Envestnet Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

There are 7 speakers on the call.

Operator

Greetings, and welcome to the Envestnet Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr.

Operator

Josh Warren, Incoming Chief Financial Officer. Thank you, Mr. Warren. You may begin.

Speaker 1

Thank you, and good afternoon, everyone. I'm Josh Warren, Incoming Chief Financial Officer of Envestnet. Thank you for joining us on today's Q3 2023 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 Web 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.

Speaker 1

I encourage you to review the cautionary statement on Slides 23 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 are Bill Kroeger, Envestnet's Chief Executive Officer and Tom Sipp, Executive Vice President for Business Lines.

Speaker 1

On our call this afternoon, we will provide a company update as well as an overview of the company's Q3 2023 results. After our prepared remarks, we will open the call to questions. During the Q and A, please limit yourself to 1 question plus one follow-up. You may get back into the queue if you have additional questions. And with that, I'll turn the call over to Bill.

Speaker 2

Thank you, Josh. Envestnet leads the wealth industry because we serve better, we scale better and we have consistently and repeatedly delivered on the future needs We had the vision and conviction that our industry's ability to deliver greater advice required an automated connected technology platform with a broader set of solutions that is powered by data intelligence. We are delivering this industry leading environment, making us more embedded and more essential to our clients. Over the past 2 years, we invested very specifically to extend our market leading position and to take share and also to increase the operating leverage and margins in our business. Our investment cycle was necessary And it is now complete.

Speaker 2

We've integrated systems, embedded automation in our processes and upgraded our technology. As we review our results and accomplishments tonight, there are 3 things to focus on. 1st, Our competitive position is unparalleled and is being validated by the marketplace we serve. We are significantly extending our competitive position by which is evidenced by client and market share gains in a challenging macro environment. 2nd, We are better servicing our clients with greater efficiency, leading them to increase their engagement with us.

Speaker 2

Over the last 18 months, Enabled by our investments, our client service scores have risen dramatically, which shows up in our 95 plus percent Wealth client renewal rates. Also, our clients are contracting to do more with us, using more of our integrated services and solutions with our contract addendums up 30% year over year. And then 3rd, the long term sustainable Operating leverage we have created will meaningfully increase shareholder value. The automation and consolidation of Our platform is delivering greater operating and expense efficiency. Since the start of 2023, We have reduced our operating expenses by over $60,000,000 on a run rate basis.

Speaker 2

We are structurally a higher margin company are the gains we are experiencing based on the success of our investment cycle. I now want to introduce you to Tom Sipp. Tom leads the business lines for Envestnet and he's going to review our Q3 results.

Speaker 3

Thank you, Bill. Our performance in the Q3 reflects Envestnet's focus and execution within a demanding macro environment. We are enhancing our platform, strengthening client satisfaction and winning market share. With the investment cycle now firmly in the past, we've become a more efficient, effective and profitable company, while accelerating additional cost reduction measures. Here are the key highlights for Envestnet for the 3rd quarter.

Speaker 3

Revenue in the Q3 grew 3% year over year to $316,800,000 within our guidance range, Despite softness in the subscription revenue, adjusted EBITDA grew 26% year over year to $67,200,000 above the high end of the guidance range. The adjusted EBITDA margin was 21%, an Improvement of 3.80 basis points year over year and adjusted earnings per share was $0.56 also above the range. Now moving on to expenses. Q3 personnel costs as adjusted for severance and non cash compensation expenses were We're down 15% year over year. These reductions primarily reflect our planned exit from the investment cycle as well as expense management actions that had been fully implemented.

Speaker 3

It's important to note that even with reduced personnel costs, We are more efficient delivering new products, technology and solutions to our clients with greater service levels. Increasing automation of service and operations is a key benefit of our investment plan. Overall, the macro environment in Q3 continued to present challenges for clients and prospects as well as our business. In the Wealth segment, our Q3 revenues grew to $275,000,000 up 7% when compared to Q3 2022. We are pleased with our performance in light of a difficult market environment, where industry wide flows remain challenged.

