Chris Curtis - SVP, Treasurer Jud Bergman - Chairman & CEO Pete D’Arrigo - CFO.

Patrick O'Shaughnessy - Raymond James Chris Shutler - William Blair Peter Heckmann - Avondale Chris Donat - Sandler O'Neill Irvin Liu - Stifel Jeff Houston - Barrington Research.

Welcome to the Envestnet Third Quarter 2014 Earnings Conference Call. (Operator Instructions). At this time I would like to turn the conference over to Mr. Chris Curtis, Senior Vice President and Treasurer. Please go ahead, sir..

Thank you. Good afternoon everyone. With me on today’s call are Jud Bergman, Chairman and Chief Executive Officer; and Pete D’Arrigo, Chief Financial Officer. Our third 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 one month on our website. All remarks made during the call are current at the time of the call. They will not be updated to reflect subsequent material developments. We will take questions after our prepared remarks. With that, I will turn the call over to Jud..

Thank you Chris. Hello everyone I add my own welcome and thanks to you this afternoon. We look forward to sharing the results of this past quarter which were very strong. Envestnet enables a transformation in the financial advisory professional toward a more transparent objective and fee based fiduciary practice model.

Transformation maybe accelerating as affluent and high net worth investors increasingly are using financial advisors and as adviser practices continue to evolve to a more fee based business model.

Also advisors are moving to independent practice centers and the firms housing these advisors, registered investment advisors, broker dealers, banks and insurers are increasingly pursing 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 the clients and to support higher standards in the management.

During the third quarter we continue to drive growth on several fronts, we added more than 2600 advisors to our platform bringing the total number to more than 36,000, 25,000 of these advisors have assets under management or administration which now total some 220 billion as a result of advisors continuing to do more business with Envestnet.

We on-boarded a record 46 billion in new assets from conversions during the third quarter reflecting strong demand for our unified offerings from large institutions, and from RIAs.

Nearly 13 billion of the conversions were in assets under management for administration and this was led by a large bank broker dealer using a range of our platforms solutions. We have been dedicating additional resources in this channel, in the bank channel since the WMS acquisition as we believe it is an area of future growth for Envestnet.

Conversions within licensing, total mortgage was $33 billion led by a very large independent broker dealer for whom we’re providing data aggregation and performance reporting. Envestnet Tamarac deployments as continued strongly throughout the quarter.

Our implementation change remained very business and our pipeline for conversion opportunities remains robust, we expect conversions will continue to drive meaningful organic growth in advisors accounts and assets in the coming quarters.

As we have mentioned in the past conversion activity is inherently lumpy as evidenced by this quarter's record volume and you should not expect another $46 billion conversion quarter or really anything close to at any time in the near future.

Excluding our conversion activity, gross sales of assets under management or administration exceeded $18 billion during the third quarter, very high by historic standards. Our redemption figures for the quarter include approximately 3.5 billion and assets under administration that left the platform during the quarter related to a client departure.

The client which had been acquired by another firm migrated it's assets to that firms incumbent solution. This is the first client loss of any meaningful size in more than three years consistent with the previous example, this was the result of merger and acquisition activity in the channel at the underlying client.

Redemption activity in the quarter came in at an average monthly rate of 1.7%. Integration of the WMS operation continues, most of the firms will be converted to the Envestnet platform by the end of this year and a few will remain on the legacy platform until sometime in 2015.

As indicated earlier we expect WMS will deliver approximately 12 million of annual adjusted cash flow once fully integrated.

Placemark, which we acquired just one month ago delivers unified managed account or UMA programs and portfolio management overlay solutions including a patented overlay and tax optimization trading technology and they deliver this for banks, full service brokers and registered investment advisory firms.

The acquisition solidifies our leadership in UMA technology which now supports nearly 30 billion in UMA assets, strengthens our assets under management and portfolio management capabilities and expands our presence in the full service broker dealer channel giving us additional resources to serve a wider range of wealth management needs.

Placemark's platform will initially operate in tandem with ours. We expect to do some cross selling in the meantime but a full integration is not expected to occur until sometime during 2016, at which time we expect to meet or exceed our return threshold for a consolidating transaction.

