Q2 2023 Envestnet Inc Earnings Call
Greetings and welcome to the investment second 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.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it.
It is now my pleasure to introduce your host Mr. Pete Darrigo CFO .
Mr. <unk> you may begin.
Good afternoon, everyone. Thank you for joining us on today's second quarter 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 website at <unk> Dot 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.
<unk> you to review the cautionary statements on slides two and three 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 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 Krager, Investment's, Chief Executive Officer, Bill and I will provide a company update as well as an overview of the company's second quarter 2023 results.
After our prepared remarks, we will open the call to questions. During the Q&A. Please limit yourself to one question plus one follow up.
You may get back into the queue. If you have additional questions with that I will turn the call over to bill.
Thank you Pete and thank you everyone for joining us Tonight.
<unk> is executing on its strategic plan that creates differentiated value for our customers and will continue to drive long term value for our shareholders with industry, leading scale and operating efficiency.
We're on the path, we set forth for driving sustained revenue growth and margin expansion.
In the second quarter, we posted adjusted revenue of $312 5 million adjusted EBITA at $57 8 million and adjusted EPS of <unk> 46.
We have intentionally invested in today, we are seeing the benefit of the integrated ecosystem. This is the future of our business. It has deepened our competitive advantage and deepened our relationships with our clients and our partners and the investments are scaling our bottomline people will go into greater detail in his remarks.
So let me spend a few moments on what we as the largest scaled player in wealth tech are seeing in the market and within our business.
The wealth Tech market is rapidly moving and investment has been ahead of the curve and investing in the environment and scale necessary to capture more of the economic opportunity. We've been exactly right in our focus of modernizing and expanding our ecosystem of intelligent data integrated technology networked.
To the broadest set of solutions.
We are becoming more essential to our partners driving their growth and productivity, while creating more distance from our competitors.
As industry consultant Joel <unk> told investment news in May people underestimate how challenging it is to build something like investment invest net has finally made major strides, bringing together all of their silos I don't think anybody else is close.
I'd like to share. An example of how this is playing out in the market and how it will benefit our clients and shareholders in the future.
A client of ours, a broker dealer independent financial group, which has $40 billion of assets and hundreds of advisors has contracted to use the entirety of our platform and ecosystem of investment solutions.
This includes all of our platforms and services, our data and analytics.
A complete suite of financial planning technology, our investment solutions and related technologies, and our broader network of exchanges.
This is a great example of the value created by putting the pieces of investing that together into an integrated environment and it expands our revenue opportunity with clients that go all in with us by about 25% before factoring the uptake of additional asset management and fiduciary solutions.
We're getting more of these types of engagements in our renewal pipeline sure not every client we use every investnet solution, but more and more are engaging deeply with our capabilities, providing continued and accelerated revenue opportunities for us.
The headline for investment is that we are leveraging the investments we've made we're growing market share while benefiting from a stronger Q2 market.
But the market benefit was neutralized by overall challenging industry net flow environment, and our DNA research business has faced significant headwinds, but we are on the path to stabilization and restoration in this business.
Tonight, we will focus our prepared remarks to talk about the industry and market context, and what it means in terms of revenue growth and while we are optimistic for the trajectory of our business.
We will spend time on the DNA business to explain the dynamics the challenges we're facing in the progress of the business is making to restore growth over the current coming months and importantly, we will spend time on expenses.
We're very focused on managing our bottom line driving margin expansion and cash flow and we will discuss how we will exit 2023 as investments flow through to productivity and scale, resulting in greater profitability.
Our wealth business is building share in an environment of stubbornly low net industry asset flows a headwind it's carried over from 2022.
We continue to execute and we're doing what we said we would do putting us in a powerful position just as the wealth market accelerates with a more integrated environment that we had predicted.
There's real pressure on other participants in this space today as we move ahead into areas of significant impact by data intelligence, while others are trying to solve problems that our scale. There is an advantage for us <unk>.
Invest net drives and we benefit from strong secular <unk> that are powering the industry in the quarters and years ahead.
Increasing demand for financial advice growth of independent advisor channels fee based and managed accounts and <unk>. These are the growth engines for the industry.
All industry segments, which also includes technology enabled offerings and more and more industry utilization of data and insights the market is moving in our direction.
We are capitalizing by gaining share.
In the second quarter, our net flows from M&A, where 10 billion, representing an organic asset growth rate of 5%. These flows are very healthy, especially in the context of the broader industry. For example, long term mutual fund and ETF flows across the industry were essentially flat.
Once again in Q2, and multiple wealth firms reported seeing low investor buying activity given the debt ceiling overhang and other factors that trend that seemed most pronounced among high net worth investors.