Speaker 3

Envestnet continues to generate positive net flows into both AUM and AUA, but the mix in the quarter was unfavorable for our fee rate. Our asset based revenues increased to $193,900,000 up 9.5% when compared to Q3 2022. Our Wealth business continues to increase market share. Our Q4 results are impacted by markets during Q3, where the blended sixty-forty portfolio was down approximately 3%. For Q4, we anticipate asset based revenue to be between $183,500,000 and $186,500,000 Assuming the midpoint, this leads to our projected asset based revenue growth to be approximately 1 half of 1 percent for the full year 2023.

Speaker 3

As a reminder, all of Envestnet's asset based pricing models are in our Wealth segment. Our subscription based revenues in Wealth increased to $76,800,000 up 1.1% when compared to Q3 2022. Our Q4 performance in Wealth will be negatively impacted by timing delays in connection with new client conversions and new programs coming online that we now expect to begin recognizing in 2024. We do not believe that the Q4 wealth subscription performance reflects the underlying opportunity for this business. Recent pricing actions and new customer wins gives us confidence in an accelerated subscription revenue growth rate in the next few years.

Speaker 3

All in all, our expectations remain to grow our wealth subscription revenue at approximately 6% in 2023. In our data and analytics business, our revenues declined 15% compared to Q3 2022 to $41,800,000 but grew sequentially by 2.4% compared to Q2 2023. As discussed in previous quarters, the banking crisis led to client cost cutting initiatives and implementation delays. Continuing lower than forecasted subscription revenues in bank and tech channels. That being said, Our revenue has stabilized and business metrics, including pipeline and bookings are strengthening, giving us optimism as we go into 2024.

Speaker 3

As we look out to Q4 and the full year and consistent with how we provided information previously, For the Q4, we expect revenues to be between $309,000,000 $314,000,000 adjusted EBITDA to be between 64 point $5,000,000 $68,500,000 and adjusted earnings per share to be between $0.51 $0.54 Therefore, for the full year 2023, we expect revenues to be between 1,237,000,000 $1,242,000,000 adjusted EBITDA to be between $245,000,000 $249,000,000 And adjusted earnings per share to be between $1.98 $2.01 With that, Let me turn it over to Bill to highlight the conviction we have for the opportunity before us.

Speaker 2

Thank you, Tom. Let me share our marketplace perspective with you. For the first time in a generation, there is the option to place assets in money market funds and secure a higher yield. In Q3, The industry once again saw negative long term fund flows and public commentary from asset And Wealth Managers has noted that account cash balances are rapidly growing. Retail money market fund assets are up 50% in the last year.

Speaker 2

Financial advisors are asset allocators and fiduciaries. And given the environment, We are seeing them shift to securing and protecting capital, while they are creating and revisiting financial plans with their clients. We've seen a significant influx of reporting only accounts as investors allocate more to cash. There will always be market cycles In the current cycle of higher interest rates and depressed equity flows are a challenge. However, and this is important, Our operating metrics are strong.

Speaker 2

We are taking share. Our annualized AUM and A organic growth of 11% in the quarter compares to low to mid single digits for other companies. On a trailing 12 month basis, our organic asset growth rates Have been 8% for AU M and A that is well ahead of the industry. Also advisors are using more Of what we offer with increasing adoption and activity on our platform, something I track very closely is our AUM and A accounts per advisor And those are up 9% year over year. That is impressive given the environment.

Speaker 2

We are Focused on ensuring that as assets begin to rebalance into investment portfolios, we are extremely well positioned for the demand and growth that will come. This is the advantage we have in the scale and depth of our installed base as we serve 107,000 more than 107,000 financial advisors and $5,400,000,000,000 in assets. Envestnet is more deeply engaged and connected with our clients and partners than ever before. Our clients are adapting to the environment and using this cycle to look at their cost structure and operating environment. They are focused on making their Our focused engagement model and the work we did to integrate our capabilities has put us at the center of many vendor consolidation discussions.

Speaker 2

At a recent meeting with a large client of ours, they told me that their analysis discovered that Envestnet could help them consolidate over 68 Different applications they use to operate their business today. There's proof of our progress that's evidencing itself in many ways, including new logo wins and deepening contracts with our installed base of clients. Our recent announcement of our partnership with First Command It's a bellwether of what we're accomplishing. As First Command stated, Envestnet has all the capabilities, solutions and tools that we need To serve our military families, Envestnet is the leading platform in the space. First Command is signing up for our full platform in our full suite of solutions.

