Q1 2024 Envestnet Inc Earnings Call
Operator: Greetings and welcome to the Envestnet First Quarter 2024 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's now my pleasure to introduce your host, Josh Warren, Chief Financial Officer. Thank you, sir. You may begin.
Greetings and welcome to the investors that first quarter 2024 earnings conference call at.
Operator: At this time all participants are in a listen only mode.
Operator: A brief question and answer session will follow the formal presentation.
Operator: Once you require operator assistance during the conference. Please press star zero on your telephone keypad.
Operator: As a reminder, this conference is being recorded.
Operator: It's now my pleasure to introduce your host Josh Warren Chief Financial Officer. Thank you Sir you may begin.
Josh Warren: Good afternoon, everyone. I'm Josh Warren, the Chief Financial Officer of Envestnet. Thank you for joining us on today's first quarter 2024 earnings call. Before we begin, I'd like to point out that our earnings press release, supplemental presentation, and associated Form 10-Q can be found in the investor relations section of our website at Envestnet.com. This call is being webcast live, and a replay will be available for one month under the investor relations section of our website as well. During the call, we'll be discussing certain forward-looking information. This information is based on our current expectations and is not a guarantee of future performance.
Josh Warren: Good afternoon, everyone I'm, Josh Lauren Chief Financial Officer of Investnet. Thank you for joining us on today's first quarter 2024 earnings call before we begin I'd like to point out that our earnings press release supplemental presentation and associated Form 10-Q can be found under the Investor Relations section of our website at Investor <unk>.
Josh Warren: I encourage you to review the cautionary statement on slides two and three of the supplemental presentation regarding the potential risk, uncertainties, and other factors that could cause actual results to differ from those expressed by the forward-looking statement. 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 supplementary presentation for reconciliation of these as-adjusted financial measures to the most directly comparable gap measures.
Josh Warren: 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.
Josh Warren: During the call we'll be discussing certain forward looking information. This information is based on our current expectations and is not a guarantee of future performance.
Josh Warren: Encourage you to review the cautionary statement 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.
Josh Warren: Further information can be found in our regular SEC filings.
Josh Warren: During this call we will be referring to certain 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.
Josh Warren: Joining me on today's call are Jim Fox, our board chair and interim CEO, and Tom Sipp, executive vice president for business lines. On our call this afternoon, we'll provide a company update, as well as an overview of the company's results during the first quarter. After our prepared remarks, we'll 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. I'll now turn it over to Jim Fox.
Josh Warren: Joining me on today's call are Jim Fox, Our board chair and interim CEO and Tom <unk> Executive Vice President for business lines.
Josh Warren: On our call. This afternoon, we will provide a company update as well as an overview.
Josh Warren: The Companys results during the first quarter. 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 I'll now turn it over to Jim Fox.
James Lawrence Fox: Thank you, Josh. Good afternoon, and thank you for joining our Q1 2024 earnings call. We appreciate your time and look forward to highlighting for you the strengths and opportunities Envestnet provides for our clients and shareholders. Let me start with our Q1 results, which illustrate our focus on disciplined execution. Q1 revenue was $325 million, representing a 9% growth over Q1 2023 and near the high end of the guidance range. Adjusted EBITDA was $70 million, slightly above our guidance range and representing a 22% adjusted EBITDA margin and approximately 350 basis points of margin expansion when compared with Q1 2023.
James Lawrence Fox: Thank you Josh good afternoon, and thank you for joining our Q1 2024 earnings call. We appreciate your time and look forward to highlighting for you the strengths and opportunities investing it provides for our clients and shareholders. Let me start with our Q1 results, which represent our focus on disciplined execution.
James Lawrence Fox: Adjusted EPS for Q1 was $0.60, also above our guidance range, up 30% from the $0.46 we reported in Q1 2023. AUM net flows were $12.5 billion, an annualized organic asset growth rate of 12%. Free cash flow in Q1, as always, is impacted by seasonality, but improved more than $40 million year over year.
James Lawrence Fox: <unk> Q1 revenue was $325 million, representing a 9% growth over Q1, 2023 and near the high end of the guidance range. Adjusted EBITDA was $70 million slightly above our guidance range and representing a 22% adjusted EBITDA margin.
James Lawrence Fox: And approximately 350 basis points of margin expansion when compared with Q1 2023 <unk>.
James Lawrence Fox: Adjusted EPS for Q1 was 60.
James Lawrence Fox: Also above our guidance range up 30% from the 46, we reported in Q1 2023.
James Lawrence Fox: AUM net flows were $12 5 billion, an annualized organic asset growth rate of 12%.