Looking at our annualized organic growth rates for public companies that have reported so far the average growth was between 1% and 5% compared to our 5% organic growth.
I think it is very useful to look at longer term trends regarding flows for some added perspective.
Looking at our AUM net flows compared to those of the managed account industry. Overall, we gained 70 basis points of share in the last few years.
Compared to our publicly traded Tam peers are M&A flows in dollars had been about seven times larger than their combined flows over the last three years.
These types of flows get reflected a more activity by more advisors utilizing more of our services in the second quarter. The number of accounts on our platform grew 5% year over year to $18 7 million in M&A accounts grew.
7% year over year per advisor.
The outperformance of the industry in flows and the growth activity on the platform are leading indicators of our business over.
Over the last couple of years assets accounts and advisors are all up in our higher margin tax direct indexing and high net worth solutions.
Active advisers selling these solutions have grown 61% over the last 18 months in tandem the gross profit is projected to grow by 26% from 22 to 23 and over the next few years, we expect a 40% CAGR for these solutions.
As industry asset flows normalize there is an important dynamic at play for us to share gains account advisor growth will translate to accelerated revenue growth.
The revenue story for investment is grounded in these higher margin solutions and data and technology enabled adoption and cross sell.
Over time, we see fee rates expanding as we cross sell more solutions let.
Let me share a few examples of this in practice.
The promise of data in the wealth business is paying off is it a leading capability for us a differentiator and it drives longer term flows to higher margin solutions.
Our enterprise wide reporting solution, which aggregates, both managed and held away accounts and generates them into opportunities has meaningfully increased its pipeline into double digit millions, while launching two firms this quarter with over $35 billion of assets collectively.
The invest net wealth data offering provides tremendous value by creating more visibility across more assets that ultimately we will use our platform to be managed assets. The industry has taken notice our insight engine was named the best AI based solution for financial services at the AI Breakthrough Award.
An important use case is one of our leading clients who plans to share an additional $150 billion in off platform assets through the data platform by the end of the year. This allows invest net to consolidate more assets and drive more cross sell opportunities from a financial standpoint every 10% of these assets.
We convert represents a roughly 9 million gross profit opportunity for investment assuming a six basis point net fee.
We're also working closely with our asset manager and client partners to drive mutually beneficial outcomes. The insights engine identifies engagement strategies for over one trillion.
Brokerage to manage an advisor as portfolio manager opportunities on our platform, we are working with partners and their distribution teams to maximize this opportunity.
For every 100 billion of brokerage to managed flows that equates to roughly $60 million of gross profit to investment assuming a six basis point net fee.
We continue to innovate and connect all the pieces of investment together to drive greater productivity and growth for the firms and advisers, who use our platform.
Our modernized proposal tool is connected to the entire ecosystem of solutions, including PMC portfolios and services connected to our exchanges tax an FSP overlay and analytics. This has opened more and more opportunities and we see that client firms have turned on 25% more of these solutions this year versus the <unk>.
Prior year.
We continue to make progress on unique custody options through our partnership with FMC, We talked a lot about this and the benefit it will provide our clients with an option for a more digital environment and capturing the economics of cash through this partnership fills a gap we have had and creates a long term benefit for invest net and our shareholders.
As we've integrated the ecosystem is accelerating our pipeline driving value for our clients and creating bundling and pricing opportunities for investment.
Our strategy and more importantly, our execution is working in the marketplace. We've created the most seamless operating system network to the broadest set of solutions with digital and data driven engagement tools is increasing client engagement, helping them be more productive, which drives more cross sell and assets on the investment plan.
Form.
Now, let's spend a few moments on the data and analytics business as I spoke about just a few moments ago. While we've created in the wealth market is competitively unique is being well received and adopted and is foundational to the long term advantage as we serve the industry.
While other participants in this space work to figure out build feature sets and configure ability things that we have long delivered at scale to our customers. We are able to move to AI driven insights that drive greater adoption for our vast set of solutions.
That said and the non wealth parts of the data business, we continue to see challenges, particularly in our data research business.
This has been a resilient headwind for us and increasingly competitive market coupled with the decline in the quality of users in our dataset has pressured revenue in the business for several quarters.
We indicated we would experienced weakness in the first half of 2023 with stabilization coming in the second half of the year.
We've been focused and purposeful on restoring our datasets we.
We have made significant progress moving back in a position of strength with the best quality the best quantity of data that we've ever seen.
These datasets are in production and we're testing with clients and we live by the end of this year.
This is why we feel good that the business is stabilizing and leading to stronger interest in higher renewals and pricing the remainder of the year should have promising bookings for this business that will point to restoration of the revenue in 2024 and beyond.
