EBITDA to be greater than our growth in organic revenue. In 2017, based on our revenue outlook, we might normally expect adjusted EBITDA to grow between 14% and 17%. However, in 2017, as Pete mentioned, we expect to benefit from the incremental contribution from both WMS and Placemark. Accordingly we expect adjusted EBITDA to grow 21% to 27% compared to 2016 to a range of $120 million to $126 million.

The financial network we are empowering is a culmination of more than 15 years of successful innovation and disciplined strategic activity. We now have the integrated solution that deepens understanding of the client, accelerates client onboarding, automates the major activities required for wealth management and financial wellness, and turbocharges advisor and enterprise productivity. This results in better intelligence, better outcomes and ultimately better lives for Envestnet clients.

Thank you again for your time this afternoon. Thank you for your support of Envestnet. And with the completion of our prepared remarks, Pete, Anil and I are happy to take your questions.

We would take the first call are Chris Shutler from William Blair.

Hi, guys, good afternoon. First, on the Q1 guidance, the AUM/A revenue looks like it's expected to be flat or even down a touch sequentially. I know AUM and AUA assets were up nicely Q3 to Q4. I also recognize the fee rate guidance. But maybe you can just dive into that a little bit more and why you would expect it to be flattish quarter over quarter.

I think what we're seeing is the effect of that industry-wide change or shift from active management to passive management, and the cost of the vehicles that are reflected there. Industry-wide, I think mutual funds saw somewhere in the range of $500 billion of flows to passive, and a similar amount out of active. So, as that trend continues, that affects the mix of assets within AUM, and overall affects the average fee rate. That is the 11.2 to 10.7 or 10.8 in the guidance.

Okay, got it. So, it's a mix issue of active versus passive. There's no significant fee compression within your existing clients or anything like that?

Nothing unusual, no.

Okay. And then on the full-year guidance, when you talk about it being risk-adjusted for conversions and synergy revenue, I don't know if you can dive into that a little bit more, maybe what you are assuming for both of those items at each end of the range.

I think, Chris, I will basically repeat, the target range is what we expect over the intermediate to longer term and normalized. Here is the business that signed up, here's the contractual conversion activity, here is the sales pipeline and the contracts we have from cross sell. And if we get those brought on in the timing that we expect, then we would generate target organic growth rates in the mid teens. Those are targets.

We found in 2016 that there were delays in conversions. And we found out there were delays in realizing some of the cross-sell synergies. This is a dynamic that we do not want to repeat in 2017 or 2018, and so we have incorporated some expected slippage in those two items.

The other items tend to be much more predictable -- advisor growth activity, account growth per advisor. Although it's slower than it had been in the 2010 to 2014 timeframe, it has stabilized and it showed some positive signs of life in the fourth quarter. And then the user base for subscription-based services, whether they are data aggregation or data analytics or advisor-based subscription, much more of a predictable growth rate.

What we are really looking at handicapping is not the core drivers of the organic growth in terms of advisors, accounts, consumer-users or advisor-users on subscription, but more the factors that are a little harder to actually predict, and that is the convergence and the cross-sell synergies. That's the difference between guided growth of 12% to 14% and target growth in the mid teens.

Okay, got it. And then, Jud, just one last one, bigger picture question, I just wanted to get your thoughts on, I think there has been a custodian and maybe a few other software providers out there talking about this concept of a model marketplace. Where do you see that being a real competitive threat, or where won't it be a threat?

We see it as a competitive dynamic that is beneficially driving our business. The percentage of model-based separate account managers that we are delivering is growing every year. That is at the expense of traditional manager-initiated models. We are very well-positioned for that, including we are the core enabling technology for the MMI hub and we expect that, that will over time, become an industry standards type benefit to the Company, although not a tremendous revenue benefit.

Also, with the marketplace of strategists that we have, I believe it's the broadest, widest network of third-party strategists. Many of those strategists are essentially model providers, providing basic asset allocation, basic portfolio construction, and very simple vehicle selection -- for example, ETFs. And they have very low-based models, is what their offering is.

So, what you see in the AUM/A line where Pete has indicated this continuing mix shift from traditional active strategies to more emerging passive or rules-based strategies, you are finding that advisors have access to the simple models at lower rates than what they have for the fully packaged traditional TAMP offerings of bundled asset allocation portfolio construction, vehicle selection and rebalancing. I think you followed what I said there, right?

