Greetings, and welcome to the Envestnet First Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Pete D'Arrigo, CFO. Thank you, Mr. D'Arrigo, you may begin..

Good afternoon, everyone. Thank you for joining us on today's first quarter 2023 earnings call. I'd like to begin by noting that our earnings press release, supplemental presentation and associated Form 10-Q will be available under the Investor Relations section of our website at envestnet.com.

This call is being webcast live and a replay will be available for one-month under the Investor Relations section of our website as well. During the call, we will be discussing certain forward-looking information. This information is based on our current expectations and is not a guarantee of future performance.

I encourage you to review the cautionary statements on Slide 2 of the supplemental presentation for the potential risks, uncertainties and other factors that could cause actual results to differ from those expressed by the forward-looking statements. Further information can be found in our regular SEC filings.

During this call, we will be referring to certain non-GAAP financial measures.

Please refer to the non-GAAP disclosure statement on Slide 3 of the supplemental presentation for an explanation of the non-GAAP financial measures and to the appendix in our supplemental presentation for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures.

Joining me on today's call is Bill Crager, Envestnet's Chief Executive Officer. Bill and I will provide a company update as well as an overview of the company's first quarter 2023 results. After our prepared remarks, we will open the call to questions. [Operator Instructions] And with that, I will turn the call over to Bill..

we're driving multiple new higher-margin revenue streams, leveraging investments for operating efficiency while carefully managing expenses. All of this will propel us towards our 25% adjusted EBITDA margin target by 2025.

We will keep innovating and adding to our ecosystem to drive more and more engagement on the platform, creating greater value for our clients and creating greater distance from our competitors. Let me take a moment to share some very tangible examples.

We invested in our next-generation proposal engine, which is a critical piece of technology and at the center of driving more utilization of the platform. And this is rolled out, and by the end of the year it will be live in 5,000 firms covering 77,000 financial advisers.

This is so important because this proposal engine not only has best-in-class user experience, it also allows for personalization of portfolios at scale by fully integrating the entirety of the Envestnet ecosystem, that's data plus planning, network to all of our solutions, investments, insurance, credit, the entirety of what we offer being available to all of our advisers that speeds adoption, reduces administrative friction and is just one of the ways we are enabling service and operating scale for our company.

Our partnership with FNZ is creating tremendous interest in the marketplace and was the highlight in standing-room-only discussion at the summit. Together, we are solving real challenges for the industry and the work we're doing with FNZ is on schedule.

We are hitting all the milestones on our road map to build out an end-to-end Envestnet plus FNZ technology option. And we expect to be in the market by the end of this year and see gaining traction starting in 2024.

To put a little perspective or color around it, in the RIA world, all economics related to custody average around 15 basis points and in the broker-dealer market, around 9 basis points.

With FNZ, we'll begin to participate in those economics for the first time, and the opportunity that we have is significant, exemplified by the $1 trillion plus of annual gross flows that runs through our platform every year. We are making considerable progress. Our clients are leaning in with us, and we're going deeper.

I am super energized by the progress we've made and the validation the market is reflecting to us. It's important to understand the impact Envestnet is making for our clients as we deliver our results. I'll turn the call now over to Pete, who will provide details on this quarter's performance and our outlook for the rest of the year..

Thank you, Bill. Our first quarter results continue to reflect the impact of our strategy and the anticipated progression from 2022 into 2023. During the first quarter, the economic environment brought further uncertainty with regard to continued market volatility, inflation, liquidity of regional banks and so on.

Our first quarter further demonstrates the attractiveness of our business model and the impact of the actions we've taken amidst this current economic environment. As we think about the first quarter and the rest of 2023, I want to remind you of the context of our financial performance.

In 2021, we announced a long-range plan to better organize and streamline the company, working more deeply with our clients and in more ways, ultimately paving the way for longer-term sustainable revenue growth and higher levels of profitability. We began these investments in 2021 and had them fully included in our operating expense base in 2022.