James Lawrence Fox: Free cash flow in Q1, as always is impacted by seasonality, but improved more than $40 million year over year, Josh who will discuss our results in more detail later in this call.
James Lawrence Fox: Josh will discuss our results in more detail later in this call. As we look forward, Envestnet is in a tremendous strategic position for growth. We are uniquely able to deliver for clients through our connected ecosystem and extensive capabilities. Investment continues to be in this leading position because we are executing on what our clients need. We have unmatched scale that the leading wealth management firms, RIAs, and broker-dealers rely on to power their businesses.
James Lawrence Fox: As we look forward investment is in a tremendous strategic position for growth, we are uniquely able to deliver for clients through our connected ecosystem and extensive capabilities.
James Lawrence Fox: Investment continues to be in this leading position because we are executing on what our clients need.
James Lawrence Fox: We have unmatched scale.
James Lawrence Fox: That the leading wealth management firms ria's and broker dealers rely on to power their businesses we are there.
James Lawrence Fox: We are the industry leader by assets, advisors, and accounts. We've invested in our technology and data capabilities, which are connected to the broadest set of solutions. One, we are providing meaningful data insights, over $20 million each day, that enables advisors and home offices to make better decisions and put more assets on our platform. Two, our technology is industry-leading and connects all parts of the advisor workflow. You see this in client engagement and in industry recognition like the annual T3 survey, where Envestnet finished in the top three in 13 separate categories.
James Lawrence Fox: The industry leader by assets advisors and accounts.
James Lawrence Fox: We've invested in our technology and data capabilities connected to the broadest set of solutions.
James Lawrence Fox: One we are providing meaningful data insights over $20 million each day that enables advisors and home offices to make better decisions and put more assets on our platform to our technology is industry, leading and connects all parts of the adviser workflow you see this include.
James Lawrence Fox: <unk> engagement and an industry recognition like the annual T. Three survey, we're investing that finished in the top three and 13 separate categories.
James Lawrence Fox: Third, our investment platform is the largest in the industry with the broadest set of solutions, investments, alternatives, insurance, and credit, supported by the leading product producers in the industry. We have a talented, experienced, and aligned leadership team that is driving the next phase of Envestnet and delivering results. All of this is why we are deeply and broadly embedded in our clients and partners, driving the growth and productivity of advisors by providing the leading wealth management platform to the industry.
James Lawrence Fox: Our investment platform is the largest in the industry with the broadest set of solutions investments alternatives insurance credit and supported by the leading product producers in the industry.
James Lawrence Fox: We have a talented experienced and aligned leadership team that is driving the next phase of investment and delivering results.
James Lawrence Fox: All of this is why we are deeply and broadly embedded in our clients and partners driving the growth and productivity of advisors by providing the leading wealth management platform to the industry. We have connected the pieces of investments to create scale and competitive advantage, which leads to revenue growth.
James Lawrence Fox: We have connected the pieces of Envestnet to create scale and competitive advantage, which leads to revenue growth, operating leverage, and improving free cash flow conversion. We're focused on execution, delivering greater value for our clients, and that, in turn, creates value for our shareholders. I'd now like to turn it over to Tom Sipp, who leads our Envestnet business lines, for an overview of the drivers of the business. Tom? Thank you.
Thomas Michael Sipp: Operating leverage and improving free cash flow conversion, we're focused on execution delivering greater value for our clients and that in turn creates value for our shareholders.
Thomas Michael Sipp: I'd now like to turn it over to Tom <unk>, who leads our investment business lines for an overview of the drivers of the business Tom.
Thomas Michael Sipp: Thank you Jim.
Thomas Michael Sipp: I would like to start today with a very important KPI that underscores our progress. In Q1, we delivered $12.5 billion of AUM net flows into our asset management marketplace. This compares to $30 billion for all of 2023.
Thomas Michael Sipp: I would like to start today with a very important kpis that underscores our progress.
Thomas Michael Sipp: In Q1, we delivered $12 5 billion of AUM net flows into our asset manager in the marketplace.
Thomas Michael Sipp: This compares to $30 billion for all of 2023.
Thomas Michael Sipp: Now, let me highlight the key drivers of this progress and exciting momentum. The Envestnet Wealth Management Platform continues to be unparalleled in both capabilities and scale. We provide access to the solutions advisors need to provide holistic advice. We are essential partners for our clients, asset managers, and product manufacturers. And we continue to enhance the breadth and depth of our technology capabilities to solidify our leadership position, drive sales, and deliver financial results.
Thomas Michael Sipp: Now let me highlight the key drivers of this progress and exciting momentum.
Thomas Michael Sipp: The investment wealth management platform continues to be unparalleled in both capabilities and scale.