I do. That's helpful, Jud, thank you.

It is a trend that I believe benefits the end investor. I think it's a trend that benefits advisors, to some extent. And we are in the forefront of that. Having said that, that has an impact in terms of the product mix and the financial yield per dollar of invested assets. And that's not positive.

Got it. Thank you.

We'll take our next question from Surinder Thind from Jefferies.

I'd like to touch base on Yodlee. Can you provide some color around what the Yodlee revenues were for Q4? And, then, how should we actually be thinking about the growth of that business as we look across 2017? It sounded like you were a little bit more cautious on maybe the synergies that are being generated there.

I will take that. Surinder, thank you for your question. Our revenues for the fourth quarter were $36.5 million, which was very close to the number that we had projected for the year. I think it was a few hundred thousand dollars off. And that was primarily related to the synergy revenue recognition that Jud and Pete have referenced where we are signing deals but we cannot recognize revenue until we launch some of the customers that we have signed. What that represents for the full year is strong revenue growth and exceptional EBITDA growth for the Yodlee business. And I think we feel good about the underlying fundamental drivers of the business that we discussed before.

Understood. And then in terms of the actual offering itself, if you were to rewind six months, there was a discussion of the second phase of Yodlee in terms of going beyond just the live data pulls into the FinApps and stuff. How should we think about where that offering is in terms of the rollout of the product?

I think what we had said, just to summarize what you had alluded to, that our integration into Envestnet, and with a slight lag our integration into Tamarac, would go in phases, with the first phase being data aggregation, the second phase then with various applications -- as we call them, FinApps, and then simultaneously data analytics. All three of those are on track in terms of our integration efforts.

As we have emphasized before, there is no conversion related to offering Yodlee as an integrated service, as it has with some of the prior acquisitions. It is a simple API integration. We are currently live on the Envestnet integration launches that we have spoken about before and just recently went live with the Tamarac integration, as well.

Understood. There was an earlier question around the fee rates, and we talked about the active-passive mix. It seems like the push towards passive is fairly relentless at this point. How should we maybe be thinking about the evolution of the fee rate? And then, maybe, or perhaps a different way to think about the question is where is the mix in your client base right now in terms of active versus passive?

I'll answer the mix question. I think this is similar to trends we have seen over the last couple of years, not just with the major breakdown of asset-based fees between AUA and AUM, but now more recently we have seen an impact in those categories, particularly because of the shift within AUM. Several years ago we had talked about our average fee rate of AUM approaching 40 basis points. Because of what we've seen over the last year and a half or two, it is in the mid to upper 20s now. That's a number we've talked about, but it's also reflective of that trend. In terms of larger and broader dynamic, Jud?

The RIA channel, which primary acquires or buys our service on a subscription basis, but also oftentimes is the leader in establishing of best practices, for the most part the leading advisors have adopted strategies that often favor passive or sometimes factor-based lower-cost investment at the core of a portfolio, supported by satellite strategies in areas like small cap growth, mid cap growth, emerging market growth that are active. Because they source our services and our technology using subscription, we don't have a delta or a change as that continues to take place in the RIA channel.

In the enterprise channel, which consists of independent broker-dealers, bank broker-dealers, insurance broker-dealers, regional broker-dealers, bank and trust companies, there is an emerging model, and there is a continued growth of the passive or the rules-based factor-enhanced strategies. I don't know where it will end and we are not focusing on that. We are focusing instead on providing the full range of activity and options, alternatives, that those representatives within those enterprise firms are looking for. We're seeing that in terms of increasing flows, increasing accounts. And you are seeing the additional effect, the corollary effect, of seeing some decline in the average yield or average fee rate.

Understood. And then maybe just a really quick question here, just regarding the growth in the adjusted EBITDA, you alluded to this earlier that probably you're in the 14% to 17% range. And then when you add WMS and Placemark the incremental adjusted EBITDA from those activities, did you say 21% to 27%?

Yes. The 12% to 14% would compound out to a number higher than that or greater than that. For example, one way of calculating that would be 14% to 17%. And then when you take that core growth rate in the business, apply it to the generated EBITDA, and then add the synergies from WMS and Placemark, that's what drives you to that 21% to 27% growth year over year that we are guiding to for adjusted EBITDA.

Understood. Thank you. That's it for me.

We'll take our next question from Peter Heckmann with Avondale.