Envestnet continues to evaluate a variety of opportunities to further accelerate our growth or to extend our unified wealth management platform offering, beyond the ongoing innovation we delivered through frequent enhancements, to the features and functionality of our platforms.

These innovations both home grown and acquired are empowering advisors to deliver client outcomes and also profitability grow their businesses faster than advisors who do not use unified technology.

I will conclude with a few remarks in a moment but I would now like to turn it over to Pete D’Arrigo, our Chief Financial Officer to discuss our financial performance in more detail.

Pete?.

Thank you Jud. Hello, everyone and thank you for joining the call today. In the third quarter of 2014 revenue from assets under management, or administration grew 26% to $74.9 million compared to $59.6 million in the third quarter of 2013.

Licensing and professional services revenue in the third quarter was $13.7 million up 33% from $10.3 million a year ago. In total adjusted revenue increased 27% to $88.6 million in the third quarter from $69.9 million last year.

Our cost of revenue increased to $39.1 million for the quarter from $30.2 million last year as a percentage of revenue from assets under management or administration, our cost of revenue was 52.2% compared to 50.6% last year.

This increase was driven by the continued adoption of our UMA products advisors use for implementing portfolios with third party strategists in addition to revenue growth at WMS each of which carry relatively higher cost of revenue compared to the rest of our business.

Adjusted EBITDA was $14.7 million for the third quarter, 46% growth compared to last year's $10 million, adjusted earnings per share increased to $0.21 in the third quarter which is 50% increase from $0.14 last year.

At the end of the third quarter we had $106 million in cash which included the proceeds from $30 million in borrowings from our credit facility. On October 1, we completed the acquisition of Placemark with approximately $15.4 billion of AUM, 45,000 accounts and 3400 advisors.

We paid approximately $66 million in cash and as a result Placemark's results will be included in our consolidated results for the entire fourth quarter.

We expect Placemark to generate approximately $6 million in revenue in the fourth quarter, and this will all be from assets under management or administration and will be recognized on a net basis meaning there is no cost of revenue reflected in our income statement.

Adjusted EBITDA for Placemark should be at least $500,000 in the fourth quarter and quarterly going forward, until we complete the integrate in 2016.

Looking forward to the fourth quarter on a consolidated basis relative to last year we expect our revenue from assets under management or administration to be up 29% to 30%, this reflects an effective fee rate of approximately 13.9 to 14 basis points on our beginning AUMA asset base of approximately $235 billion which includes the 15.4 billion from Placemark.

Licensing and professional services revenue should be up approximately 30% to 32%, we expect adjusted revenues to increase between 29% and 30% and we expect cost of revenue to be between 48% and 49% of AUMA revenue. Adjusted EBITDA is expected to increase 43% to 45% compared to last year.

Regarding income taxes we expect our effective tax rate for the fourth quarter to be approximately 42%, diluted shares outstanding should be approximately 37 million based on the current stock price. These expectations translate to adjusted earnings per share of $0.22. 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 very well positioned to deliver meaningful organic growth 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 revenue from the WMS acquisition and the fourth quarter that includes Placemark. Based on our year-to-date results in the fourth quarter guidance, Pete provided, we expect revenue growth of 43% to 44% for the full year 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 our retirement solutions offering, we expect adjusted EBITDA, adjusted cash flow to grow approximately 43% to 44% for the full year compared to 2013.

We believe the strength we have seen in our business during 2014 positions us well for growth in the coming years. We plan to provide our outlook for 2014 on our next earnings call in February. 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’re happy to take your questions..

(Operator Instructions). And we will take our first question from Patrick O'Shaughnessy with Raymond James..

So the first question is just on the really, really strong conversions you guys had during the quarter, what happened there? Basically did all the stars align and you had a bunch of things that just kind of closed during the quarter? Is there any particular initiative that you guys had that kind of led to that, kind of what the genesis of this quarter being such an outlier in a positive way for you guys..

Yes. I don’t think there is anything more to add than really what we have said, conversions are lumpy, we do not have a strong conversion quarter in the second quarter.

It was decent but it was below trend and really it was two very large conversions, a large bank broker dealer and a large independent broker dealer, one was AUM and AUA and the other one was licensed transaction for performance measurement and aggregation.