Next I'd.
I'd like to provide some thoughts around expenses and reiterate our conviction in achieving a 25% adjusted EBITDA margin in 2025.
In 2022, our adjusted EBITDA margin was 17, 8%.
In the first half of 2023, we expanded the margin by 90 basis points.
Compared to the first half of 2022, despite macro headwinds. This performance has been driven by a combination of expense discipline and investments we have made to modernize our platforms.
In the back half of 2023, we expect to drive even stronger margin expansion helped by incremental efficiency initiatives.
For the full year of 2023, we're now expecting to generate margin expansion of 270 basis points, which is at the mid point of our guidance range, putting us at around 25% for the year.
On the expense side, the key takeaways that was exited the investment cycle and are focused on managing all expenses, which include personnel vendors G&A costs, while not wavering from our key strategic initiatives client support and product delivery commitments.
As our investments take root here are the specific expense actions, we've taken and will continue to act.
Our onshore our head count is lower year to date by 5% as we noted last quarter, we have taken action by restructuring combining teams now joined by the unified technology work that we've done and we've been very judicious about selected hires.
We've reduced the first half real estate occupancy spend by 27% and marketing by 33% as we use data and analytics to more efficiently target. Our efforts both areas are targeted for additional efficiency in the second half of the year.
And total adjust.
Adjusted expenses are down 3% in the first half of 2023 with 7% year over year reductions targeted in the second half of the year. All of this equates to full year adjusted expenses, excluding cost of revenue being down 5% year over year.
The entire organization is focused on managing our expenses, while making sure our priorities are fully aligned with the needs of our clients and drivers of financial results for the company.
Looking beyond 2023, there is additional room to expand margins and we are confident in revenue growth acceleration via our solutions are more normalized industry flows.
Despite challenges in the market and in the non wealth DNA segments. We continue to make considerable progress on our plan and remain committed to our 25% adjusted EBITDA margins in 2025, we have modernized our platform expanded our solutions connected the pieces of investment to drive greater adoption.
And engagement from our clients.
As we operate in this stage of our cycle, we continue to focus on our core strategy. While we review areas that are non core to the business.
We are disciplined in our expense and capital allocation to accelerate our earnings and free cash flow in the coming quarters.
I'd now like to turn the call 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 second quarter results provide evidence of how the business is progressing through this phase of our investments as expected we are seeing margins expand compared to 2022, while we are effectively managing our expenses.
While the macro economy performed well in the quarter. The wealth industry continued to experience dampened flows while advisors and firms remained cautious during this recovery.
Our expectations for 2023 without the year was to be one of execution and delivery with the anticipated result of margin expansion, which we are demonstrating further as bill described we are continuing to see positive signs for future revenue growth in both segments.
For the second quarter revenue came in at the low end of our guidance range. Adjusted EBITDA was above the high end of the range. Adjusted revenue was approximately $312 $5 million adjusted EBITDA was $57 8 million, while adjusted EPS was <unk> 46.
Our guidance for Q3 and for the full year as laid out in the earnings release and in the supplemental presentation.
Overall, the environment in Q2 continued to present challenges for our clients and prospective clients impacting both segments of our business as well as both asset based and subscription revenue.
While industry wide flows remained under pressure our wealth segment continued to experience positive net flows in our asset based products. Although the mix of flows has not been as favorable for our average fee rate.
Our guidance for the rest of the year reduces our outlook for net flows and mix from what we had previously expected at.
At this point these updated assumptions for the rest of the year are offsetting higher revenue from Q2 capital markets increases.
We expect subscription revenue in the wealth segment to grow at mid to upper single digits organically for 2023.
The data analytics segment had challenges in research as well as delays with bank and tech clients. The emerging wealth channel is showing positive signs, but it's still a relatively smaller part of that segment.
While we have lowered our G&A forecast for the rest of 2023, there are positive signs in the segment's bookings and client pipeline.
For the third quarter, we expect adjusted revenue to be between 316, and $319 million adjusted EBITDA to be between 64% and $66 million and adjusted EPS to be between 52 and 54.
For the full year, we are modifying our adjusted revenue guidance to be between $1 $252 million and $1 $259 million adjusted EBITDA to a range of 255 and $260 million and adjusted EPS of $2 nine and $2 15.
Yes.
Our guidance is always does not assume any changes in the capital markets from prior quarter end and is based on market levels as of June 30.
Turning to the balance sheet, we ended March with $59 million in cash and debt of $913 million, making our net leverage ratio just below three nine times adjusted EBITDA.
In June we paid down the remaining $45 million outstanding on our 2023 convertible notes using our revolving credit facility as of June 30, only $20 million remained drawn on the revolver and that $20 million has been paid down in July .