Good afternoon, everybody. Can you go over your comments on Placemark again? I wasn't quite clear. I think you said the conversion was tracking towards completion but then you discussed some synergies that were produced through 2016. Can you talk about when Placemark will get to that full run rate and the conversion will be complete?

When we acquired the business in 2014, we had set out a target in the range of $12 million to $14 million of incremental EBITDA that it would provide. And it was generating about $2 million a year at the time we acquired it. With cost savings, which we had initially targeted for the first quarter of 2017, we expected an incremental $10 million to $12 million of EBITDA based on the integration of the business.

Throughout the course of 2016 we had updated activities that had taken place here where we had managed to accelerate some of that cost savings throughout the year. So, when we finished the year there was an incremental $6 million already in the baseline. The incremental $4 million to $6 million is in the guidance for the full year of 2017.

Got it, okay. That's helpful. And then forgive me if I missed it or if this is a stupid question but was there an item within depreciation and amortization in the quarter that served to lower that number? Why was there a sequential step down from the third quarter?

Which line?

Depreciation and amortization, $14.1 million.

We will follow-up with you on that one.

Okay. And then, just last, I don't know if it is too early, but any preliminary commentary on the renewal of Fidelity and any expectations that might be built into the guidance?

As I said before, the March 31 date that a lot of people are focused on, we don't expect to be an eventful date in any way. As we've indicated, the Fidelity relationship has an evergreen provision in the master services agreement. My expectation is that there will not be a new agreement by March 31 or perhaps any time immediately after that.

Eventually there will be a new agreement. The relationship with Fidelity is strong and it consists of hundreds of three-way contracts between the shared client, Envestnet and Fidelity. And that part of our business, revenue is growing nicely and we expect it to continue. But we don't expect to have any news on a new agreement at any time in the near future, and we expect there to be a continuation essentially as is of the economics of the current arrangement.

That's helpful, Jud. Thank you.

The next question comes from Rishi Jaluria from JMP Securities.

Thank you for taking my questions. A couple quick ones. When we look at the AUM/AUA line items and the different components, it looks like we saw a headwind from the market impact on AUM and a tailwind on AUA. Can you help me square these away together why the impact went one way on AUM and the other way on AUA?

It is less a market impact, it's more probably a flows impact.

And the timing of the flows when they hit within the market within the quarter.

Generally speaking, for the last couple of years -- generally speaking, it hasn't been every quarter but the net flows in the AUA component of AUM/A have been faster and the AUM flows component of the AUM/A have been slower.

Okay, got it.

So, that's not capital market related, it is more demand market related.

Got it, okay. Going back to the guidance and the idea of doing a risk adjusted, I think you have explained well the factors that go into it. But just looking at the guidance and comparing it to guidance that you have given before that may not have had that risk-adjusted portion, how should we be thinking about your guidance relative to guidance of even before, to make it more of an apples-to-apples comparison?

I don't know if I quite understand the question. We are signaling that we think the long-term strength of the business is very solid in terms of growth potential. We think that the growth potential is higher in the subscription-based revenue lines than in the asset-based revenue lines over the near to longer term. That would suggest growth in the 17% or 18% or higher for subscription-based revenue. That would be the target. And the target for expected intermediate to long-term growth in the asset-based revenue would be in the 12% or 13% range.

Now, you can blend those together and you can get something in the mid teens. What we are saying is that is what we expect. But we also expect that, as we are looking to 2017, where buy side and sell side analysts want to model our business as accurately as they can, that it is prudent to take our targeted expected longer-term rates of growth and adjust for two parts that are most difficult to predict, and that is the conversion and the synergy revenue.

In the past, prior to 2016, we have not had the dependency on synergy revenue or conversion revenue that perhaps we have now because our conversion pipeline has grown to be a little bit more large organization dependent, and those large organizations, they create some third-party dependency that, frankly, earlier in our lifecycle as a business we didn't have those dependencies on a handful of very large big conversions. So, apples to apples, it should be seen as our best attempt at guidance for the year with the benefit of an additional year's hindsight around the recent experience on conversions.

Another thing is that we are expecting zero market increase from 12/31. We think the best way to manage the business is to provide guidance based on no market increase from 12/31. Markets could go up, they could go down.