All happened to hit during the third quarter and maybe there was a little bit on the client side wanting to get these things in before year-end that really caused an extra push, but I don’t think there is really a lot to read into it. It just so happens that it was a particularly productive quarter for the onboarding teams..

And then based off your commentary, no similar size deals in the pipeline at this point right?.

The pipeline is strong but there should be no quantification of some standard or standardization of this amount into any projections in the future..

And then switching gears little bit, I think that the flavor of the day in some ways is robo advisors, Charles Schwab announced that it has a robo advisor offering out there certainly a betterment in all front continue to raise capital.

How do you view them as a competitive threat at this point either in terms of they might potentially cut into the business with a RAAs that are big growth opportunity for you or they might provide some of the rebouncing and other services that you guys provide..

So we take the robo advisor threat, the so called robo advisor threat seriously.

We see it as potentially taking share from our advisor clients and so what we’re doing and have been very active at doing is to enable advisory firms who use our technology to create an investor portal and extend their presence into an internet based, a cloud based portal so that that advisor can leverage their practices.

We’re spending all of our developments on technology that empowers the advisor as opposed to technology that replaces the advisor and the same technology that does client risk assessment, that does product suitability and does portfolio construction, asset class selection, rebalancing and performance measurement is available to advisors who want to extend that capability to a subset of their clients or to a new set of clients and maybe interesting to you that today out of some $600 billion of assets that we support, there are more than 50,000 accounts and more than 10 billion of assets that are supported via Envestnet technology for advisory firms that are either exclusively or primarily supporting a segment of their client base through our cloud based investor portfolio.

So this is already happening, we’re enabling it, those asset levels I think dwarf what the so called robo advisors trump it.

But to take a step back we’re very interested in the development, we believe that overtime a number of advisors will adopt an investor strategy that will enable them to reach new segments and we expect to be the partner that those advisory firms use in order to reach those new segments..

And then one last quick one for Pete, the 42% tax rate in the fourth quarter, do we read anything into that going forward or is that just kind of a catch up to that full year closer to 40%..

What's going to happen there to spike that potentially is non-deductible cost related to the M&A transaction that was completed in Q4, so the effective rate increases as a result of that. You saw similar thing in Q3 of last year. So, no we still think -- again longer term 40% is probably the expected rate..

And we will go next to Chris Shutler with William Blair..

Jud, when you think about this business over the next few years and just look at your pipeline, I mean recognizing that you’re not going to get '15 guidance right now, I mean how much of a visibility do you think you’ve into what revenue was actually going to be over next year or maybe over the next 2 or 3 years?.

Well I mean you’re asking a crystal ball question when you go out 2 to 3 years. And as we all know there is a high degree of recurring revenue in our business model. We have got very strong insight, very good insight into the current quarter and that’s why we’re able to give a fair degree of precision about the immediately future quarter.

But beyond that our practice has been to give some annual guidance in that February earnings call following the Q4, earnings results and the budgeting process that we’re going through is very much underway and it's fully underway.

We don’t expect to have that completed until sometime in early December and so all of these factors into the long term outlook. So we have a pretty good idea about what it is but we don’t have as a clear an idea about 2015 as we do about the fourth quarter of 2014..

And then with the pickup in market volatility, just wanted to get your take on what you’ve seen from a redemption standpoint thus far in October?.

Well, VIX kicked up a lot in early October, but it's back down to end of September levels now, maybe even a little bit below that. We did not see a meaningful increase and as long as VIX stays where it is, we do not expect a meaningful increase in redemptions for the current quarter..

And then just last one, Jud, I was hoping to get an update on the quantitative portfolios, you didn't really mention that on the call. I know it's still early, but just any thoughts on what you're hearing from your advisors there. Thanks..

We're getting a building group of advisors who I believe will be strong advocates of the product in the marketplace. We still are working through distribution, because although these quantitative portfolios sit on the investment platform, we have to go to all of our partner firms, there is a due diligence process.

So we're still in the process of gaining distribution and we're encouraged by the early results and the advisor responsiveness has been very positive. But I do not believe you're going to see a meaningful contribution to Envestnet financially for some time..

And we will go next to Peter Heckmann with Avondale..