We expect our high point for the leverage ratio to be March 31 of this year dropping below three five times EBITDA by the end of the year, we expect to continue to reduce our leverage ratio and improve our balance sheet with growing EBITDA going forward.
One last point to note, we expect to see an increase in cash taxes paid in 2023 related to the legislative change eliminating the immediate deductibility of research and development expenses effective for tax year 2022.
We will have an estimated payment in Q3 of approximately $13 million, which is higher than our quarterly expectation going forward in the near future.
We paid cash taxes of around $2 million to $3 million quarterly over recent years, and we expect that to go up to $4 million to $6 million quarterly for the near term.
Again, all related to this legislative change from 2022.
Thank you again for your support of investment and before we open it up for Q&A I'll turn it back to Bill for his final remarks.
Thank you Pete Investnet is executing on our strategic plan. We are on the path, we set forth for driving sustained revenue growth and margin expansion, while creating greater demand and engagement from our clients and a significant competitive advantage in the marketplace.
We continue to gain share with industry, leading flows and are addressing the challenges in the data research business.
We will continue to be laser focused on our expenses and have confidence in the revenue upside through our network of solutions data and technology.
As always I'd like to thank every member of the investment team hard work dedication to our clients industry, leading innovation, usually the hallmarks of a great organization and I'm appreciative everyday excellence and to our clients. Thank you for the trust you put in us and the partnership to drive greater growth for your business and better.
Outcomes for our clients. It is extraordinary what we are doing together now I'll hand, it back to the operator for questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Information indicate that your line is in the question queue.
You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Thank you.
First question comes from the line of Michael Cho with Jpmorgan. Please proceed with your question.
Hi, good.
Good evening and thanks for taking my question here. My first question I just wanted to touch on.
Kind of the industry flow trends that you highlighted.
You talked last time that sentiment leading into it into investment as well.
And really carrying on from 2022 I guess.
In your mind and from your seat I mean, what do you think is prolonging that fresh.
Friction in space for investment as well in terms of kind of industry.
Advisory AUM closing.
What causes it to normalize from here and what is normalized mean.
In your mind.
Thank you Michael I hope Youre doing well.
It has been a stubborn I think in my in my prepared remarks, I used the word stubborn and it's been a very stubborn.
Dynamic and yes, the first half of the year has been a healthy.
First half for the capital markets, but as you know it's been pretty narrow right. So.
The leaders of the market are concentrated in a couple of.
Stocks.
So that the broader market really hasn't participated along with that narrow group and.
What's been interesting because whenever we've had a healthier market. It correlates to increased flows increased account openings and that has not been the case. This time and I think it goes back and it really tells you very clearly.
Net.
There's an alternative out there and that alternative or yield assets, whether that's cash or fixed income.
The yields are higher.
With a higher interest rates, we spend a lot of time focused on.
The industry data and industry data Q2.
ICI mutual fund ETF data Youre negatives in <unk>, which is surprising given given the health of.
The overall market or the returns of the headline return on the overall market and we dig in.
If we look at a lot of survey data and.
Surveys, particularly around the high net worth category or even more deeply negative.
And then you dig in and you look at some of the public comps that we that we study whether that's a wealth management firm or whether thats in.
In asset management firm in those <unk>.
Growth rates have been really kind of suppressed.
<unk>.
It's this is not an invest net issue, it's an industry issue.
I speak to a lot of leaders in the business, whether leading asset management firms wealth management firms and there is some head rubbing out there on okay. What does that catalyst how does it begin to turn I think it turns Michael as you broaden out the participation in the overall market.
The rate overhangs there the question.
The governments that issue was there in the quarter you have got.
You have got.
This recessionary overhang that certain banks or continue to to talk about and so there is a risk off you've got an alternative in cash.
You need to broaden out the participation.
<unk> market in the market for the flows to respond all of that said I look at how Investnet has performed and I'm looking at or get overall organic growth rate, which is at the upper tier of any firm that we really take a close look at and then I look, particularly.
Lee in some of these higher value services, and yes, theyre not meeting our expectation as to what we thought when the market began to turn that would be.
Quicker restoration towards flows, but we're doing really well there we've enrolled or have active advisers over the last 18 months of 61% growth in number of advisers using new solutions and.
If I dig in and I look at each of these types of capabilities the direct index.
Capability for instance.
41% growth in assets, 26% account, 47% and advisors.
Year to date or year over year growth rates Thats impressive and so we're chipping away. We're doing what we're doing I think where we're at the upper tier of the growth in the flows.
In the industry and returning back to the conversations I have with the asset manager partners with distribute with us.