Now 2023 becomes a year focused on execution and delivery with the anticipated result of margin expansion. We saw the beginning of this in Q4 2022 and continuing sequentially into the first quarter of 2023.

For the first quarter, although the challenging environment continued to have an impact on our clients, adjusted revenue was approximately $299 million, and adjusted EBITDA was $55.4 million and adjusted EPS was $0.46 in Q1. Our guidance for Q2 and the rest of 2023 is laid out in the earnings release and in the supplemental presentation.

Overall, the economic environment in Q1 produced a difficult time for clients and prospective clients, impacting both segments of our business with extended decision-making processes and ultimately prolonged sales cycles in some cases. This dynamic affected both segments and asset-based subscription and professional services revenue in Q1.

While industry-wide flows remain under pressure, the wealth segment continues to experience positive net flows in our asset-based products. Subscription and professional services revenue was relatively more impacted by the economy.

Our outlook for the rest of the year takes further on-boarding delays throughout the rest of the year into consideration, to some extent offsetting higher revenue from Q1 capital markets increases. The Data & Analytics segment had a number of potential and existing clients affected by the regional banking crisis.

We saw a number of smaller tech clients put a hold on data spending due to liquidity challenges. However, we remain encouraged by the level of interest and the progress we're making in building the overall pipeline.

For the second quarter, we expect adjusted revenue to be between $312 million and $315 million, adjusted EBITDA to be between $55 million and $57 million, and adjusted EPS to be $0.45 to $0.46.

For the full year, we are raising our revenue guidance to be between $1.26 billion and $1.27 billion, adjusted EBITDA to a range of $253 million and $260 million, and EPS of $2.11 and $2.19. Our guidance as always does not assume any changes in the capital markets from prior quarter end and is based on market levels as of March 31st.

Also, Q2 carries with it a seasonal increase in professional services revenue and cost of revenue related to the Elevate Summit. Turning to the balance sheet; we ended March with $53 million in cash and debt of $938 million, making our net leverage ratio just below 4 times EBITDA.

Seasonally, the first quarter is always the highest use of cash as we pay the majority of our incentive compensation in Q1 as well as the most significant vesting dates for employee equity compensation, giving rise to high employment taxes due.

Additionally, as we've managed through the impact to our asset-based revenue from declining capital markets in 2022, Q4 of last year and Q1 of this year also carried with it elevated severance expense, which we expect to decline in the last three quarters of the year.

We expect our high point for the leverage ratio to be in the first half of the year, dropping below 3.5 times by the end of the year. Thank you for your support of Envestnet. And before we open it up for Q&A, I'll turn it back to Bill for his final remarks..

Thank you, Pete. Envestnet is succeeding in a challenging market by delivering what we've committed to. Our business is executing on this strategy, and we have a leading competitive position in a growing marketplace. We're delivering significantly for all stakeholders.

This is through our deep understanding of the marketplace, a drive to serve our clients today and into the future through the dedication and hard work of our team. We're managing expenses and leveraging our investments in scale to drive organic growth and margin expansion.

We are building on the progress that we've invested in, driving margin expansion throughout 2023 and reaffirming our goal of 25% adjusted EBITDA margins in 2025. We're doing what we said we would do. We are modernizing the platform and integrating it for our clients. We're increasing our operating leverage, becoming more efficient.

We're also going deeper with clients and growing higher-margin solutions. I want to thank our clients for the trust they put in us. They recognize the value we provide for them today and into the future. I also want to add a very special note of immense gratitude to retiring Director Ross Chapin.

He's been a tremendous steward of the business and an incredible support to Envestnet during the highs of this incredible journey as well as an essential pillar in the company's hardest days following the death of Jud Bergman. At every turn, Ross has been a driver and a tremendous steward on behalf of the company and our shareholders.

Finally, to the Envestnet team, every day you execute, building, innovating, enhancing the advice to drive the success of our clients and millions and millions of end consumers, and you are driving the success of our business. As one client of ours said to me last week at the conference, what you are doing is extraordinary. I thank you.