Speaker 2

Long time significant customer of ours is another example of a client doing more with us, We've expanded beyond our managed account platform to include a broad set of our services, including a mandate to carriers and advisors that 100% Annual annuity contracts will be processed through the Envestnet Insurance Exchange. This is a long term client who is consolidating vendors leading to the expansion of Envestnet's reach. Adding more solutions to our contracts is a Leading indicator of future results, our enhanced operating environment has led to deeper engagements and this is evidenced by addendums to our contracts, which are up 30% year over year. We're seeing a convergence point for our partners as well As they position themselves to benefit from our distribution footprint, it is because we have connected the components of Envestnet and engaged more advisors that now We have more levers to drive incremental revenue streams through partnerships. Among these are asset managers.

Speaker 2

We're expanding our relationship model, adding new distribution and collaboration opportunities as the leading asset managers focus on capabilities that will drive their growth. Another area is custody partners. We sit at a key convergence point for a truly integrated wealth Plus custody platform that the market needs for greater scale and operating flexibility. We're incredibly bullish on the long term revenue We're leaned into this partnership with FNZ and are building out a differentiated option for the marketplace with growing customer interest. Additionally, we've seen increased interest from existing custodial relationships to integrate more closely with us And this is a recognition of our scale and our distribution strength.

Speaker 2

A brief update on our data and analytics business. Last quarter, we outlined the critical factors for stabilization of this business. While there continues to be softness in banking and aggregation sectors, the research business Reached a significant milestone as the new data sets have been onboarded. After only 1 month, we are seeing a meaningful rebound in our business indicators and results. In Q3, new bookings are up $2,000,000 year over year.

Speaker 2

There are also 21 opportunities that are in the research trial queue, representing $8,300,000 of potential Q4 bookings. This is progress. We're on an improving path for this Business and we'll report on the progression we achieve in next quarter's meeting. To summarize, We're operating with deeper client engagement, quality of service and efficiency. Let me be clear, client feedback is strong.

Speaker 2

Our service scores have risen by 40% over the last 18 months. And in the second half of this year, We have lifted our adjusted EBITDA by 19% versus the first half of this year. We are confident that this will continue. Now I'll hand it over to Josh Warren, who we are very excited to welcome to Envestnet and will be fully installed as our Chief Financial Officer next week. His comments set the stage as he steps into his new role.

Speaker 2

Josh?

Speaker 1

Thank you, Bill. I'd also like to thank the entire team at Envestnet for a warm welcome And Pete D'Arrigo, Envestnet's CFO for the last 15 years in particular for helping me with the smooth transition. I'm excited about the journey ahead because Envestnet holds a distinct position within the ecosystem that others have tried and failed to replicate. This position is important and impactful, powering financial advisors and the millions of clients they serve. I'd also like to emphasize that the long term sustainable operating leverage created will meaningfully increase shareholder value.

Speaker 1

You're seeing the benefits of the investment cycle being completed, more automation, scale and an ability to reduce costs While delivering an industry leading platform and operating environment for clients that are looking to have fewer and deeper partner relationships. We ended September with $43,200,000 of cash and $892,500,000 of total debt from our 2 tranches of convertible notes. Based on the operating results that Tom outlined, we reduced our net leverage ratio, Our net debt over trailing adjusted EBITDA to just shy of 3.7 times as of September 30. Based on the rest of the year outlook outlined previously, We expect to reduce our net leverage ratio to approximately 3.5 times by the end of this year. We're in the process of our annual planning cycle and will give an appropriate outlook for 2024 on our next call, but let me share how we're thinking about the outlook to provide some added visibility and transparency.

Speaker 1

Envestnet is now a structurally more efficient company following the conclusion of our investment cycle. Bill and Tom mentioned the investments made in automation and scale. During 2023, these initiatives are expected to yield approximately $27,000,000 in expense savings with the additional expense Further, given our scale and our operating leverage, we expect future revenue growth initiatives, such as those that Bill and Tom outlined will all be margin accretive as they scale.

