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 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 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 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 will turn the call over to Jud. .

I 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 the 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. Advisers with asset-based revenue increased 8% year-over-year, and accounts per adviser 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 on to 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 adviser 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 financial organization, which affected our control environment and ability to complete our 10-K on time.

The control deficiencies, which will be reported on our 10-K as material weaknesses, primarily relate to nonroutine 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 of 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 our 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 in 2014 -- 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 advisers and with the success we have seen selling integrated Wealth Management Solutions, including financial planning and data aggregation, we remain confident that we will receive -- achieve a $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, adviser and the clients that they serve..

We expect to achieve this through 3 broad offerings. Our integrated wealth management technology offerings to enterprises, advisers 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 ActivePassive Portfolios and Quantitative Portfolios as well as research and other fiduciary services.

And third, Envestnet's data aggregation and analytics offering provides actionable insight and intelligence to advisers, enterprises and investment managers.

Benefiting from tens of thousands of advisers, millions of investment accounts, over $1 trillion in adviser-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 3 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..

expert-centric, intelligent systems for financial wellness, and 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. 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 from -- 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% of 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'll 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 3 years, we booked our 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 0. However, we will have cash obligations still for foreign and state taxes.

For adjusted purposes for net -- 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 approximately 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 build 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, namely, 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'll 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..

So 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 from -- 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 adviser 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. .

[Operator Instructions] We'll go ahead and take our first caller, Chris Shutler from William Blair. .

So I guess first on the Q1 guidance. The AUM/A revenue looks like it's expected to be flat or even down a touch sequentially. So I know AUM and AUA assets were up nicely Q3 to Q4. I also recognize the CRA guidance.

But maybe can you just dive into that a little bit more and why you would expect it to be flattish quarter-over-quarter?.

Yes, I think what we're seeing is the effect of that industry-wide change from -- 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 the range of $500 billion of flows to active and a similar amount, maybe just a little less, out -- I'm sorry, I said that backwards, into passive and a similar amount out of active.

And so as that trend continues, that affects the mix of assets within AUM and overall, affects the average fee rate for the -- that's the 11.2 to 10.7 or 10.8 in the guidance. .

Okay. Got it. So now 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 could dive into that a little bit more.

I mean, maybe what you're assuming in both -- for both of those items at each end of the range?.

So I think, Chris, I'll just basically repeat that the target range is what we expect over the intermediate to longer term in kind of a normalized. Okay. Here's a business that's signed up. Here's the contractual conversion activity. Here's the sales pipeline and the contracts we have for 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 target. And we found in 2016 that there were delays in conversions, and we found that there were delays in realizing some of the cross-sell synergies.

So 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 2 items..

The other items tend to be much more predictable. Adviser growth activity, account growth per adviser, although it's slower than it had been in the 2010 to 2015 -- 2014 time frame, 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're data aggregation or data analytics or adviser-based subscription, much more of a predictable growth rate.

So what we are really looking at handicapping is not the core drivers of the organic growth in terms of advisers, accounts, consumer users or adviser users on subscription, but more the factors that are a little harder to actually predict and that is the conversions and the cross-sell synergies.

And 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 want to get your thoughts on some -- I think there's been [ Custodian ] and maybe through other software providers out there talking about this concept of a model marketplace.

And I mean, 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're delivering is growing every year. That's at the expense of traditional manager-initiated models.

So we're 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 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're finding that advisers 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.

So I think you follow what I said there, right?.

I do. Yes, that's helpful, Jud. .

So it's a trend that, I believe, benefits the end investor. I think it's a trend that, I believe, benefits advisers to some extent, and we are in the forefront of that. Now 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. .

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

I'd like to touch base on Yodlee. Can you provide some color around what the Yodlee revenues were for 4Q? And then how should we actually be thinking about the growth of that business as we kind of look across 2017? It sounded like you guys were a little bit more cautious on maybe the synergies that are being generated there. .

Sure. I'll 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've discussed before. .

Understood. And then in terms of the actual offering itself, if we were to rewind 6 months, there was kind of the discussion of the second phase of Yodlee in terms of going beyond just the live data polls, I think, to kind of the FinApps and stuff.

How should we look -- think about where that offering is in terms of the rollout of the product?.

Right. So I think what we had said, just to summarize what you had alluded to, that our integration into Envestnet and with the slight lag, our integration into Tamarac would go in phases with the first phase being data aggregation, the second phase then with various applications. So as -- we call them FinApps and then simultaneously, data analytics.

All 3 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's a simple API integration.

And 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. And then maybe a question around -- there was an earlier question around the fee rate and we talked about the active/passive mix. It seems like that 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 kind of the mix in your client base right now in terms of active versus passive?.

Well, I think -- I'll answer the mix question. I think this is similar to trends that we've 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've seen an impact within 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. And because of what we've seen over the last 1.5 years or 2, it's in the mid to upper 20s now. And I think that's a number we've talked about, but it's also reflective of that trend in terms of larger and broader dynamic. Jud... .