Now I'll hand it over to the operator for questions..

Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Devin Ryan with JMP Securities. Please proceed with your question..

Hi. This is actually Michael Falco filling in for Devin. Good afternoon..

How are you, Michael?.

Good. Good. Maybe to start, you had a pretty healthy quarter of asset flows and grew new accounts, but there has been some press to the earnings cycle around tech budgets overall being under pressure across enterprises.

Are you seeing this in the financial advice space? And can you give us a little bit of flavor for where demand for your solutions is strongest and maybe where it's weakest, both by product and by channel?.

Yes, Michael, I would say – I would characterize it this way. I would say that there is very, very strong activity deep in our pipeline. So late-stage pipeline and our bookings are up significantly as we look towards the end of 1Q. Why is that? Because there's keen interest in a lot of the subs' capabilities that we offer.

Our data – our wealth data platform, our financial planning capabilities and in our RIA technologies, particularly are all showing really strong signs of strength.

Where the headwind is going to be through the year is in the bank segment as both on the data side of our business and the wealth side of our business, as we deploy new clients, new logos who are in that pipeline to be deployed, we'll push them out a few quarters as we kind of work with them to make sure that everyone's got the focus on the project.

And then also on the data side, we've got a pretty healthy business in the banking segment. And there's been – well, the pipelines and bookings are pretty encouraging there. Again, we anticipate some delay in new logo rollout in that segment..

Sure. That makes sense. And then maybe for my follow-up, just switching gears a little bit; there's been a ton of attention around artificial intelligence and new applications in the market. I know that's an area you've been focused on for some time.

But maybe remind us how you think about the potential applications for AI for Envestnet over time and how you would tie that to either existing or new revenue opportunities for the firm? And then related, you mentioned gaining efficiency from modernization.

As you look deeper into the model, are there ways that AI applications can actually drive a more efficient expense base, whether that's by doing more with your people or just helping drive efficiencies more broadly?.

Yes, absolutely, Michael. And I think in this category, we're really kind of carving a leadership position in being stewards in the data and thinking very responsibly about the use of AI.

But the ways that we're using it today is in looking at our data set, and our data set spans from people's daily financial activity through our traditional Yodlee capability into the wealth or portfolio strategy and beyond into the plan, financial plan. So we can connect people's daily financial lives to their long-term goals.

And by doing that we can create insights or suggestions for financial advisers to more deeply engage their customers and we're doing that at scale. So today, we'll publish 24 million of those insights for our network, and that ranges across just shy of 100 different use cases.

The use case might be around taxes or about risk or about insurance coverage, et cetera, et cetera. So we're surfacing these insights, and that way the adviser can do more for their client and pinpoint these opportunities to go deeper.

When we looked at the macro set of the insights that we're creating and we look at our financial advisers, same-store or going deeper with their current clients that are on the Envestnet platform, we saw that they could grow an average of 31% based on the insights we surface for them today.

So they're being – that's highly coveted information because its clients they work with and services they can provide that, that client is likely in need of. And so what that does, as we look at the data even more closely, we see that advisers who are using those insights, Michael, are growing faster than the other advisers on our platform.

I mentioned that last week we were at our annual conference in Denver, Colorado, standing room only at any session that was related to our data platform and to our Insights Engine. Firms, advisers want the insights in their hands, and so there's growing demand.

And at the back end of that pipeline or the top end of that pipeline for our wealth data platform and insights is very, very strong. And so we'll be deploying that wealth data platform and insights to more and more firms and more and more advisers this quarter, next quarter and beyond. So we're very encouraged by it.

But at the end of the day, what I think a really important message is around AI is money equals trust. And at the end of the day, that human adviser is going to be the navigator, is going to be the steward of that relationship.

The scale that AI provides to them is going to be the support mechanism that they'll lean back on and utilize more and more with them in the cockpit, with them at the helm in that relationship with the household, and that's really what we're enabling.