Speaker 2

Those who

Speaker 1

have followed Envestnet are familiar with our as adjusted metrics. On our income statement, we're naturally progressing to our 2025 target of 25% adjusted EBITDA margins, the metric we've used in our debt covenants and provided guidance on. I would also like to add some additional commentary here as it relates to free cash flow, compensation expense and software development as we look forward. This year, Envestnet will pay approximately $34,000,000 of cash for severance expenses, which we expect will impact our free cash flow during 2023. We expect severance expenses to be significantly lower going forward.

Speaker 1

Given our lower employee base, we expect our non cash Stock based compensation will be down by approximately 15%. We anticipate providing visibility on our free cash flow generation going forward For transparency and comparability, our free cash flow will deduct both our capital expenditures and our internally developed software or IDS Capitalized under GAAP based on the stage of development and deployment. While our 2023 CapEx, As previously stated, will be approximately the same as it was in 2022. Our internally developed software costs for 2023 Are expected to be approximately $93,000,000 representing a 4% increase from 2022 IBS. Now that the investment cycle is complete, we anticipate both our CapEx and our IDS to be lower in 2024.

Speaker 1

To summarize, because of the investment cycle in 2022 and for the full year 2023, Envestnet's free cash flow was and will be negative. This will not be the case in 2024 and will give greater detail on our February call. One final note before I move on. As of October 1, the advisor focused Wealth Analytics business transferred over to the Wealth segment To better align reporting with the way we manage the business, focused on the clients that we serve. We anticipate this transfer to be approximately $4,000,000 of revenue Q4 and it is reflected in the outlook that Tom provided earlier.

Speaker 1

As stated in February on our next earnings call, we'll provide an update and outlook at that time. Thank you. And I'll now turn it back to Bill for closing remarks.

Speaker 2

Thank you, Josh. And once again, welcome to Envestnet. I want to spend just a moment to recognize and thank our departing Chief Financial Officer, Pete Torego. Since joining Envestnet in 2008, Pete has made invaluable contributions to our organization and to our success. He helped to lead our successful IPO and he's helped guide our company through multiple market cycles.

Speaker 2

Pete has been an exceptional colleague and leader and his tenure as Envestnet CFO has been vital. Pete, Thank you. Now let me wrap up our prepared remarks and I'll conclude with this. Our investment cycle is complete and has been successfully implemented. Our competitive position is unparalleled and our long term growth thesis is being validated by the marketplace that we serve.

Speaker 2

We're better servicing our clients with greater efficiency, leading them to increase their engagement with us And the long term sustainable operating leverage we have created will meaningfully increase shareholder value. We're doing what we said we would do and it is working. Despite negative industry flows, we are gaining share and have solidified the right to win in the marketplace. We're using our leading technology, solutions and data intelligence as powerful competitive advantages to go deeper and become even more essential to our customers. And importantly, we will build on the progress we've already made on delivering I'm incredibly grateful for our clients, partners and the employees of Envestnet I'll now turn it over to the operator for questions.

Speaker 2

Thank you very much.

Operator

Thank you. We will now be conducting a question and answer session.

Speaker 4

Thanks for taking my question, Eric. I guess my first question, I appreciate all the color around the expenses and the 24 kind of initial thoughts. I guess, I'm just kind of just curious if you could elaborate a little bit more in terms of kind of how we should think about Margin progression over the course of 2024 as you think about the 25% targets for 2025. And I think, Bill, you mentioned the $60,000,000 kind of run rate savings. And Josh, I think you said $27,000,000 of expense savings in 20 Maybe if you want to talk through maybe a run rate exit run rate in 2023 and how we should kind of Think about that for 24 as well.

Speaker 4

Thanks.

Speaker 2

Great. I'm going to add Tom Sippa is going to begin and then Josh will finish. Yes. Michael, I would think about it

Speaker 3

a couple of ways. First, we've seen some pretty good margin expansion over the past 12 to 18 months. We are well on our way to the 25% target. We think it will not be back end weighted. We will evidence some pretty material progress In 2024, so think about it as more of a linear progression from 2022, 2023, 2023 all the way out to 2025.