But we have found in the past there has been a discrepancy because many of the analysts incorporate assumptions on capital markets into their models. So, we may have guided to one number but the consensus of analysts may be higher. And a lot of that difference may have been because of an assumption on market. But even on the assumptions on market we have found that people assume that all advisors are going to behave net of fees at 100% of benchmarks, and that is just simply not how it works. There are a number of advisors who beat their benchmarks, there are a number of advisors who don't. And then there are expenses associated with any product, including low-cost ETFs.

We think that the market-neutral assumption is the best way to model this. And we are trying to eliminate differences between what our stated guidance is and what the consensus becomes among analysts. That is a longer answer than what you probably asked for. We think it is apples to apples but we learned a little bit last year.

Okay, got it. That's really helpful. The last one for me, just looking at Q1 and the 2017 guidance, it seems to imply a pretty steep decell in growth rates from Q1 to the remaining quarters. Is this just conservatism? Is this based on your conversion pipeline and maybe deals that have already closed given the almost three months of visibility you have into Q1? How should we be thinking about the trends going on there?

I think it's really pretty much the same answer. We have got a high degree of visibility into Q1. If you look back and look at our current quarter guidance and then subsequent results, they track extremely closely.

We've got the benefit of a 12/31 billing cycle under our belts, so to speak. We also have the benefit of having a pretty good sense of what the pipeline is on anything that will change from that 12/31 date with respect to net flows or net subscription increases in our subscription-based businesses.

The current quarter is always going to be a lot more accurate than the out quarters, so there is that factor. I don't want to just repeat myself on the things that have provided a little bit trickier to identify and to measure. I don't want to repeat myself.

Okay, got it. Thank you so much.

The next question comes from Chris Donat with Sandler O'Neill.

Thanks for taking my question. Pete, I had one for you on the other side of active versus passive and the negative implications for your fee yield. Isn't there an option on the cost of revenue as the world moves [closer], as assets move more passive that the cost of revenue decreases, or it decreases as a percent of asset-based revenue?

We expect that to be the impact but that's not a revenue item.

Right, I just mean it is a partial impact that affects EBITDA.

That's right. From a modeling standpoint, that's the right way to think about it.

It is a mitigator to the impact of the revenue change, yes.

Okay. So, if this trend continues of active to passive we would expect your cost of revenue as a percentage of revenue to decrease.

What we would expect is that both gross and net fee rates would moderate, decline, and that the cost of goods sold as a percent of the gross revenue, the top-line revenue, would also decline.

Okay, got it. And then on the issue of the sales tax and the collection of it, I'm curious if you can talk about how much of the $6.2 million is from 2016 and how which is prior, because I'm trying to look at this through the eyes of your customers who might say -- yes, we get it, it's not Envestnet, it is the local tax authorities. But it's still money out of their pockets. And then if they feel like they're getting a back door fee increase, I'm just trying to think what a normal run rate for this or what for them might be an unpleasant surprise from a tax perspective.

I don't know if the period really makes that much of a difference. We factored in how our approach to implementing a solution here would look based on the aggregate exposure. Going forward, what happened in the past is less relevant to what the impact will be on the client so much, as opposed to the overall business. The business, when we implement it, it is more of a collect and remit type of thing. But we are just including this estimate phase and we will embark on the implementation of it shortly in the next couple days here.

Is it something you've talked to any clients about yet or is this going to be a little bit of a surprise?

I don't want to get too specific. We have had experiences in certain jurisdictions in the past. There is a mix, depending on the sophistication of the client, in large part, what their anticipation or what they may have already done. So, we are just beginning a more broad implementation of that approach.

Okay, that helps. Thanks, Pete.

We next move to David Grossman with Stifel.

Thanks, good afternoon. I was wondering if we could just go back -- I know there's been a couple of questions on this already but just to get the numbers straight on EBITDA and the reconciliation going forward. If we add $4 million for WMS, and it sounds like $5 million for Placemark, that would be roughly $9 million. Maybe I'm not doing that exactly right -- yes, $9 million. It would seem that the residual then is growing around 13% to 14%, and that seems to parallel revenue growth. I may have missed some of the moving pieces that you were describing earlier in the call, but what is the reason that the underlying business wouldn't grow, or the EBITDA wouldn't grow faster than the pace of revenue growth in 2017? Is that all conservatism that you've been talking about or is there something else blended in there that I may have missed?

David, the $14 million to $17 million is about 1.2 times the targeted revenue growth.