From an administrative or operating standpoint, absolutely, when we look at our business, its administrative-heavy where regulated business processes need to be repeated and scaled.

And so again, just given our data heritage, which is unique in the industry we are building that deeply into our modernization efforts so that we can scale and respond to service issues, support tickets, routinized type administrative processes in ways that utilizes the technology and our intelligence versus more and more personnel.

And that's really just beginning to be realized inside the business. You look at, I noted in my prepared remarks, a record number of trades last quarter, and guess what, 58 million trade blocks, fewer service tickets, a decline and also support requests.

We did that with lower personnel and a lower degree of errors across that enormous trading activity. How do we do that? We use the intelligence of the platform plus the experts that we have that execute that volume. And that's just one example of many that's kind of beginning to really take root inside the company..

That's great color..

Thank you, Michael..

Thank you. I'll hop back in the queue..

Good. Thank you..

Thank you. Our next question comes from Michael Cho with JPMorgan. Please proceed with your question..

Hi. Good afternoon. Thanks for taking my question. I just wanted to touch on the FNZ partnership. Bill, you mentioned it's a packed room at the conference and you can appreciate the – some of the numbers you gave.

But I guess my question is, again, I'm just trying to get a better sense, you mentioned second half for a rollout of the custody platform by the end of 2023.

And I guess I'm just curious kind of in terms of rolling it out to clients and the rollout plan once the solution is live, I mean, if you could just kind of give us any color around there and then also the contribution to top line and margin. It seems all incremental to the 2025 plan, but we appreciate any color there, too? Thank you..

Yes, that's awesome, Michael. And in Denver, those rooms were full because the reality is we're solving – this partnership begins to solve some hard problems for our clients and really for the industry. And it's 2023, but the average time to open a new account many times, it's five – lasts for five business days.

With our partnership, you bring that down to a couple of minutes, right? So it becomes a more real-time, fully digital, paperless environment that streamlines account opening; that provides real-time activity, so the trades that are made during the day are made during the day, and the execution happens for a customer in seconds, not in a batch in the overnight.

And then the service cycle also becomes sped because it's all connected to workflows, right? So what this is – is really next-generation capability that catches up to the 2023 expectation that we have everywhere else in our lives. When we ask something – the machine to do something, it does something.

And so we're excited about it, and I think I go back to last week which was a terrific week for our company, that the interest from our customers both large and small is very high because this not only takes time, it takes a lot of labor.

And there's probably a higher degree of error rate or administrative patch-up that you have to do on a large, large number of accounts as you go to administrate, serve, open accounts.

So this is going to take a lot of friction out, and really, I think of it as just the viscosity of the account opening or access to our network of solutions will speed because of the relationship with FNZ. But FNZ is just a choice. It's just going to be an option for firms to utilize.

We continue to have very deep and good relationships and great partnerships with all the custodians that we work with, pretty much the entire industry, and enable those for our customers. From a rollout standpoint, I'd say we're exactly on schedule. We've hit all the milestones that we need to from a project standpoint.

We will do a reasonably – probably a contained deployment of the partnership to select clients by year-end. And so to look forward, you look for a contribution of revenue and EBITDA from this partnership in 2024, beginning in 2024 as we get going.

The other note I'd really just kind of emphasize here through the partnership, we're not taking on a ton of costs, right? We thought about this in lots of ways on how we enable this environment for our customers and do that through partnership versus taking on the administrative burden and the administrative kind of responsibility that FNZ, who is expert in global and has really cracked some hard problems around the globe, they're great at it and will be our partner here.

So as we roll this out, I see a good adoption, I see interest in what we're doing, I see it also being pretty high-margin revenue for us as we get going..

Wonderful. Thank you so much, Bill..

Thank you, Michael..

Thank you. Our next question is from Alex Kramm with UBS. Please proceed with your question..

Yes. Hey, good evening everyone..

Good evening..

