Q2 2022 AssetMark Financial Holdings Inc Earnings Call
Outsourcing option.
I am extremely pleased with what we've accomplished and the direction. The company is going continued execution on the five components of our growth strategy will further evolution of being more than a tap in the years to come.
As we do every quarter, let me provide an update on our growth strategy.
The first component on slide five as to meet advisors, where they are catering to varying affiliations and new growth oriented or mature advisors.
In June we announced the acquisition of adhesion wealth, a leading provider of wealth management technology solutions to Ria's, Alright enterprises and asset managers.
<unk> platform enables over 2800 fee based advisors across 180, <unk> to deliver better investor outcomes, while successfully growing their practices by providing outsourced overlay trading services client engagement technologies and managed accounts program.
We believe this transformation. We believe this is a transformational acquisition for <unk>, Let me explain why.
First the addition of adhesion will further strengthen our ability to serve the rapidly expanding <unk> market with an ecosystem of flexible purpose built solutions that drive growth efficiency and scale.
As we've discussed in previous earnings calls more and more advisors are moving to the <unk> channel.
Second the acquisition will enable us to provide a broader range of investment in technology solutions through a flexible and modular approach, including to those advisers that prefer to assemble solutions for their practice themselves versus fully outsourcing and delegating.
This lays the groundwork for providing a more unbundled offering at aftermarket through adhesion.
Third this will greatly expand our total addressable market as historically through asset Mark institutional we've been focused on outsourced oriented.
With practice size is between 25 and $250 million.
<unk> platform provides a more flexible modular offering value by larger Rts.
Simply put we will have expanded our advisor total addressable market by three times through the acquisition of adhesion.
Lastly, the acquisition will benefit <unk> existing advisers by delivering value added services and solutions, including direct indexing tax transition portfolio administration.
<unk> analytics and client reporting.
We expect adhesion to close in the second half of the year and to be accretive to <unk> earnings in its first full year.
Turning to slide six the second component of our growth strategy is to deliver a holistic differentiated experience to advisors and their clients.
It's been one year since we closed the acquisition of <unk>, which has greatly accelerated our financial wellness vision over the last year Hawaiian has realized meaningful growth in both the number of enterprise and small and midsized business or SMB licenses.
Enterprise advisor and consumer licenses, which make up approximately 43 of <unk> subscription revenue are up 6% and 17% respectively.
F&B licenses, which make up the remaining 57% avoid subscription revenue were also up year over year.
Feedback from our advisors continues to be positive and we are pleased with points growth over the last year.
In the second quarter, <unk> signed a new enterprise client in Canada, and we expect to see an acceleration in the number of enterprise relationships as key geographies open back up.
The third component of our growth strategy is to enable advisors to serve more investors across the Las baucus spectrum varying life stages and generation.
Let's turn to slide seven.
This quarter I'd like to highlight two of our recent platform additions as well as provide an update on how we are supporting our advisers during this year's market volatility.
Last September we launched a curated selection of professionally managed estimates, which cover a wide breadth of asset classes investment styles and asset managers.
These have been actively used by our advisers and their clients with over 13000 submitted proposal totaling $650 million since inception.
Most recently, we launched our values driven investment program, which launched four new ESG strategies. In addition to our robust suite of ESG resources and educational materials.
We're already seeing early adoption from our advisers with over 400 proposals submitted.
We continue to focus on timely education for advisors.
Their clients are conduct their clients are confronting strong and persistent market volatility for the first time in two years.
This type of environment is when financial advisers are needed most and have the greatest opportunity to prove their value.
We help our advisors connect with our clients to provide context resources and guidance to navigate recent volatility in the effective and consistent manner.
In the second quarter, we launched a market volatility toolkit, which includes curated and timely resources that guide and educate advisers. So they can stay informed your confident in and provide their clients comfort in volatile times.
Being there for our clients. So they can be there for their clients is why advisers continue to choose asked Mark and why we continue to win new advisors.
The fourth component of our growth strategy as seen on slide eight to help advisors grow and scale their businesses by offering turnkey advisor solutions and program.
I would also like to provide an update this quarter on a couple of offerings, we've launched over the last 12 months.