As regard to your guidance, can you -- to the practical effect of Placemark is -- because you're recognizing the revenue net, it lowers the average basis point spread on assets. And then it does as well on the cost of goods side.

Do you expect that over time that the dynamic of more advisors putting more assets on the UMA platforms with third-party advisors? I guess I'm trying to think about how -- you have kind of three different moving parts on the gross margin line and how that might shake out.

Can you talk a little bit more about that without going into full year guidance, but maybe a little bit about how you think about that?.

Yes, I think the fourth quarter will look like -- as you've seen in the past kind of the one-time reset and then the trends that we've seen in the business will creep back in from these new points from Q4. So again, I think we've seen a trend of lowering of our average fee rate and that's likely to continue.

We've seen a trend increasing the cost of revenue, as we've talked about based on product mix, the cost of revenue as a percentage of the AUMA revenue.

Again, we're modeling that to continue as well and in terms of overall profitability, if Placemark comes on pretty close to where we were in Q3, so it should -- we probably -- again, not that we're guiding on EBITDA margin, but that should remain about where we are and we expect that to continue to increase.

But again we're focused more on the absolute level of EBITDA growth..

And then, I did -- versus my back-of-the-envelope calculations, it seemed like market action had a little bit more impact in the quarter.

Can you call that out in terms of maybe a waiting towards certain asset class?.

I think that the -- are you trying to explain the positive variance to what we had guided to?.

No. Just my own calculations of market action in the quarter would have suggested maybe an 80 basis point hit to AUMA and actual looked like it was more like a 2% hit to assets. And though just it suggests that there was a greater weighting to riskier assets in the quarter than maybe there had been in previous quarters.

Is that an incorrect assumption?.

Yes, I do think we saw -- we've had a little heavier weighting towards equities and I think the performance to get to a 0.8 is based more on the larger cap indices that you follow. And if you look at small cap and international and even commodities, much more significantly negative during Q3..

We will go next to Chris Donat with Sandler O'Neill. .

Wanted to ask with respect to the announcement of Fidelity's partnership with Betterment and I asked this question because according to your filings, you get about 20% of your revenues from Fidelity.

Does anything change in that relationship, either positive or negative or is it just completely away from you and your relationship with Fidelity is what it is?.

I don't know very much about Betterment's business. I know that what was announced has no effect on any of the business that we do with Fidelity. And it's a very good partnership for us. So it will have no known negative effect on anything that we're doing with Fidelity..

Okay. I just thought like I had to ask given the size of the Fidelity relationship.

And then the concept of robo advisors come up, I think another advisor or another theme that we've seen in the last year or so has been some of the consolidating of the industry and this -- in the last few months, FolioDynamix being acquired by Actua, I go back a year and it's Genworth being acquired by a couple of private equity firms.

How do you feel about your prospects for doing consolidating transactions and should we be thinking about this as a -- as you being focused on the TAMP space or is it more like with Placemark as you've moved beyond sort of your traditional TAMPs those opportunities for consolidation?.

Well, this space is consolidating and it would be reasonable to expect that because we are actively evaluating potential acquirers. Reasonable to expect that we would see most of the opportunities that are there.

We're going to be very disciplined and if we do not believe that a prospective consolidating transaction will meet or exceed our return profile, we won't be pursuing it. I think that TAMP space is not a precise term. And so, I think it's -- I'm not sure I would agree with your supposition or your premise that Placemark is or is not a TAMP.

Placemark does overlay asset management through a unified managed account and a lot of people would consider that to be at a TAMP. They don't do performance measurement the same way we do, there is other things that they don't do, but this TAMP is not a defined scientific term.

But we're going to continue to look for consolidating and strategic opportunities in our space, which we define as technology-enabled wealth management, some people would call that FinTech.

But we're looking to empower and equip the independent advisor and the firms that house those independent advisors as they move towards better solutions for wealth management and so there are a number of firms that are in that space that lack scale and that don't have the distribution footprint that Envestnet enjoys with some 36,000 advisor users.

And so we expect that we're going to continue to see opportunities that are either in our space or in closely related tangents to that space..

Okay, but to be clear, when you think about the tangents, your focus is very much on the advisor, it's not -- you're not going to disrupt that channel at all at this stage?.