A lot of feedback is that we continue to leave when they look at the flow rates that are coming into different environments.
Cross the wealth industry investment is performed.
Probably at the top tier of those types of.
Types of opportunities or distribution points for the asset manager community.
It's out of comparative basis that were doing well, it's not on an actual basis compared to what we were hopeful as the market began to restore you'd see a restoration of flows.
Yes.
Great. Thank you for that Bill.
And I guess just for my follow ups kind of switch gears on the other.
Got it.
On your DNA business I appreciate all the commentary there and some of the near term puts and takes equal wabco.
I'm just kind of curious what you're hearing from clients as well I mean is it kind of clients delaying purchasing decisions or is it really just a matter of product pipeline.
Just curious.
Again from your seat in terms of what Youre hearing from clients and some sentiment there for that for investments products, great. Thank Michael I'll spend a minute on.
The DNA business I'll kind of walk through kind of what we're seeing in the wealth market with our wealth data product. There is high demand theres, a deep pipeline that really good bookings theres good adoption.
Firms that are adopting particularly in this brokerage to manage where we are looking at kind of the firm's broadest set of data and we're moving assets into.
Beginning to move assets into more managed account environment those firms.
Top tier growers for us.
It is having an effect and that effect is great data to return back to the tour to the marketplace and say hey firms that are using this are growing at a faster rate here, here's some numbers and so we were very bullish there.
And again I would reiterate that the pipeline is strong and the bookings are strong the usage as it goes up is driving a faster result for our clients. So we're we're very enthusiastic about the wealth data offering.
Bank market as you know has had a tough very difficult first half of the year. There is some delays on a particular client deployment and thats impacted our outlook for the rest of the year.
And then in the.
Fintech market, particularly to the larger fintech type companies, which utilize our verification business Theres lower volume and Thats also had an impact and impacts our outlook for the rest of the year the real challenge though.
A circle around the research business and in that research business. What we do is we de identified data we use we look at underlying consumer activity separated from.
<unk> separated into kind of generic datasets, we share that with a universe of asset managers, who utilize that to help understand momentum or activity.
For a particular company, it's been a very useful capability and something that we.
Really innovated in that space and we're a leader in that space, but over the years has been competition in the competition began to match, our dataset and impact our dataset was degrading over the last couple of years given given.
Sure.
The data makeup and the characteristic makeup that we were able to to utilize and share with our research clients.
That said so that's been a focus of ours a focus of ours has been to restore that data set to improve it and to create a characteristic set that was once again unique and preference store or kind of.
More competitive than what was in the marketplace that can happen overnight it happens over quarters and I would tell you that as we get to this year versus the beginning of the year to when we ended the year.
Contracted in the door being processed and beginning to be shared with our research data clients is a data set that is profoundly.
<unk> been enhanced.
In the in the many many many millions of users and many many many millions of characteristics that have real value because of geographic reasons because of.
Demographic reasons.
And it is now I believe.
The high watermark for the quality of data that we're able to provide to our research clients and the high watermark for the the quantity of data that we'll be able to share with our research clients. So.
That doesn't solve the short term.
Revenue headwind that we faced in the first half of the year.
I believe over the last couple of earnings calls I've.
Called out that the first half is going to be weak and that we'd begin to see stabilization in restoration as we got to the back half of the year.
I'm reiterating that outlook that the first half of the year was was.
Was the challenge in that research business, but now as we've.
Acquired process beginning to share that level of data with our research clients. We believe that that business will be stabilized and that towards the end of the year, we'll start to see a restoration of the revenue for that research visits I hope that's helpful.
Yeah. Thanks, Thanks, Bill appreciate it.
Thank you and our next question is from Devin Ryan with JMP Securities. Please proceed with your question Hey.
Hey, Devin how are you.
Hey, good Bill how are you Hey, Pete.
I guess first question, just kind of hitting on expenses and.
If I look at the guidance for the third quarter I think it implies for the fourth quarter, something like 64 to <unk> 70.
For fourth quarter EPS.
Implied pretty nice step up in.
In EPS from the third quarter and so it sounds like that's.
<unk>, driven primarily and so just trying to think about some of the moving parts. There. So theres kind of two things going on there.
These efficiencies are driving but then I think there's also a little bit of timing or seasonal dynamics. So just trying to think about.
The kind of pieces to getting to a better expense level at the end of the year based on some of things you said and then maybe it's a little bit earlier, but just thinking about the jumping off point for 2024, just given that expenses are obviously folks.
Yes. So this is this is Pete thanks, David.
You've caught kind of the highlights on the expense side it.
It's not entirely expense driven there is some some revenue growth assumptions that kind of meat.
Sort of our ongoing growth.