Speaker 3

There's Expense initiatives that we've already implemented that will flow through next year. And then the other thing that you should think about is Our free cash flow conversion rate will improve as well. So we're on our way to the 25%. It will be a linear progression and more will drop to the bottom line going forward. And with that, Josh?

Speaker 1

Yes. Thanks, Tom. And Michael, let me just say, first, as a reminder, just With regard to our 2023 OpEx that Tom mentioned, given our outlook to the full year, a headline to take away approximately $27,000,000 And in connection with that, you asked about the $60,000,000 of run rate savings. That's based on actions already taken. About half will be was recognized this year and the remainder of the $60,000,000 will be recognized next year in a combination of operating and capital On delivering a robust and sustainable free cash flow generating franchise going forward as we continue to deliver the highest quality platform in the industry.

Speaker 4

Perfect. Thank you. And so for my follow-up, I just want to switch gears a little bit just kind of zooming out here. I mean, We've kind of talked about the opportunity set for the custodian for some time now. I'm just kind of, 1, kind of curious on an update on timing there.

Speaker 4

And then Bill, you talked about kind of a large set of long term revenue opportunity there for Envestnet looking ahead. I mean, how do you think about sizing This kind of opportunity for this custodian offering over the medium term for investment, is it really just merely offering Custody to clients or are there other synergistic areas that might create further value for investment?

Speaker 2

Yes. Awesome, Michael. Yes. No, making very good progress with our partners at FNZ. They have recently Transition to their operating platform that is mostly trust focused and will be in market with them either in Q2 or Q3 of this year, when market analysts as well as clients Take a look at the operating environment that we're going to be able to offer them.

Speaker 2

It is differentiated and there's a great deal of interest. So again, we're making a lot of engagement progress, integration progress And now to get to market by Q2 or Q3, that does not include their broker dealer registration, Which they filed with the regulators and we're hopeful that they received that and we're In operation with the broker dealer side of the offering at some point in 2024, but we're encouraged. The other dynamic, Michael, that I would just spotlight is that overall, I think that the custody environment sees that the integration of what We do and what they do as a very meaningful step forward in operating efficiency, helping our clients take out costs, Helping them open accounts and manage accounts with less friction. So we're deeply engaged with legacy custodians on how we offer that. And in each of those environments, both the FNZ and with our current custody partners, we believe there's financial benefit for Envestnet.

Speaker 2

So we're working hard and that's a focus point of ours. The other area of opportunity I spotlighted When it comes to strategic partners is asset managers and we own and have a very critical distribution footprint. And as we brought the platforms together and all of our advisors have access to all of what we do, It becomes an incredibly valuable conduit to reach more and more advisors with Capabilities that asset managers are focused on and investing more in, which includes personalization, which includes overlay and adding value, alpha to performance through things like tax overlay, risk overlay, And individualized portfolios that are defined by the industry as direct indexing. Tom, would you add anything

Speaker 5

to that?

Speaker 2

I would just add

Speaker 3

on the Custody, Michael, we're going to retain revenue on custody economics. Think of that as 2 to 5 basis points, And we'll provide an integrated custody wealth custody ecosystem, real time account opening, Real time trading, so a better solution and we're going to have several options. F and Z will be one option and then we'll have At least one, if not more options from the established players in the U. S. Market.

Speaker 3

And initially, we'll be in market with Bank trust departments and REAs, call it, in the middle of next year, and then we will then cross sell to our broker dealer clients End of next year into 2025. But for the first time, investments then participating in those custody economics, which include the money they make on cash. And then when Bill is talking about the asset managers, we're seeing a big trend in personalization. We have we work with 800, 900 asset managers as part of our marketplace today. There is an We've invested a lot in personalized capabilities.

Speaker 3

So think of direct indexing, think of high net worth solutions, trust solutions. We're going to work with a smaller group. It's going to be, call it, a handful of major asset management partners And the economic relationship with those partners will be very different than what Envestnet's experienced with the asset management community before. And then they'll also lean in from a marketing distribution sales footprint perspective. So you're seeing a theme here where we're participating in more economics From the custodians and from the asset managers, which over the next couple of years are going to start to be a meaningful impact to our P and L.