Thomas Michael Sipp: We provide access to the solutions advisers need to provide holistic advice.
Thomas Michael Sipp: We are a central partners for our clients asset managers and product manufacturers.
Thomas Michael Sipp: And we continue to enhance the breadth and depth of our technology capabilities.
Thomas Michael Sipp: To solidify our leadership position and drive sales and deliver financial results.
Thomas Michael Sipp: Let me provide some context for the marketplace we serve by highlighting some of what we confirmed via our advisor survey. We conduct a survey each year to help inform our roadmap and ensure that our strategy is aligned with what our clients are looking for. I'd encourage you to review the survey in detail when it comes out over the next few weeks. But today, I want to call out a few key highlights.
Thomas Michael Sipp: Let me provide some context for the marketplace, we serve by highlighting some of what we confirmed via our advisor survey.
Thomas Michael Sipp: We conducted a survey each year to help inform our roadmap and ensure that our strategy is aligned with what our clients are looking for.
Thomas Michael Sipp: I'd encourage you to review the survey deeply when it comes out over the next few weeks, but today I want to call out a few key highlights.
Thomas Michael Sipp: The average broker-dealer-affiliated advisor expects to increase their fee-based mix by 10 percentage points in the next five years. That's a tailwind to utilization of managed accounts and thus a tailwind to utilization of investment. Most advisors do not want to be a CTO. They don't want to assemble, integrate, and maintain a plethora of point solutions.
Thomas Michael Sipp: The average broker dealer affiliated advisor expect to increase their fee base mix by 10 percentage points in the next five years.
Thomas Michael Sipp: That's a tailwind to utilization of managed accounts and thus a tailwind to utilization of investment.
Thomas Michael Sipp: Most advisors do not want to be a CTO, they don't want to assemble integrate and maintain a plethora of point solutions.
Thomas Michael Sipp: In fact, roughly half of the advisors that are assembling their own tech sacks today say they would prefer an all-in-one solution. Third, advisors want more seamless workflows. A more unified experience is the primary reason an advisor changes technology providers. This advisor feedback informs our strategy of offering a best-in-class, one-stop technology and fiduciary platform. Investments we've made in the last few years in our Proposal Engine and Managed Account Solutions position us to attract flows to our platform and accelerate revenue growth in the years to come.
Thomas Michael Sipp: In fact, roughly half of the advisers that are assembling their own tech stacks today say they would prefer an all in one solution.
Thomas Michael Sipp: Third advisers want more seamless workflows.
Thomas Michael Sipp: A more unified experience is the primary reason and advisor changes technology providers.
Thomas Michael Sipp: This adviser feedback informs our strategy of offering a best in class, one stop technology and fiduciary platform.
Thomas Michael Sipp: Investments we've made in the last few years in our proposal engine a managed account solutions position us to attract flows through our platform and accelerate revenue growth in the years to come.
Thomas Michael Sipp: These trends align with our focus. Specifically, we have enhanced the planning to proposal process to help the advisor go from a financial plan to implementation of the full set of investments and solutions an advisor needs to holistically service their client. In fact, in Q1, we experienced the highest usage of our proposal generation capability.
Thomas Michael Sipp: These trends align with our focus spin.
Thomas Michael Sipp: Specifically, we have enhanced the planning to proposal process to help the advisor go from a financial plan to implementation of the full set of investments and solutions and adviser needs to Holistically service their clients.
Thomas Michael Sipp: In fact in Q1, we experienced the highest usage of our proposal generation capability.
Thomas Michael Sipp: This enabled $12.5 billion of net flows into an AUM marketplace in Q1, as compared again to $30 billion for all of 2023. Finally, within our PMC solutions, our high network solutions, direct indexing, and tax overlay capabilities have each seen year-over-year growth of more than 38% in assets, accounts, and advisors. Our Turnkey Asset Management Program is industry-leading. We have over $450 billion of AUM and continue to take managed account share
Thomas Michael Sipp: This enabled the $12 5 billion of net flows into our AUM marketplace in Q1, as compared again to $30 billion for all of 2023.
Thomas Michael Sipp: Finally within our PMC solutions are high net worth solutions direct indexing and tax overlay capabilities at each seeing year over year growth of more than 38% in assets accounts and advisors.
Thomas Michael Sipp: Our turnkey asset management program is industry leading.
Thomas Michael Sipp: We have over 450 billion of AUM.
Thomas Michael Sipp: Can you to take managed account share.
Thomas Michael Sipp: Yeah.