In January of this year, we launched a digital prospecting capability for advisors, a tool designed to streamline prospecting for financial advisers and provide them with insights to drive lead conversion.
While still in the early innings, our advisers are actively using the tool with over 500 high quality leads generated since launch.
In February we launched our marketing advantage program and all in one marketing platform that helps the financial advisors build relationships and grow their business with robust suite of ready to use tools.
While still early hundreds of our advisers are leveraging this platform and feedback has been extremely positive as advisor site, both time and cost savings.
Helping our advisors grow and scale is a key component of our growth strategy and we continue to dedicate resources here in fact over the last year, we have expanded our business consulting team by over 30%.
Now turning to slide five the final component of our growth strategy is to pursue strategic transactions by adding capabilities and assets that improve advisers ability to serve investors and expand their businesses.
As I've mentioned on previous earnings calls, we remain very focused on M&A and our disciplined buyer looking only to buy capabilities that we felt would be a strong fit for our platform.
Now I'll turn the call over to Gary who will take us through a deeper dive into our second quarter results and then an updated outlook for 2022.
Thank you Natalie and good afternoon to all those on the call Natalie mentioned second quarter was a record quarter among many of our top.
Chuck.
Our key top and bottom lines.
This is a direct testament to our ability to be more than just the Tam for our more than 8600 advisors and a 220000 household batesville.
As usual I will start with a discussion about platform assets, then talk about our revenue expense and then I.
I will conclude with an update on our outlook for 2020.
Starting on slide 10 second quarter platform assets with $82 1 billion.
I'd like to $10 $1 billion market loss net of fees.
Flows for the quarter was one 4 billion.
And our $3 5 billion for.
For the year.
Annualized net flow as a percentage of our beginning.
<unk> asset with seven 5%.
We are extremely pleased with our first half of 2022 organic growth given the market volatility and the amount of money continues to sit on the sidelines, we continue to stay well engaged and our advisers and provide them with the resources they need to lead their clients through these volatile and uncertain markets and now you mentioned this among other things.
Does allow us to continue to win new advisors and share of wallet from our existing turbines.
Now turning our attention to our advisor metrics, please turn to slide 11.
The second quarter, we added 193, new producing advisers or MPA.
Louise pointed out growing the number of our engaged advisers on our platform.
Key focus dramatic.
It is crucial to drive further growth in that business.
Thank you.
We just find engaging well with over $5 billion in assets in our platform.
Our total engaged advisers on the end of the quarter second quarter was 2663.
This reflects 23, new engaged advisers in the quarter offset by 175 advisors, we've dropped below $5 million due to market depreciation.
Our engaged advisers make up 91% of our platform assets.
Turning to household the number of households is up 12% year over year to 220000 is powerful and I think that that asset Mark is close to impact in the financial hopes and dreams of over a quarter million American Sam.
Now, let's turn to slide 12 to discuss this quarter's revenue, which was a record $151 million as you know we focus our revenue net of related variable expenses.
We focus on our revenue net of related variable the.
In the second quarter 2022, our net revenue was a record $110 million up 21% year over year, which is driven by asset based net revenue, which was up 11% and $99 million.
Spread based revenue, which was up a robust 260% $6 5 million and the addition of subscription based revenue from <unk>, which was $3 $3 million.
This quarter <unk> revenue was impacted by foreign exchange pressure.
Later during my prepared remarks, I will provide some detail on how increase rate and market volatility impact our financials.
Slide 13 details year over year, our year over year net revenue walk and the waterfall shows net revenue was up year over year, driven by the impact of our asset growth, which generated $13 million in additional net revenue.
Also adding to our increase in net revenue.
It is zero point $6 million reduction.
Net basis.
Reminder, this is ongoing savings is primarily driven by restructuring agreements with our providers.
Year over year fee compression approximately one basis point in line with our expectations.
Subscription revenue void and another $3 3 million in additional revenue.
<unk> consulting revenue drove the increase in our.
Other revenue line as well.
Lastly spread based revenue increased almost.
$5 million year over year due to the improvement in our average yield from 29 basis points to 81 basis points.
Now, let's discuss expenses.
Slide 14, <unk> adjusted expenses increased 17% year over year, and $109 million and were down 2% quarter over quarter.