Speaker 2

Which really It's all made possible because we brought the platform together into an integrated conduit to reach so many advisors, Michael. Thank you for your questions.

Speaker 4

Perfect. Thanks, guys.

Operator

Thank you. Our next question comes from the line of Alex Kramm with UBS. Please proceed with your question.

Speaker 5

Good morning, Alex. Good, good. Thank you. Good evening, everyone. First off, maybe on the topic of Pricing and this may be a 2 parter, but maybe it's a 1 parter.

Speaker 5

But I think Tom, you made some comments and I think it related to subscription side That you've taken some pricing action and looking for things to turn around. So maybe you can just flush out what exactly you did and what that meant? And then Connected to that just quickly, I think the revenue guide for the Q4 assumes some sort of Pricing deterioration on the AUM, AUA side like maybe like 3%, 4% or so at the midpoint. So maybe I don't know if those two things are related or different. So maybe just flush out those 2 things.

Speaker 2

Thanks. I'll take both of those

Speaker 3

and I think they're not related. So one, the fee rate, what's going on there when you're kind of backing into The fee rate for the Q4, that's being driven by really 2 primary things. There was a big client conversion about $17,000,000,000 of assets that starts off at low fee reporting only assets. And then next year, we're going to see the managed accounts convert onto our platform. So that will lead to Higher fee incremental assets next year.

Speaker 3

So that's one of the drivers in the Q4 fee rate. The other is just the mix between AUM and AUA. And clients, when they move more to cash, it affects our fee rate because that's mostly a reporting only relationship. So again, Nothing to do with pricing. It's that conversion and then as clients move and that's happening across the industry, More AUA, more cash and that affects your blended fee rate.

Speaker 3

And then if you move to the pricing, I'd say that we're making a lot of progress With REAs where our unit pricing is going up, but then also what we're doing is we're bundling more with RA relationship. So we are with our Tamarac REAs, it's an operating platform relationship, trading, reporting, rebalancing. We've now bundled insights and analytics. So the fee goes up, but they're also getting more for You know, more enhanced platform. And then from our perspective, strategically, when they use those insights and analytics, Over time, that will lead to further adoption of our solutions.

Speaker 3

So we not only get the higher fee with that bundle, but you're going to get better penetration rate

Speaker 5

Great. Thank you. That's helpful. And then maybe for my second topic, and this is for Josh. I mean, I know you're not taking over as CFO until next week, but obviously, you made some comments here.

Speaker 5

So just, I guess bigger picture, you're stepping into the role with the stock being down year to date, I think, 39% and the market is up 15 or 14, 15. So from the outside looking in, this is looking like something is broken. So I heard your comments. Obviously, it sounds like you're very supportive of what's been going on and the I guess what's in place In terms of the operating leverage, but just wondering if you look from the outside in and now having a chance to look from the inside a little bit more, What else do you think you can enact here to obviously improve the picture because the market is obviously Not buying in what's been laid out so far. Thanks.

Speaker 1

Sure. Well, thank you for that question, Alex. I mean, look, I'd say this. I've gotten to know Envestnet over many years as a partner, as a counterparty. All of this is public information and well known in the marketplace, But Investment is a core partner of BlackRock, where I worked for the last 8 plus years.

Speaker 1

It's a core partner of I Capital, an alternative investment marketplace where I've been on the Board And Audit and Risk Committee for the last 4. As the leading vertical provider That serves the needs of financial advisor financial advisors. Envestnet delivers the operating environment.

Speaker 5

Fair enough. Looking forward to more.

Speaker 2

Thanks, Alex.

Operator

Our next question comes from the line of Pete Heckmann with D. A. Davidson. Please proceed with your question.

Speaker 6

Hey, good afternoon. I appreciate being able to ask the question. I just want to go back to that pricing issue On the last question, it does appear that the fee rate declines really quite a bit In the Q4 and I can't I heard the one thing about the one big client conversion was 17,000,000,000 But on that base of assets, I wouldn't think that would move the needle quite so much. So You said once they move the managed accounts over, the fee rate should go up. And then as you continue to collect assets, in the first party managed, Should we start to see the fee rates start to move higher in 2024?