Simple one to start, just on the updated guidance, I mean, obviously EBITDA and EBITDA margin came up for the full year. Nice to see that, but the question is really, is this just the market performance? Or are there some other things contributing here maybe on the cost side? So maybe just run through the delta here as we saw it..

Well, I mean, mechanically it's mostly the way we've reforecast. As I kind of discussed in the prepared remarks, there is upside from the guidance, and there is a little bit offsetting that based on some of the on-boarding delays that we've forecast.

We've kind of pushed things out maybe a quarter to two, probably less than two on average, two at the extreme for certain expected new clients and new logos. But as we've adjusted that, that is all of what's reflected in the guidance, both the markets as well as the client impact..

Yes. And Alex, the only – what I'd add on the expense side is what we're tactically being very, very conscious of every cost across the company, but you're also beginning to see some of that operating leverage that we have spoken about. And the automation of our processes is beginning to take root.

What you get this year is kind of the full year benefit from the Tata relationship on the data side and the ops modernization that we're beginning to effect in the wealth business. And so as we kind of roll through 2023, we are operating in a pretty kind of unknown climate – operating climate, especially this banking issue is resilient.

This is core to our client base, and so at the top line we're being thoughtful about when we're going to onboard some of these new clients. On the bottom line, we're just executing.

This is just simply us executing and the platform beginning to respond to the enhancements and the decisions that we've made, and that will roll through 2024 and will roll into 2025, which we reiterated our adjusted EBITDA of 25% by 2025..

And then secondly, I think also a quick one, but year-to-date and then maybe this is not completely new, but clearly we've been finding ourselves in a different type of fixed income environment. Rates are much higher. Behavior is changing. I assume, also on the adviser side, so just – maybe just review what you're seeing out there.

Maybe the summit actually had something on that, I assume.

So is there more reallocation to fixed income because of the higher rates? And if so, does that change the pricing environment? Anything we should be watching out for as maybe flows go into different directions than they were over the last decade or so that we've been following the company?.

Yes. It's a great observation, Alex. And I think across the board, behaviorally, things are changing, right? So you've got – you have your bank deposits. The bank deposits are going to money markets.

You look at the flows in the money markets year-to-date or by quarter end, I mean, they're very significant, up 12%, I think quarter-over-quarter, and we track a lot of data.

So what we're able to see, Alex, is what was interesting and this doesn't – I'm going to get to your answer, but just an anecdote, I think that is interesting for analysts on the call is that we can see where the bank deposits and the transition of dollars that went very quickly to the money market from banks to money markets.

And particularly of interest to us was that the high net worth did that. So the beyond secured deposits at the banks had a high outflow to money markets, whereas the average or lower deposit value kind of stayed put. So they moved at a 3% rate, where the higher deposit moved at a 40% rate.

So that's a very significant shift of money, right? So now the adviser is in the mix on that, and they're looking at the overall allocation of that client. They're looking at the returns that you can get from cash and also from fixed – short-term fixed income instruments to longer-term fixed income instruments. So we are seeing a rebalancing.

We're seeing a flow there. But we've also innovated as part of the overall fiduciary work that we've done, kind of this idea that we can ladder bonds and we can specialize and uniquely position bond portfolios for more and more clients.

And so in our DI business, we are seeing flow into that product, which is kind of commensurate with an equity-based direct index type portfolio..

So nothing on the fee side we should be worried about or anything else as allocation change?.

No, not meaningful. No. It's good for advisers to be able to provide advice in this market because what they're able to do is look – what this is motivating advisers do.

Again, a conversation I had, I don't know how many times, dozens and dozens since March 10th in Silicon Valley is that this is really taking a consumer, their clients and asking their adviser to take a broader look at all their money.

I've got the money at the bank here, what do I do? And that question is really motivating more of this holistic kind of connected advice.

They're using money markets that is not necessarily a real benefit to Envestnet, but that money is going to go and it's going to come back into a more holistic advice package that that adviser is going to offer them..

Okay. Helpful. Thank you very much..

Thanks Alex..