Operating expenses were up 18% year over year to $64 million, driven by $4 $2 million increase in compensation expense.
$5 million increase in SG&A.
Let me quickly run through our adjustments for the quarter, we added back a total of $9 $1 million pre tax which is comprised of three items.
$3 million of noncash share based compensation, we anticipate the quarterly run rate to be just under $4 million going forward.
Secondly, guests into expenses $1 7 million of amortization expense related to prior acquisitions.
We expect this to be our quarterly run rate throughout 2020 to.
Lastly, $4 $50 million related primarily to reorganization and integration costs and one time costs related to the pandemic.
Now, let's turn to slide 15 to discuss our earnings for the quarter.
Second quarter 2022, adjusted EBITDA was $49 6 million up 24% year over year, and the highest quarterly adjusted EBIT in our company's history.
Really pleased here I guess, maybe this quarter is a testament to our growing revenue diversification and the flexibility and disciplined management of our expenses.
Adjusted EBITDA margin for the quarter was a record 32, 8% up a robust 150 basis points year over year.
Our reported net income for the quarter was a record $25 $3 million almost equal to our reported income for the full year of 2021.
Just at net income for the second quarter was a record $32 $4 million 44 per share.
This is based on our second quarter diluted share count was $73 7 million.
Our adjusted effective tax rate for the full year is unchanged at 23, 5%.
Well for further color. Please see the adjusted net income walk on slide 20.
Now, let's look at the reported second quarter balance sheet.
I would highlight two items first we have continued to do a great job of generating cash and $17 $8 million to our cash position quarter over quarter and ending the second quarter were $116 $5 million in cash.
Actually we still have a $375 million in our credit facility is available to the company our cash balance on our low debt leverage will gave us flexibility in deploying cash for future M&A deals, which remains an important focus at the peak component of our growth strategy.
Second point on the balance sheet capital expenditures.
We primarily reflect our long term investments in technology to create new capabilities increase scale improved service in the second quarter, our capital spend was $10 million.
6% of total revenue in 2022, we are setting our capital expenditures to be about 7% of total revenue as we continue to invest in the future of the business.
Before I discuss our 2022 outlook I would be remiss to not provide some clarity on how we think about the impact of future rate hikes and market volatility on our financials.
Turning to slide 16, the left hand column shows the annual impact of a 25 basis point increase in the fed funds rate on our spread based revenue.
A reminder, spread based revenue was influenced significantly by interest rate changes.
In the amount of cash held by investors that are proprietary to us.
Currently the insured cash deposit or ICD portion of our at <unk>.
Cash at <unk> Trust company, which is 5% of polo at much higher than our historical three 5%.
This is due to the strategy of allocating more to cash during this market volatility.
For modeling purposes, we are using the three 5% number to show a revenue impact of 25 basis point increase.
Right, which would equate to an additional $4 $5 million annual spread based revenue.
Now, let's turn to the impact on our asset based revenue.
Reminder.
We view our platform assets is a blend of 60% global equity at 40% domestic fixed income equating to approximate five beta to the S&P 500.
While we are committed to diversifying our revenue I wanted to show that the impact of 1% to 5% I'm sorry, the impact of a $1 two 5% decline in this 60 40 global portfolio on our asset based revenue assuming the current platform assets $82 billion and no future asset.
Asset based fee compression, we would see.
A 1.25% decline to impact our asset based revenue by four national golf, So simply put a 25 basis point increase in defense fund rate could offset a $1 two 5% depreciation in.
Our platform assets.
We hope this provides some clarity regarding the inflection point between interest rate height and market volatility.
Finally, let's turn to slide 17 to provide an update on our 2022 expectation we.
We have flexibility in our business model given that we bill in advance and have a strong track record of expense management.
Despite the continued market the market volatility.
He used to announce that we are reaffirming our earnings outlook as well as EBITDA margin expansion target for the year let.
Let me share some perspective on this.
As a result of billing in advance we have already collected revenue for three quarters of the year.
We have lost approximately $10 billion of platform assets in the market in the second quarter, we are getting a greater contribution from spread based revenue than previously expected due to more rapid increases in interest rates as well as a greater amount of cash and <unk> Trust company.