Trajectory, although we've obviously pulled things down a little bit from what our prior expectations were but yes on the expense side, it's a couple of things.
The activities that we've that bill mentioned that is going to kind of lower our run rate and then there is that seasonality aspect.
Where we typically see.
<unk>.
Fourth quarter come in a little bit lower and then probably in Q1.
Comes in a little bit higher, but still a general run rate is going to be significantly lower.
Compared to where we have been in 2022 so.
I'll, let bill get into a higher level strategy right Devin.
So a couple of things that will happen between now and the end of year as you know we've kind of we're factoring in.
The.
The overall flow rates and it's just not the flow rate, it's kind of the fee dynamic to that flow rate, where the assets are coming from and kind of what solutions there they're coming into an net really modified our guidance for the rest of the year, but there there are real kind of interesting and notes.
<unk>.
Revenue opportunities that will begin to come to fruition as we get to the to the fourth quarter of the year.
<unk> in that or how we're partnering with asset managers and pulling them in a little bit more closely to.
The the engagement strategy that we have across the span of our business that will generate.
Begin to generate additional revenue of high margin revenue as we get get to <unk>. The other the other dynamic because we get to <unk>.
The revenue side will be our partnership with empower for the retirement business begins towards the end of the year.
So those are those are dynamics.
That are kind of the pluses were some of the headwinds that we're factoring in on our guide are very much industry flow assumption that we've experienced in the first half of the year and we don't want to be ahead of ahead of whenever that trend begins the transition we're going to be observers and say hey.
This is the overall health of the marketplace and then we will modify to.
To make sure that were in line with the restoration of flows begins to happen.
But I do I do want to highlight or call out some of these other revenue opportunities that we see coming before the end of the year and then will be ongoing as we roll into 'twenty four on the expense side look.
This is a very focused organization, we're focused on a couple of things one is that the wealth market. We believe that we are deeply establishing a competitive advantage given the integration work, we've done and how we've injected the data into that environment to help power the growth and efficiency of our clients. So that's.
A big deal and so the focus on the wealth market, we think creates material and long term.
A competitive advantage for investment to continue to win share and continue to grow we will power our growth.
Connected to that is the executing of the focus on the execution of strategy. A couple of years ago. We said this is where the industry is headed and it is exactly where the industry is headed is a more integrated holistic wealth environment.
And and utilizing data technology and connection to broader set of solutions and that's exactly what we're delivering to our clients clients are reflecting that back to us and they're utilizing us more in a holistic way, but really very important important important is our focus on margin and expenses.
Where we're focused our priority list is pretty sharp, it's pretty tight we're delivering on it.
And then when we look around the firm we're managing expenses in every corner to make sure that we are going to deliver on that 25% adjusted EBITDA by 2025, Thats a high watermark that we believe that we can sustain from a profitability standpoint, and we're making progress and we make progress this year. Despite some of the headwinds, but we're going to make.
Important progress as well in 2024 will roll into 'twenty, four and a strong position to make that progress.
Okay terrific. Thank you and then just on <unk>.
Follow up on some of the cross sell opportunities. Obviously, you guys have been talking a lot about insight Tien tsin and it does seem like differentiated offering and a win win for both you and advisors and so and then ultimately clients as well. So I guess I'm just trying to think about the ability to really get.
Get more traction there to kind of accelerate the cross sell opportunity is it just more of an education aspect of just getting in front of folks and make sure. They are.
Understand that capability because again it seems like it would sell itself, but at the same time.
How do you accelerate that growth and how do you get it to another step function higher if you will.
That's awesome Devin.
So there is.
I said it there when I was talking about the data business high degree of interest in it. The pipeline is strong the bookings are strong and usage is beginning to usage is picking up and as the usage picks up you get some really great return data meaning.
Firms that are utilizing the insight engine of just growing faster than other firms.
There is a great marketing story, there and it's an important one it's fact based and database and so we're excited about that one of the things that we are also and this is connected to another important focus of ours, which is pricing.
And as we move forward on renewals for our clients and contracts.
You will see the data insight engine bundled in with an increased fee from a licensing standpoint on the licensing contracts.
In those in those renewals and so what we're doing is we're bundling that data into our base products.
Whether it's trading rebalancing reporting et cetera, and the value add for us as incremental higher subs right, but.
The real kind of objective there is to drive more and more usage of the data platform, which will drive more and more kind of adoption of these higher value fiduciary solutions that we provide so.
Is embedded in this strategy, it's embedded in the platform. It's embedded in our go to market is going to be embedded into our pricing.
Okay.
I appreciate the color alright.
Alright, Thank you Devin.
Thank you.
