Hello, and welcome to the Envestnet Second Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. As a reminder, this conference is being recorded. There will be no Q&A session following prepared remarks. It is now my pleasure to introduce Josh Warren, Chief Financial Officer. Thank you, sir. You may begin..

Good afternoon, everyone. I'm Josh Warren, Chief Financial Officer of Envestnet. Thank you for joining us on today's second quarter 2024 earnings call.

Before we begin, I'd like to point out that our earnings press release, supplemental presentation and associated Form 10-Q can be found 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 statement on Slides 2 and 3 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 as adjusted financial measures. Please refer to the appendix in our supplemental presentation for a reconciliation of these as adjusted financial measures to the most directly comparable GAAP measures. Joining me on today's call is Jim Fox, our Board Chair and Interim CEO.

On our call this afternoon, we will provide a company update as well as an overview of the company's results during the second quarter. Due to our pending transaction with Bain Capital, we will not be taking questions on today's call and will not be providing guidance for the third quarter. I'll now turn it over to Jim..

Thanks, Josh. As you know, on July 11, the company announced that we have entered into a definitive agreement to be acquired by Bain Capital and related parties. Earlier today, Envestnet filed its preliminary proxy statement relating to this pending transaction.

It includes comprehensive details of the process conducted by our board, and we encourage you to read the filing for further information.

As noted in the proxy, the Board and the company's senior management team regularly reviews the company's business and operations, competitive position, historical performance, future prospects, and long term strategic plan with the goal of maximizing stockholder value.

As part of these ongoing evaluations, we have from time to time considered various strategic alternatives, including the execution of the company's strategy as a stand-alone public company or the possible sale of the company to or in combination of the company with a third-party.

This transaction is the result of a thorough process by the Envestnet board and our advisors and provides certain and immediate value for our shareholders. Our board unanimously concluded the transaction, is in the best interest of the company and our shareholders.

We remain on track to close the transaction in the fourth quarter, subject to customary closing conditions, including obtaining approval from Envestnet shareholders and receiving the necessary regulatory clearances. We look forward to engaging with our shareholders in the days ahead.

The road ahead is incredibly bright for our clients, our partners and our associates. As a private company and with the support of Bain Capital, we expect to continue executing our strategy through organic and inorganic initiatives and investing in our platform to make it more customized, connected and intelligent.

Before handing it back to Josh, I'll turn to this quarter's results, which reflect our commitment to deep client relationships. Our Q2 revenue was $348 million, representing 11% growth over Q2 2023 and above the high end of our range.

Our adjusted EBITDA was $78 million, also above the high end of our range, representing a 22% adjusted EBITDA margin and nearly 450 basis points of margin expansion compared to Q2 2023.

Our adjusted EPS was $0.55 lower than our guidance in connection with certain non-cash charges that Josh will detail, but nevertheless up 20% from the $0.46 reported in Q2 2023. With that, I'll turn it back to Josh..

Thanks, Jim. At our Annual Envestnet Elevate Client Conference in May, nearly 2,000 advisors and professionals experienced first-hand the growth and productivity made possible by our leading wealth management platform.

Consistent with other second quarters, this conference caused slightly higher professional services revenue, which offset the associated direct expenses incurred. During Q2 2024, our advisor count increased to over 110,000, representing 3% growth year-over-year. We reported 4% account growth compared to Q2 2023.

Accounts on our platform declined during Q2 to over $19.4 million, driven by a programmatic effort to reduce unfunded, dormant accounts among certain clients that won't have a meaningful revenue impact.

In our Wealth Solutions segment, across diversified client channels, the extent of our platform and both asset and subscription based pricing constructs provide the breadth of solutions to fit the industry's needs. Traditionally, we have defined asset based revenues as primarily consisting of variable fees for providing access to our platforms.

Our asset based revenues include both fiduciary and technology services, and our offerings range from consolidated performance reporting to higher touch tailored solutions, such as full discretionary portfolio management that blends traditional indexing with the customization of managed accounts to improve after tax and risk-adjusted results.