Speaker 3

Well, Pete, thank you for the question. So that $17,000,000,000 comes over at a very low fee rate. The managed accounts don't come over until next year. So that's when we'll make 6, 7 basis points on that asset base versus 1 or less than 1. But there's 2 things that are driving your Q4 calculation.

Speaker 3

1 is That specific client and then 2, the mix of AUA versus AUM, more money across the industry and our platform is in AUA And then more money within AUA is moving to cash. So as more money moves to cash, it shifts From AUM higher fee assets to really a reporting only fee for us. So those 2 are the drivers that are affecting that fee rate. So It's not price degradation prices decreasing with existing clients. It's really that new client and the mix issue that's affecting that fee calculation.

Speaker 2

Yes, Peter, this is Bill. Yes, it's the dynamic and I would just spotlight kind of the overall market net flow Environment, in the past quarters, I've really I've spotlighted and I'll do it now, the success we're having in selling Into our existing client base more of these high value solutions. But year to date or year over year For our high net worth solutions, account growth of 63% and assets of 55% Year over year direct indexing assets of 48% growth year over year and account growth 27%, overlay 41% year over year growth with account growth of 28%. So we're being successful, but it's not enough to defy the overall AUA flow As they position their clients in more cash or defensive positions and ultimately rebalance into these types of solutions When the market normalizes and the rate environment becomes clear. So that's just the dynamic and we're managing it.

Speaker 2

And again, There's a conversion, good thing, dollars 17,000,000,000 low fee rate, ultimately becomes higher fee rate. There's a big flow of AUA, But our focus and our success, our continued success in penetrating our current book of business is meaningful. I would also so we see our fee rate as stable,

Speaker 3

Both on our AUM and AUM, it's the mix that's changing the calculation. But then as you look forward and think about our Subscription revenue, we've got a lot going on in the retirement space, so there will be growth in subscriptions driven by those initiatives. We've talked about a partnership with Empower. That will come through as subscription revenue. It will also come through as fiduciary revenue as we're the default manager on those plans.

Speaker 3

We have a lot we talked about the asset managers. We're going to get different economics going forward from the asset managers. And that's That will mostly come through incrementally as subscription revenue. And then we have organic growth, new clients coming on board. We talked about First Command, that's a pretty material client.

Speaker 3

It's about 500,000 accounts, dollars 35,000,000,000 of assets. It will come on second, Q3 of next year. And then we see solid growth in our insights and analytics based on the signed deals in the pipeline. And then our REA growth, it's 1, the subscription standalone platform, we bundle analytics and then we cross sell from there, Managed accounts, tax overlay, direct indexing and then at some point next year, call it the middle of next year, we'll start to cross sell custody to those existing relationships.

Speaker 2

The only thing I'd add to that, Pete, not to pile on, but also stabilization in the DA subs line because that has not been the case. That has been a heavyweight That has kind of dragged down our overall subs growth. And so we have made a lot of progress this past quarter And we'll report on more as we get to the end of the next quarter the quarter that we're in now.

Speaker 6

Okay. Okay. That's helpful. And then I should probably remember why, but Professional services in your guidance is up over 90% year over year. Remind me what's driving that dynamic?

Speaker 1

So this is Josh. I'm happy to take that. That's effectively a single client, which is an existing client of our DNA business, where the new service that we're providing for them in connection in some respects with the new data sets that Bill mentioned is

Speaker 3

Yes. And you had some revenue shifting between subscription and professional services throughout the year as well.

Speaker 6

Okay. All right. I appreciate it. I'll get back in the queue.

Speaker 2

All right. Thanks, Pete.

Operator

Thank There are no further questions at this time. And I'd like to turn the floor back over to CEO, Mr. Bill Kroeger for closing comments.

Speaker 2

Thank you, Camilla. Thank you, everyone, for your interest in Envestnet and for joining us this evening. I once again want to thank all of my colleagues at Envestnet for the incredible work that you do. Thank you and have a good evening.

Operator

This concludes today's teleconference. You may disconnect your lines at this time.

Powered by Quartr
Earnings Conference Call
Envestnet Q3 2023
00:00 / 00:00