And our next question is from Peter Heckmann with D. A Davidson. Please proceed with your question.
How are you.
Good good thanks for taking my question I, just wanted to follow up a little bit on the custody opportunity, we're getting closer to that.
Just wanted to see the feedback youre getting from clients, where you are getting the most interest and if possible if you can.
Help us start to handicap or size, the opportunity and how that might roll on and kind of what it looks like in terms of.
Maybe the amount of revenue and kind of the incremental margins involved.
Great. Thank you Peter Yes, no it's been.
So we're continuing to be leaned in and.
I talked about focused on priorities are one of those focuses is clearly the integration work and work that we have going on with F. N Z.
We have spoken about in the past.
Just for those of you or not.
Completely up to speed F&B is.
Our new U S entrant global firm have done a really great work at creating a more digital environment for the custody for the custody business and.
And we're partnering with them.
Today, we trade Peter as you know to that to the industry right. So every sort of custodial trust system. That's out there we're connected to and our clients are able to utilize those F&B is another option, but it's an interesting option because in that option. It is fully digital real time account opening real time exchange of data versus <unk>.
A batch process, which is how much of the industry works today.
In our relationship with FMC will be able to garner economics.
That we have not been able to participate in the past.
Those are from a custody standpoint, but theyre also from.
Cash management and other feature sets that come along with <unk>.
Custody offering.
If you look at I've said this in the past kind of in the past is hey look I feel very very good about the investment position I feel very good about the investment.
Business model, but our Achilles heel has been that we have not been able to serve cash.
And that this is going to resolve that for us and that will become a revenue generator versus assets or or or.
The dollars that are moved away to be served outside of our ecosystem. So this is this is a good opportunity for US I would also say and I think I've I've said it may be on our prior earnings calls is I believe that the.
The digital nature of what <unk> is doing in the marketplace will bring other firms along and that has been the case. So as we lean in with F&B, we have very strong and very deep partnerships with the other custodians and working with the other custodians and figure out how to digitally connect to the investment.
World to streamline account opening administration et cetera, I think is all.
Very interesting and work that we are we're excited to engage with those partners.
We.
I think the way to think about the economics really is that.
You look at our gross sale number.
Gross assets to flow between the tamarack platform and the investment.
Platform during the course of the year.
It's been running at about a trillion dollars between the between tap Tamarac platform and the investment core platform $200 billion of that would be on the on the kind of invest in that platform. If we're able to convert 10% of that those dollars on the 200 billion. Then you are talking about a $10 million to $20 million run rate of revenue.
That would be able to generate.
They're so it's meaningful.
Also very high margin.
As we are successful there in the market I would say there's been a lot of interest and it's one of the service.
Challenges our industry has in a multi custody world is hey, I've got I've got to operate these different ways of opening accounts and servicing administrating. This is more turnkey it's purely digital is real time.
And you know that.
That's a promise.
Our perspective that has not been presented relate to the advice industry.
Sure.
Before and so there is a lot of interest.
We will have early successes in 2024, so there's definitely a 24 story not a 23 story.
And we'll get going.
Beginning to to build business there in 2024.
All right.
Great Great. That's helpful. And then I assume custody is one of these buckets, but can you just remind us of some of the larger buckets of how youre thinking about returning to 25% EBITDA margins by 2025, I think thats something like 400 500 basis points.
I guess, how do you think about.
<unk> controls expense reductions versus high incremental revenue in terms of hitting that goal.
So.
We.
We're gaining share.
We're driving more into these high value.
Solutions those carry a higher gross net for us.
And as we get a normalization of restoration of some degree of flows into the wealth market it'll be there and theres a lot of cash on the sidelines. There's a lot of money that is waiting to be put to work that will be from a percentage and market share standpoint, more likely to be.
And the investment environment than kind of competing platform. So so we feel very good about the position that we've put ourselves a meter because the work that we've done is advantage. The platform made it easier to open accounts and to drive towards these higher value solutions and we're using the data insights to really kind of motivate them there'll be more and more.
Adoption of those over the next couple of years. So our growth will be ahead of market and we believe long term with a restoration.
We're not going to back away from this idea that will be a strong teens grower.
In a normalized market in the meantime, we will grow ahead of the market and that growth will drop more meaningfully over time to the bottom line why because were created in the investment cycle and in the modernization cycle, we've created a tremendous amount of.
Of efficiency in our operations I'll give you. An example last quarter, we had a one of our largest trading quarters.
In our history top five or so.
And we did that with exactly flat head count didn't add any head count as the volumes are very significant and we had 25% fewer traders. So we're doing what we're doing the scale is growing and we're doing it on normalized lower head count across the business.