We have absolutely no intent nor have we considered anything that would bypass or disrupt the advisor. The advisors' business is our business and the advisors' productivity is our business..

We will go next to David Grossman with Stifel..

This is Irvin Liu actually calling in for David. Thanks for taking my question. First, I just want to go over -- my phone must have hiccupped up right when you provided the revenue contribution number from Placemark for the fourth quarter.

Could you repeat it for me?.

We expect about $6 million from Placemark's contribution to revenue..

And I also wanted to inquire about the growth rate of your recently acquired businesses, such as WMS and Placemark relative to the company average.

Could the growth rates of these businesses alter your growth trajectory as it relates to your organic growth target, especially when we're looking at it post the full year anniversary of these acquisitions?.

Certainly, each one comes with its own level of momentum and it takes a while. We have been successful in the past to get it on a -- get businesses on a growth path that is more like the rest of our business, but that's not always the case..

And it doesn't happen overnight..

And it looks like you recorded another strong gross sales quarter even excluding conversions and the momentum continues to build.

If you were to break apart the fundamental inputs that sort of feed into this growth function, can you provide some more color on what's driving the momentum?.

Well, it's those same metrics we've talked about before, it's more advisors, you saw a number of new advisors.

Over time, probably the single most and important variable or contributor to our organic growth is the growth in accounts per advisor for advisors who have been with the platforms for a season in period, say those who have been with the platform for a year or more.

So what we see and this goes back to the fundamental value proposition of the platform is that advisors who use a fully unified platform like Envestnet's are growing their practices at two to three times the rate that the industry in general, is growing their practices at.

So that is a very important primary driver for Envestnet's growth and that is the fact that advisors that are using Envestnet's technology are growing their practices faster than average. Accounts per advisor are up from 20% year-over-year, that's end of September '14 to end of September '13.

That's way above what trend and what our expectations long term will be or have been, but -- and that's accounts, that's not assets, that's accounts.

So we’re finding right now that there is -- advisors are being added at a faster than what we would long term expect, advisors are adding accounts at a faster rate and then our organic growth through conversions has also been, at least in this last quarter outsized..

(Operator Instructions). We will go next to Jeff Houston with Barrington Research..

Could you talk a bit about your pipeline mix by channel, which has the most momentum and which makes up more of the total, is it banks, brokers or RIAs? And then finally along that same, how does your win rate vary by these channels?.

So we don't break out, we don't report on channel activity or terms of growth.

But if you look at the core channels, independent broker-dealer, insurance broker-dealer, registered investment advisor, bank broker-dealer and now bank trust, all of those channels for the seasoned and integrated businesses of Envestnet are growing at or above our core organic growth targets, which are in the mid-teens.

How we get from that mid-teens to our top line growth rate of 20%? The difference between the same-store advisor and same-store advisor account growth and that -- which is in the 12%, 13%, 14%, 15%, 16% range and the 20% or more that we have been generating is through organic conversions and cross-sells or up-sells.

So all of the activities that we're doing right now are growing at or above target, there isn't a single channel that is lagging in terms of its growth. If you look at it from a product standpoint, assets under management, assets under administration, licensing, same story, all are growing at or above our target rates of return. There aren't laggers.

So I know it would be helpful to analysts who like to slice and dice everything to make sure that there is a great bottoms-up kind of forecasting capability. But we believe that the way we're reporting right now is directionally accurate for all the channels and the products that we're in.

So we don't have any intention of giving more guidance than that. Win rates, success rates are very high in all these channels.

You're going to find that when we have a new initiative like the retirement solutions or a new channel like the bank and trust channel that our win rates are not as high as they have been in the channels that we've been around longest in, which is the registered investment advisor and the independent broker-dealer channels.

But we expect that the S-Curve that each channel represents is going to be nicely and positively sloped. We expect that -- we don't enter new channels with the expectation that they will be slow growth..

And we have no other questions at this time. I would like to turn the conference back over to our speakers for any additional or closing remarks..

Thank you for the questions and we look forward to reconvening sometime in early February. We very much appreciate your support and thank you for your time this afternoon. Bye now..

This does conclude the conference. We thank you for your participation..