So the RIA channel, which primarily acquires or buys our service on a subscription basis but also oftentimes is the leader in establishing of best practices has, for the most part, the leading advisers have adopted strategies that often favor a 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..

And so because they source our services and our technology using a 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's a continued growth of the passive or the rules-based factor-enhanced strategies.

And I don't know where it will end, and we're not focusing on that..

We're focusing instead on providing the full range of activity and options, alternatives, that those representatives within those enterprise firms are looking for.

And we're seeing that in terms of increasing flows, increasing accounts, and you're 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 to 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 the Placemark, the incremental adjusted EBITDA from those activities that -- did you say 21% to 27%?.

Yes, so the 12% to 14% would compound out to a number higher than that or greater than that. And so 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 EBITDA, 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. .

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

Hey, can you comment on -- go over your comments on Placemark again? It 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?.

Yes, so when we acquired the business in 2014, we had set out a target in the range of $12 million to $14 million of incremental in EBITDA that it would provide, and it was generating about $2 million a year at the time we acquired it.

So with cost savings, which we had initially targeted for the first quarter of '17, we expected an incremental $10 million to $12 million of EBITDA based on the integration of the business.

Throughout the course of '16, we had updated activities that we had taken -- that had taken place here where we had managed to accelerate some of that cost savings throughout the year.

And so when we finished the year, there was an incremental $6 million already in the baseline, and the incremental $4 million to $6 million is in the guidance for the full year of '16. So... .

'17. .

'17, yes, I'm sorry. For the full year of '17. .

Got it. Okay, it's in '17. 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 soft of lowered that number? Why was there a sequential step down from the third quarter?.

Which line?.

Let me make sure I got it right, depreciation and amortization, $14.1 million. .

We'll follow up with you on that one. .

Okay. Okay.

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

Yes, so 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 plant, Envestnet and Fidelity. And that part of our business, the 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. .

Next question comes from Rishi Jaluria with JMP Securities. .

A couple quick ones. So I wanted to look at the -- when we look at the AUM/AUA line items and the different components, it looks like we saw a headwind on the -- 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's 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 generally speaking, there -- the flows -- 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. Got it. And going -- sorry, go ahead. .

So that's not capital market-related. It's more demand market-related. .

Got it. Got it. Okay. And going back to the guidance and the idea of doing a risk-adjusted, I think you've explained well the factors that go into it.

But just kind of looking at the guidance and comparing it to guidance that you've given before that may not have had that risk-adjusted portion, how should we be thinking about your guidance relative to guidance you've given before to kind of make it more of an apples-to-apples comparison?.

I don't know if I quite understand the question. How -- what we are -- we're signaling that we think that 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.

And so that would suggest growth in the 17% or 18% or higher for subscription-based revenue. That would be the target..

And the target or expected intermediate to longer-term growth in asset-based revenue would be in the 12% or 13% range. Now you can blend those together and you get something in the mid-teens, and what we're saying is that's what we expect.

But we also expect that as we're looking to 2017, where buy-side and sell-side analysts want to model our business as accurately as they can, that it's prudent to take our targeted -- expected longer-term rates of growth and adjust for 2 parts that are most difficult to predict and that's the conversion and the synergy revenue.

And so the -- in the past, we have not -- 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, when they -- they create some third-party dependency that, frankly, earlier in our life cycle as a business, we didn't have those dependencies on a handful of very large, big conversions. So this is just apples-to-apples.

It's -- 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. And then the other thing is that we are expecting 0 market increase from 12/31.

We think that 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 that in the past, there's been a discrepancy because many of the analysts incorporate assumptions on capital markets into their models. And so where we have -- where we -- 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 found that people assume that all advisers are going to behave, net of fees, at 100% of benchmarks and that's just simply not how it works. There are a number of advisers who beat their benchmarks..

There are a number of advisers who don't. And then there are expenses associated with any product, including low-cost ETFs. So we think that the market-neutral assumption is the best way to model this, and we're trying to eliminate differences between what our stated guidance is and what the consensus becomes among analysts.

So that's a longer answer than what you probably asked for, but we think that's apples-to-apples, but we learned a little bit last year. .

Okay. Got it. That's really helpful. And last one for me, just looking at the Q1 and the 2017 guidance. I mean, it seems to imply a pretty steep decel in growth rates from Q1 to the remaining quarters.

Is this just conservatism? Is this based on kind of your conversion pipeline and maybe deals that have already closed given the almost 3 months of visibility you have into Q1? Or I guess, how should we be thinking about the trends going on there?.

I think it's really pretty much the same answer. I mean, we've got a high, high degree of visibility into Q1. And if you look back and look at what our current quarter guidance and our current -- and then subsequent results, they track extremely, extremely closely. And so we've got the benefit of a 12/31 billing cycle under our belts, so to speak.

And we also have the benefit of having a pretty good sense of what the pipeline is and anything that will change from that 12/31 date with respect to net flows or net subscription increases in our subscription-based businesses. So the current quarter is always going to be a lot more accurate than the out quarters, and so there's that factor.