Last time, we spoke rigorous to 725 basis point increases in defense funds rate. This year, we've raised interest rates by about 2% by the end of the year.
We have already seen a 50 basis point increase in May and 275 basis point increases in June and July now most set rates and the year over three and a quarter per se.
As a result of walnuts, we are narrowing our revenue growth expectations from 16% to 20% to 16% to 18%.
Turning to our outlook our model has flexibility in our expense base with our revenue expectations coming down slightly due to market volatility and timing of deploying contact.
Also revising our expense growth outlook from 14% to 18% down to a narrow range of 14% to 16%.
It is important to note that we will remain disciplined so that expense growth will not outpace our revenue.
Lastly, we are reaffirming our outlook of 20% adjusted EBITDA growth for the year and EBITDA margin expansion of 100 basis points. Despite market conditions, we are on track for a record year.
Really pleased about the strong possibility of growing the top and bottom line double digits in 2022.
So with that I'll hand, it back over to Natalie for closing remarks.
Thank you Gary and thanks, everyone on the call today. This concludes our prepared remarks and I'll now turn the call back to the operator to begin our question and answers.
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Reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question. We will pause here briefly ask questions are registered.
Our first question comes from.
Patrick.
Sugar <unk> with Raymond James Patrick Your line is now open.
Hi, good afternoon guys.
About adhesion I was a little bit surprised to see the only generated $7 million in net revenue in 2021, given the large number of advisers towards it has distribution how can asset mark accelerate the revenue growth of that business.
So thanks, Patrick I'll start that question, and then hand off to Gary to get to the get to the specifics about the revenue.
But first of all we're really excited about adhesion and the combination of adhesion and aftermarket institutional.
The combination of the two businesses provides a full menu of services for <unk> on the one hand, you have aftermarket which is fully bundled highly outsourced.
And drive scale through advisors outsourcing.
Much of their business and on the other hand, you have adhesion.
<unk> also provides outsourcing support and scale to advisers, but does it in a way that allows advisors to pick and choose.
The solutions they use and key among those solutions is investment management, rather than fully outsourcing investment management advisors can continue.
To perform their own investment management.
What we're finding adhesion and asset Mark is many advisors want to do both.
Want to fully outsource part of their business and.
And continue to drive investments for other parts of their business and so the combination of adhesion and aftermarket gives advisers the full menu to choose from and so our plan is to drive drive growth and to drive advisor growth by streamlining how advisers receive both types of services.
Offering leads that are in the Aframax system that want a combination and leads that are in the adhesion system that want a combination the best of both worlds.
More to come on that in future earnings calls, but with that I will hand off to Gary to talk about adhesion revenue.
Hey, Patrick So I think high level simple numbers right at $7 million of revenue probably represents somewhere about a blended rate of about 10 basis points on the assets that we're talking about there and.
How we're going to understand that.
We'll talk more and more in the future, but we're going to look to expand the services what value we can add to it to basically.
Ill take more revenue in the value chain that.
Partners.
That's available right and so that's one focus is taking that 10 basis points and connect.
Can that go into the teens or whatnot, obviously, the second best way to increase the revenue excuse me maintenance anything because they had between the two companies won't exactly now and it was getting how can we accelerate the growth of the assets on that platform to really create scale and in Egypt. We believe they are profitable.
Now.
On day, one, but we believe that we will be able to create greater scale as we bring.
Our adviser base.
<unk> or part of them reevaluate that we work with two adhesion.
Okay now.
Thanks, Gary.
Sorry go ahead.
Oh, I was just going to say and Patrick the other thing I just wanted to point out is that adhesion serves a much larger average advisor size than aftermarket and so as a result, the basis points on assets go down a little bit.
The flip side of that is just as Gary said there are many more services that we can add to the adhesion offering that we currently offer throughout the mark or that are in development across both firms and we think we can increase the revenue yield from that type of product development effort.
Got it thank you very much.
And then in terms of net flows. So obviously, it's a pretty challenging environment right. Now would you expect this below 10% annualized pace of net flows to persist.
For the next few quarters or do you think particularly with the market rally in July and then I guess as well.