The guided revenue growth. The targeted revenue growth we had given, the guided revenue growth is 12% to 14% for 2017. That is guidance. And then if you take some expectation, which we have and we've identified that EBITDA would grow faster than revenue, that would place a calculation of expected EBITDA to grow from operations in the $14 million to $17 million, and then the incremental contribution from the others would be on top of that.

I see. So, we are at the lower end of that range, then, more or less, if I just take the mid point of guidance?

That's correct, yes.

Okay. I think this came up on a prior question but I was also thinking about the spread over the course of the year. To me it looks like you've got to actually ramp the margins up quite a bit over the course of the year to hit the mid point of your EBITDA guidance on the revenue guidance you provided. Am I doing that math right? Maybe my math is, in fact, wrong. But if it is right what are the drivers we should be thinking of that would be creating that lift over the course of the year?

I think it's similar to the seasonality that we saw in 2016 where we had more of the ramp later in the year and fourth quarter had relatively higher margin. Certainly going back to the first quarter, that seasonality plays a role.

Right. I guess that's not the same thing, but then, like you mentioned, we got some incremental synergies from WMS in the back half of the year, as well as with Yodlee. I saw some of that ramp in 2016 to be more a manifestation of some of the costs coming out as opposed to just the national leverage you would get in the business. Again, maybe I'm not understanding all the moving pieces here but it would appear that with those not present in 2017 that the margin lift you are getting is pretty much organic lift from operating leverage or other things going on in the business.

I would not go quite that far, David. I think I understand the question, I understand why that makes sense. But if you think through, let's just take -- and they're relatively small contributors but they do make a difference -- you take the difference that Placemark made in the fourth quarter, you are going to see a full-year effect of that now this year.

You also see one of the results of having relatively faster growth on subscription-based revenue than asset-based revenue is you don't have the cost of goods sold, so that there is a favorability factor going on in the mix of subscription-based versus asset-based offerings. That will have an affect on, if you will, the net contribution margin for incremental dollar of revenue. That's a factor.

And we are continuing to manage expenses and incremental hires very closely. We expect this will be a year -- you were just pointing out something that is right, that as you model it, the year will end -- I don't want to guide to a specific margin expansion but the year will end sequentially nicely higher in 2017, is our guidance and our expectation, than where it was at the end of 2016 for EBITDA margin. And that is reflected in our guidance but it's also reflected in the mix of subscription versus asset-based, and then the full year effect of WMS and Placemark savings.

I see, okay. Thank you very much for clarifying that. And then, just lastly, Jud, I understand the notion behind derisking the estimates with both revenue synergies and conversion, but can you give us perhaps a little bit of an update? You said the conversion pipeline is much larger companies, more interdependencies that make timing more difficult to predict, and I get that. But just based on what you have in progress, can you give us a quick update on where we are on the stuff that started last year but didn't quite get all the way through during calendar 2016?

What we expected in 2016 is now, in every case, in our 2017 guidance. The part that has been derisked, if you will, or risk adjusted is the stuff that is contracted and in process, with a go live date that has been agreed to. And then that go live date that has been agreed to has been, if you will, risk-adjusted because we found that agreed to dates for go live, with the best intentions of all parties, don't always get hit.

The conversion pipeline is as strong as it's ever been. I indicated in my remarks on cross-sell synergies some of the more high-profile or marquee blue-chip clients that are in process right now. Some of those have significant conversion activity associated with it. They are telling me that we're almost out of time. If you want more on this, we are happy to follow-up in the session that we've got scheduled.

Okay, very good, Jud. Thank you.

Our last question comes from Patrick O'Shaughnessy from Raymond James.

Hi, guys. Maybe just one quick one just to put a bow on the conversation around your fee on AUM/A revenues. Embedded within your full-year guidance and your internal planning, what deterioration are you expecting in that fee rate over the course of 2017?

We don't necessarily plan a specific degradation per se. We focus on more of a bottom-up product mix. And where the new assets are coming and the fee rates they come in, that leads to a blended rate. We are not going to disclose that level of specificity on how our models work.

All right, thank you.

There are no further questions. I'll would turn it back to management for closing remarks.

I want to be mindful of everybody's time. I respect the investment you have made to be with us this afternoon and I thank you for it. With that, I wish everyone a successful conclusion of the quarter and a very solid year in 2017. Thank you.

Thank you, ladies and gentlemen. That does conclude today's conference. We thank you for your participation. You may now disconnect.