And then 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. .

Next question comes from Chris Donat with Sandler O'Neill. .

Pete, I have one for you on sort of the other side of the active versus passive and the negative implications for your fee yield.

Isn't there an offset on the cost of revenue as the world moves -- or as your assets move more passive, that the cost of revenue decreases or it decreases as a percent of asset-based revenue?.

Yes, we expect that to be the impact, but that's not -- it's not a revenue item, right? That's... .

Right. I just mean it's a partial impact that affects EBITDA and... .

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

So it's a mitigator to the impact of the revenue change, yes. .

Okay. So just try and continue the active to passive, we would expect your revenue yield to kind of decrease -- or not your revenue yield, your cost of revenue as a percentage of revenue... .

Yes, what we would expect is that both growth and net fee rates would moderate, decline. And that the cost of goods sold as a percentage 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 kind of curious if you can talk about how much of the $6.2 million is from 2016 and how much 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's the local tax authorities, but it's still money out of their pockets, and then if they feel like they're getting sort of a backdoor fee cut -- or sorry, fee increase. I'm just trying to think what sort of a normal run rate for this or what for them might be a unpleasant surprise from a tax perspective. .

Yes, I don't know if the period really makes that much of a difference, right? So we factored in how our approach to implementing a solution here would look based on the aggregate exposure, and going forward it's 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, right, when we implement it is it's more of a collective remit type of thing. But we're just including sort of this estimate phase, and we'll embark on the implementation of it shortly in the next couple days here. .

Okay.

Is it something you've talked to any clients about yet, or this is 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, and there is a mix of, depending on the sophistication of the client in large part, what their anticipation or what they may have already done. And so we're just beginning a more broad implementation of that approach. .

We next move to David Grossman with Stifel. .

So I was looking if we could just go back. I know there's been a couple of questions on this already, but just to kind of get the numbers straight on EBITDA and the reconciliation going forward.

So if we add $4 million for WMS and it sounds like $5 million for Placemark, right, that'd be roughly $9 million -- or maybe I'm not doing that exactly right -- yes, $9 million. It would seem that the residual then is growing, I don't know, around 13% to 14%, and that seems to parallel revenue growth.

And 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 the conservatism that you've been talking about? Or is there something else kind of blended in there that I may have missed?.

So David, the 14% to 17% is about 1.2x the targeted revenue growth. .

Right. So the guided revenue growth. .

The guided revenue growth. .

So the target revenue growth we had given -- the guided revenue growth is 12% to 14% for 2017. That's guided. That's 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're kind of at the lower end of that range then, more or less, if I just take the midpoint of the guidance at the [ $14 million ]... .

That's correct, yes. .

Okay. And I think this came up on a prior question, but I was also thinking about the spread over the course of the year. And 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 midpoint of your in EBITDA guidance on the revenue guidance that you provided.

So I guess, am I doing that math right? Maybe my math is, in fact, wrong.

But if it is right, what are the drivers that we should be thinking of that would be creating that lift over the course of the year?.

Well, 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. And certainly, going back to the first quarter, that seasonality plays a role. .

Right. And I guess I thought 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. So 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 natural leverage that you would get in the business.

So 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're 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 just -- let's just take -- and that they're relatively small contributors, but they do make a difference.

You take the difference that Placemark made in the fourth quarter that you're going to have -- see a full year effect of that now this year.

You also see that one of the implications or one of the results of having a relatively faster growth on subscription-based revenue than asset-based revenue is you don't have the cost of goods sold, so that there's a favorability factor going on in the mix of subscription-based versus asset-based offerings..

And that will have an effect on the, if you will, the net contribution margin per incremental dollar of revenue. That's a factor, and we are continuing to manage expenses and incremental hires very closely. So we expect that -- we expect this will be a year.

You're 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 affect of WMS and Placemark savings. .

I see. Okay. And then I guess just lastly, Jud, I understand the notion behind de-risking the estimates with both revenue synergies and conversions.

But can you give us perhaps a little bit of an update of at least -- 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 kind of where we are in the stuff that started last year but didn't quite get all the way through during calendar '17 -- or sorry, calendar '16?.

Yes, so the stuff that we didn't expect -- what we expected in '16 is now, in every case, in our '17 guidance. And 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's been agreed to.

And then that go-live date that's 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 -- don't always get hit. So the conversion pipeline is as strong as it's ever been.

I indicated in my remarks on cross-sell synergies, some of them 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're telling me that we're almost out of time, but if you want more on this, I'm happy -- we're happy to follow up in the session that we've got scheduled. .

And our last question comes from Patrick O'Shaughnessy with Raymond James. .

Maybe just one quick one, just to kind of put a bow on the conversation around your fee on AUM/A revenues.

So embedded within your full year guidance in your internal planning, what sort of deterioration are you expecting in that fee rate over the course of 2017?.

So 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, and that sort of leads to a blended rate. We're not going to disclose that level of specificity on how our models work though. .

No, further questions. I'll turn it back to management for closing remarks. .

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

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