Thank you. Our next question comes from Surinder Thind with Jefferies. Please proceed with your question..

Hi Surinder, how are you?.

Pretty good. Thanks guys..

Excellent. Thank you..

Fantastic. I guess I'd like to start with a question about the subscription licensing business and more specifically the data and analytics.

Just given the challenging environment that you've cited, how should we think about the sub-segment on a go-forward basis here? Meaning that given contracts, I assume, have been renewed at this point, so should revenues be stable on a quarter-over-quarter basis going forward? Or how should we think about that?.

So Surinder, I think that there have been headwinds on the subs side in the data business, particularly as I look at the research business, I'd circle that one; and then I would say what we saw in the first quarter was VC or PE-backed fintech type companies that are data consumers absolutely rattled by what occurred at SVB as we got to the end of the quarter and I'd say going in – just that we've probably seen the delinquency rate on those smaller fintech companies, rise a bit over the quarter because of the economic condition, right? So that's a headwind, but the predominant headwind remains in the research business.

But as we look forward, here are a couple of things that you should know. We have on-boarded, contracted on-boarded data sets that really create a distinctive advantage for our overall data research product. Utilizing data from a consumer base is very interesting to the research consumers who typically are hedge funds.

And that data set really enriches the Envestnet offering. I would say, over the last three years, the Envestnet data set has been fairly constant and there's been competitive data sets that they became choice in the marketplace.

So as we get to the back half of this year, not the second quarter, but as we get to the back half of this year, we see a – we're very encouraged by both the deep pipeline on the research side, given the enhancement to the data set, and also the bookings that also give us a lot of encouraging kind of outlook for 3Q and then more significantly in 4Q around the subs rate for research, and that has been the real challenge that we've had for a long-time.

But the things that have occurred, I'll just repeat them is we've enhanced the data set; it's a very attractive and interesting consumer base for the users of the research product. And we think we have a competitively differentiated offering.

And that is resonating and visible to me anyway, deep in our pipeline and in our increased bookings as we got to the end of the quarter last quarter..

Got it. That's actually really helpful. And then switching to kind of the AUM/A business and the disclosures that you provide on Slide 11 and more specifically related to the first-party managed assets..

Yes..

Can you talk a little bit about the account growth that you're seeing there? Because first-party managed assets are a subsegment of the AUM/A segment. And so when I look at the growth rate in the accounts at 1% this quarter it's below the actual AUM account growth.

So just any color there would be helpful?.

our direct indexing, our high net worth as well as our overlay capabilities. And there, we're adding advisers at a very rapid rate who are adding accounts at a faster rate, and those accounts contain assets at depressed values but are adding assets at a faster rate than any of the flows on our platform. And that is what we've been focused on.

We keep really focused in piling assets, accounts and advisers onto the platform. And I've called that in the past as this coiled spring, but what's really important, Surinder, is that we're stacking these new opportunities that we've focused on, and they're kind of connecting to each other.

And this is building momentum and really a lot of enthusiasm. Last week in Denver, it was loud and clear, interest in DI, interest in overlay, interest in high net worth, interest in retirement, interest in RIA type managed accounts.

So this momentum in DI overlay, high net worth, RIA, fiduciary, retirement, in our insurance platform, in FDx, those are really important and they've been kind of surfaced, I also noted and I spent time on the proposal tool, modernized into more accessible environment, and we expect that that will continue to build.

So the headwind or the growth in accounts is really mitigated by the outflows in our mutual fund wrap portfolios, carry lower basis points than the other products I just highlighted for you..

Thank you. That's actually helpful, and really good to hear. So thanks for the color..

Yes..

Thank you, Surinder..

Thank you. [Operator Instructions] There are no further questions at this time. I would like to turn the floor back over to CEO, Bill Crager for closing comments..

Thank you, Camilla. I want to thank everybody for your support of Envestnet, and I look forward to speaking with all of you next quarter. Thank you very much. Have a very good evening, and we'll talk to you next quarter. Thank you..

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..