Sentiment improves and Youll see those net flows pick up sooner rather than later.
So I mean, we certainly can't predict the future as it relates to the markets that <unk> one one thing.
Does seem very clear right now and that is that we're in a lower growth higher inflation environment, which is unfamiliar to advisors and I'm familiar to investors. We haven't done this type of environment.
For quite some time.
In fact much of this whole generation of investors and advisors.
Haven't managed through this particular type of environment at all and so it's really really important in environments like this too.
Make sure that you're supporting your advisors and Eric with the tools and resources they need to support their investors. So they make the best possible decisions and uncertain times.
And the amount of time and effort. It takes advisers to have those conversations with clients for our clients to absorb the conversation.
It takes away from their ability to grow as does.
Macro influences like assets depreciating and.
Bonuses being less than they were.
For 2021.
Fewer large business is being sold et cetera.
So what we do without the markets, we focus on supporting advisers in times like this.
And making sure that they are making the best possible impact on their clients and that impact results in referrals and lead flow and growth and new dollars being placed with the adviser.
When the market environment gets more comfortable for the investors. We saw an example of this.
In our compression in flows in 2020, and then the recovery in record year in 2021.
We don't know Patrick exactly what to expect in the coming quarters, but I do know that the fundamentals of our business are extremely strong in fact over the last year. We've added over 800 high quality, new producing advisers and over 20000 households, we've also added the number of counts so underneath the net flow.
And asset numbers are really good fundamentals for the aftermarket business.
Got it thank you very much.
Thank you.
Our next question comes from.
Ryan Bailey with Goldman Sachs. Brian Your line is now open.
Hi, everyone.
Ties into that last point I think.
So it looks like household increased quarter over quarter, even as total advisor count fell.
I was wondering if you could speak to what youre seeing from the existing adviser base in terms of adding new households, even during the market volatility.
Yeah. So.
Well I will start that answer and then I'll hand off to Gary to talk about the number the total number of advisors.
So during market volatility.
Okay.
During market volatility of the reason, we see household growth is many investors who previously felt that they did not need advisors.
Find out in times like this that they need help and support because.
Because the environment is much more challenging and the decisions that they make have much more profound consequences and so you see household growth because you see advisors, winning these new households that doesn't necessarily translate into net flow growth right away because asset values are depressed and because in many.
Infancy. These clients. These clients. These new clients are just transitioning part of their household to the advisor to see what the advisers like into sort of try out the new model. That's why there is a lag.
Advisor has an opportunity with these new households, and then theres a lag as they make great impression and.
And as markets recover and asset values recover and so thats why we see household growth.
On our platform, but you don't necessarily see that.
Flowing through to new float.
New flow growth in the short term.
Then Gary why don't you talk a little bit about our advisor count and what's happening with our advisor count right now.
Yes so.
Brian Nice to talk to you again.
I think overall.
Quarter over quarter, our total advisor count.
It has a much more relatively slow growth rate than our household count.
Or even our gains in Mike's got right BBB, that's really not the most important metric for us although advisors is being vague goodbye.
While my math, our engaged adviser count went down because of 175 advisors dropped below 5 million level. They are still with us.
And they are still bringing in households.
So.
We did we did have.
A $1 billion four of net flows for the quarter a lot of that net flows is going to be new households that advisors are bringing on.
<unk>.
And so.
That's why we talk about the household count.
That's almost more relevant to understanding the organic growth in the business than the overall advisor count.
And again the engaged adviser count has that nor even there are some bonds in the market, but again. We also highlighted we won in 23, new engaged advisers right. Excluding the market impact we still didn't have our engaged advisers go up by about 1%.
This quarter over quarter.
As well.
And then <unk>.
Building on what Gary just said, while our advisor count is down just marginally.
It's a little a little less than flat, it's up two 3% year over year, and we do have some amount of churn in our.
This engaged advisers, so as Gary said, our quality is as rising with our engaged adviser count rising.
And then some advisors that are disengaged have left the platform.
Got it understood.
And then Gary you may not be through happy about the direction of this question, but even though we have a very strong outlook for spread revenues I think the forward curve is now forecasting cuts in 2023.
So is there any interest in walking rates or extending duration.