We have experienced structural inflows into wealth solutions asset based revenue accounts. During Q2, our total inflows of nearly $11 billion reflects expanded relationships with existing clients. While there are always specific events in any quarter that impact flows, strong and consistent growth with our clients is at the center of our strategy.

We delivered over $13 billion of AUM flows in Q2. Our $26 billion of AUM flows during the first half of 2024 compares to approximately $30 billion of AUM flows for all of 2023. During Q2 2024, total asset based revenue generated by wealth solutions was over $219 million, an 18% increase from Q2 2023, supported by improving market conditions.

Our subscription based revenue represents our software-as-a-service-oriented offerings. During Q2, we delivered wealth solutions subscription based revenue of over $84 million, representing 6% growth over Q2 2023.

During Q2, we deconsolidated FIDx from our results in connection with the recent funding round led by insurance company partners and Envestnet clients. During 2023, FIDx contributed approximately $9 million of consolidated revenue to Envestnet, with approximately 90% of this contribution in subscription revenue.

Envestnet is the largest shareholder in FIDx despite not participating in this funding round. In total, wealth solutions segment revenue grew to over $312 million during Q2, representing 13% growth over Q2 2023. Turning to our data and analytics business, which generates subscription based revenues across open banking and alternative data offerings.

During Q2, our D&A revenue was $36.2 million, representing a 1% decline from Q2 2023. Q2 revenue represented a 3% revenue increase from Q1, with professional services as the primary driver. Our recurring subscription revenue of $33 million has been approximately flat during the last four quarters, consistent with our stabilization efforts.

In connection with business conditions, we recorded a non-cash impairment charge of $96 million during Q2, writing off the remaining goodwill related to the D&A business created by Envestnet's 2015 acquisition of Yodlee. Now moving on to expenses.

As previously detailed, Envestnet's costs consist of a combination of non-controllable and manageable expenses. Our non-controllable expenses include asset based payments to third parties common in the wealth industry that move in tandem with revenue growth. Our Q2 direct expenses of $144 million included $130 million of these asset based costs.

Our manageable costs fall into three general categories, compensation-related, non-compensation expenses, and capital expenditures. Regarding compensation expenses, as a reminder during 2023, Envestnet reduced its headcount by 10%, consistent with the conclusion of a period of elevated platform infrastructure investment.

We expect our headcount to be roughly flat during 2024.

As discussed on previous calls, despite increased variable compensation in connection with improved results, we expect a decline in total compensation related costs, which include all salary, benefits, stock based compensation and severance, regardless of accounting treatment regarding software development.

The second major area of total costs is non-compensation expenses, which encompasses all other operating expenses, including capitalizable software development, consistent with our focus on free cash flow.

As discussed on prior calls, despite inflationary headwinds, we continue to anticipate our non-compensation costs will be modestly lower versus 2023, given our scale. Finally, CapEx was $3 million for Q2, consistent with our annual planning cycle.

Our free cash flow during Q2 2024 was $67 million, a sequential improvement from negative $20 million during Q1 and up from $37 million during Q2 2023. During the first half of 2024, Envestnet generated approximately $47 million of free cash flow, more than it generated in all of 2023.

Cash on our balance sheet increased to $122 million, driven by our improved free cash flow generation, efficiency and conversion. As of the end of Q2, our leverage ratio, defined as total debt less cash over trailing adjusted EBITDA was approximately 2.7 times, representing more than a full turn of leverage reduction relative to a year ago.

In addition to our previously described impairment charge, during Q2, our financial results were impacted by non-cash items in connection with our continued efforts to enhance our operations. These include accounting gains from our minority investments of $20 million, primarily related to the FIDx deconsolidation.

These gains are partially offset by losses of $13 million from writing off previously capitalized software development in connection with streamlining our platform accounting efforts. There is no cash or cash flow impact from these items.

Before closing, I'd like to convey a sincere thank you to all our stakeholders, particularly our clients, our employees, and our shareholders. Envestnet has been on an incredible journey during the last 25 years. We're pleased to have announced this transaction with Bain and we look forward to embarking on this new chapter.

We are confident that our firm's best days are ahead as we continue to grow and evolve the company and capitalize on the substantial opportunities for our industry. Thank you for your interest in Envestnet..

Thank you. And with that, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..