And we're doing it more effectively and that you can see it in our trading you can see it in our cross the administrative part of parts of our business will be able to do more because of the the AI and the cloud work that we've done.
With.
Fewer personnel costs.
To serve the business, well, which will drive higher margin and then the last thing I'd say as I said it just before its a focus focus focus on <unk>.
Priority prioritization and focus on where we're spending money.
And.
Again, the modernization of the platform has connected our operating environment, we don't need three trading teams. We don't need three performance reporting teams you can start to consolidate those groups into best.
Best in the industry talent and get the real scale and quality that that investment is known for so so there is.
As we normalized markets.
Where we're going to grow the EBITDA and profitability of the company.
That will that will be delivered and I will reiterate that the 25% adjusted EBITDA will come no matter, what the topline growth, we will deliver on that commitment to investors and so there is the flexibility and room to do it we.
We don't want to disrupt the work that we're doing.
So we're very focused on executing on it but we're also very committed to the 25 adjusted present adjusted EBITDA.
Okay, Okay, well thats good it's great to hear the confidence and we'll look forward to seeing that progress.
Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
And our next question comes from the line of Surinder <unk> with Jefferies. Please proceed with your question.
Hi, Surinder Hi, Bill.
Alright.
I guess for the first question I'm, just trying to get a sense of you talked about.
Having exited the investment cycle and you are now focused on managing expenses.
As you.
Move forward and trying to sell.
Sell more of your high value added <unk>.
The fiduciary solutions.
But there is a bit more handholding.
<unk> kind of required at this stage with clients.
Is it a bit of a macro issue.
How should we think about the dynamic of.
Where growth is currently versus where you want it to be.
Yes, it's very market related surrenders so.
Exiting 'twenty two you have got as I said.
Healthier.
Market from a headline standpoint, the returns are positive at screen right.
But it is very narrow and so when advisors look at it at portfolios in a holistic way.
And they're thinking about diversification and not concentration and so when you're thinking about the financial advice and how it ties to our financial plan. You are you are you.
You automatically have a reasonably conservative posture.
On the other hand, you have got alternatives now you've got cash yielding you've got other fixed income kind of yields that are pretty steady that our.
Much higher.
Higher than they've been for more than a decade and.
They're also safer and so advisors are waiting for that catalyst. They are waiting for that moment, where the market broadens out and they put the money to work now all that said I'm going to give you a couple of statistics.
In our direct index business, which we're one of the leaders in the industry.
We're significantly growing.
Assets year over year growth of 41% account numbers are up 26% year over year and advisor usage, new advisers using that platform advisors are up 47%. So in the market environment, we continue to chip away, we've broadened our footprint and opportunity set.
By contracting with more firms have access to the product advisors are using it.
47% more advisers year over year.
But the account flow within all there and I think that when the.
The catalyst occurs you're going to see the benefit and accelerated benefit across our platform, particularly in these high value personalized solutions, which is exactly where the market is headed and thats how were positioned ourselves.
That's helpful.
And then.
You also made a comment I only caught part of it. So apologies if it's just a clarification question here. If I heard you mentioned something about reviewing non core areas of the business can you elaborate on that please.
Sure. Thank you Sir.
Sure.
I'd use the word focus in that.
We're focused on the wealth market, we're focused on bringing the parts of our business together.
Two really exert the competitive advantage that we've invested in and that is that is.
What we've got the company tuned into and tuned onto that is what we're delivering and focused on so as we go through that.
And you get to this stage of an investment cycle you start to really again the word focus what are those areas that contribute to that mission and what are the areas that might not really participate and not be closely closely aligned enough from an adjacency to be focused on to be investing in.
To build markets outside of that core focus and Thats exactly where were at at the moment is really doing those evaluations and thinking through okay. What it adds to the competitive long term advantage of what we've built from a well standpoint and what is not.
Not core.
That's exactly what it is.
Thank you.
For me.
Great. Thank you Sundar.
Okay.
Thank you.
No further questions at this time I would like to turn the floor back over to Mr. Bill Crager CEO for closing comments.
Thank you Camilla.
As we wrap up I just want to again, thank all of my colleagues at investment you do an extraordinary job and the work that we're doing is making a difference.
Thank our partners.
Thank our customers and clients for your partnership together, we're changing the way advice is offered to millions of millions of households, I also wanted to thank our shareholders for your commitment to investment and I'm looking forward to seeing you and talking to you all next quarter. Thank you.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
[music].
Yes.
Hum.
[music].
Sure.
[music].
Mhm.
Hum.
[music].
Uh huh.
Hum.
[music].
Okay.
Hmm.
Hello.
Oh.
Okay.
[music].
No.
Yeah.
No.