Of your peers doing the advisory space.
Yes.
Interestingly, we're well aware of that and we are.
I'm very conscious that at some point that rates could probably come down early at some point probably in late 2023 or something right you can see that turn.
Back to whatever whenever the fed thinks they're long long term targeted.
I'll be honest, we have not done that yet we have looked into it.
It's interesting.
Is such a great hedge for our asset base exposure.
There is a.
The thinking Ryan is that trade off of having a nice hedge on your activation versus muting it overtime.
To reduce the volatility on that.
And so we can talk more about it if we actually go into it but we have not done that yet, but we are looking at it.
Got it thank you.
Thank you.
Our next question comes from.
Gerald O'hara with Jefferies.
Your line is now open great.
Great Thanks, and good evening folks.
Gary perhaps one for you is it.
Is it too soon to revisit I suppose the revenue contribution from <unk> that we did.
I think it was previously discussed prior to some of the border.
Border shutting down in the in the access, especially for the Canadian market.
For that revenue contribution.
It's a very fair question, Hey, Jerry how are you doing.
Fair question.
I think the way we're thinking about it now.
What about last year voyage contributing about.
$20 million.
Uh huh.
Last year on <unk>.
Because we only had it for half of the year on an annualized basis.
And they're not quite at that run rate now again due to primarily the Canadians the slowdown in Canada that said <unk> discussed a little bit we have processed.
Canada in.
We're very excited about and so.
One way to think about it very is that maybe the voyage revenue growth is kind of a one year delay due to the pandemic due to the slow rollout.
And that.
By the time, we get to later in this year, we'll be back to that $20 million run rate, which will get us back on track from a growth trajectory, we organic growth trajectory that we have planned.
Yes.
Okay.
That's helpful and then.
Clearly strong EBITDA margins adjusted EBITDA margins in the quarter.
Any.
Thing that would sort of.
Prohibit the sort of margin profile from kind of continuing to.
Brian grind upward as we as we look out over the next 12 to 18 months.
So I'll start a little bit on the numbers Natalie I guess and then you can follow up if needed.
Our strategy right I guess, Joe what I would say.
Yes.
This is a very good quarter for margin, we did a great job in our expense management revenue was great both.
Primarily driven by interest rates.
Second quarter was a tough quarter for equity, we're going to we're going into third quarter now.
Billing on a much lower level.
I wouldn't be surprised if our revenue margins quarter over quarter take a slight step back because it is such an.
<unk> is so great which is.
Wi from a full year.
Talking about 100 basis point increase not the 150 basis point increase we saw in <unk>.
We are going to have now that all being said.
We are still focused on expense management trying to balance in the investments, we're making for the future and so all that math going together is why we are targeting a full year 100 basis point increase which will leave you can do the math of third and fourth quarter are probably going to be a step back from QQ naturally due to the revenue pressure on the activation revenue.
But.
I'll pause, there and I don't not only than any other.
Got it.
On your side on our.
Strategic investments I guess make sure were unfunded.
Yeah.
So I just.
In any given year, what Gary said is absolutely correct, because we bill in advance and because we have a set of initiatives that we think are the right growth initiatives for that year and the coming years.
Gary's team and we work together to make sure that we're.
We're achieving our objectives and our standing our margins as.
As we lay out.
In the future we may choose to make strategic investments that we think will lead to outsize growth and will clearly share that with all of you.
You know.
If there is an opportunity we think it's a big opportunity.
We want to make sure that we have the ability to invest in that for future growth and for future margin expansion.
But as Gary said.
Our business is a great business and we feel like we're investing a tremendous amount in the future and are still able to or expand our margins given given where we are now.
Okay, great. Thanks for taking my questions. This afternoon.
Thank you.
There are currently no further questions in queue. So again as a reminder, that star one on your telephone keypad to submit for a question.
There are currently no questions in queue. So I'll pass the conference back over to Natalie for any additional or closing remarks.
Thanks, again to everyone on the call today, we all look forward to seeing you in person at upcoming Investor conferences have a great day.
Thank you that concludes today's asset Mark Financial Holdings 2022 earnings call. Thank you for your participation you may now disconnect your line.
Okay.