Thomas Michael Sipp: Operating from an industry-leading position allows us to deliver more functionality, better technology, and deeper integration than anyone in the industry. This is a significant competitive advantage and one that we will continue to pursue. We work with over 700 asset management partners to deliver for our advisor clients. We are seeing more interest from asset managers to partner with us to provide an even more customized, integrated, and seamless experience. This will positively impact the client experience as well as our economics. This is how we are driving our results, and I want to emphasize what those results are. Envestnet during Q1 had revenue growth of 9%.
Thomas Michael Sipp: Operating from an industry, leading position allows us to deliver more functionality better technology and deeper integrations and anyone in the industry.
Thomas Michael Sipp: This is a significant competitive advantage and one that we will continue to press.
Thomas Michael Sipp: We worked with over 700 asset management partners to deliver for our advisor clients.
Thomas Michael Sipp: We are seeing more interest from asset managers to partner with us to provide an even more customized integrated and seamless experience.
Thomas Michael Sipp: This will positively impact the client experience as well as our economics.
Thomas Michael Sipp: This is how we are driving our results.
Thomas Michael Sipp: And I want to underscore what those results are.
Thomas Michael Sipp: <unk> during Q1 had revenue growth of 9%.
Thomas Michael Sipp: We are serving over 109,000 advisors with over 19.6 million accounts totaling over $6 trillion in platform assets. We have improved margins, and prudent expense management will remain a focus, positive AUM, and annualized organic growth of 12%, handily outpacing growth rates of other large TAMs and wealth managers. AUMA accounts grew 11%, and AUMA accounts per advisor grew 10%. Our client service scores continue to show improvement year over year. So what's next?
Thomas Michael Sipp: We are serving over 109000 advisors with over $19 6 million accounts totaling over six trillion in platform assets.
Thomas Michael Sipp: We have improved margins and prudent expense management will remain a focus.
Thomas Michael Sipp: Positive AUM annualized organic growth of 12%.
Thomas Michael Sipp: Handedly outpacing growth rates of other large camps and wealth managers.
Thomas Michael Sipp: A accounts grew 11% in <unk>.
Thomas Michael Sipp: Accounts per advisor grew 10%.
Thomas Michael Sipp: Client server scores continued to show improvement year over year.
Thomas Michael Sipp: So what's next.
Thomas Michael Sipp: We continue to enhance the features that drive further adoption and usage of the platform because that is what drives our top line. We will continue to make it easier for advisors to seamlessly move from planning to implementation as we see the impact of facilitating more client and advisor actions in our flows and cross-out initiatives. We will be rolling out enhanced outsourced trading and model management capabilities to enable greater efficiency for our advisors and investments.
Thomas Michael Sipp: We continue to enhance the features that drive further adoption and usage of the platform because that is what drives our top line.
Thomas Michael Sipp: We will continue to make it easier for advisers to seamlessly move from planning to implementation as we see the impact of facilitating more client and advisor actions in our flows and cross sell initiatives.
Thomas Michael Sipp: We will be rolling out enhanced outsource trading and model management capabilities to enable greater efficiency for our advisers and investment.
Thomas Michael Sipp: We will enhance our Unified Managed Account and Unified Managed Household capabilities, which allow the advisor even more ability to personalize portfolios for their clients, but at scale. Jim mentioned earlier the number of insights we deliver to advisors every day. We are incorporating those insights into the tools that advisors use to make them actionable, empowering our advisors to be more effective with their clients. Additionally, we will continue to focus on integrated experiences for advisors and clients.
Thomas Michael Sipp: We will enhance our unified managed account and unified managed household capabilities, which allow the advisor even more ability to personalize portfolios for their clients, but at scale.
Thomas Michael Sipp: Jim mentioned earlier, the number of insights we deliver to advisors everyday.
Thomas Michael Sipp: We are incorporating those insights into the tools that advisors use to make them actionable.
Thomas Michael Sipp: Our advisers to be more effective with their clients.
Thomas Michael Sipp: Additionally, we will continue to focus on integrated experiences for advisors and clients.
Thomas Michael Sipp: We recognize that an integrated wealth management plus custody experience is a key component of a truly connected technology platform. We are working to deliver the account opening, funding, and servicing workflows between our wealth management platform and custody back office functions in one single experience. We have, and always will, support a number of choices for every channel in the industry to meet the needs of our clients, which will be different depending on their persona.
Thomas Michael Sipp: We recognize that an integrated wealth management plus customer experience is a key component of a truly connected technology platform.
Thomas Michael Sipp: No.
Thomas Michael Sipp: We are working deliver the account opening funding and servicing workflows between our wealth management platform and custody back office functions in one single experience.
Thomas Michael Sipp: We have and always will support a multiple of choices for every channel in the industry to meet the needs of our clients, which will be different depending on their persona.
Thomas Michael Sipp: What we're doing is impacting our clients and driving our results, continuous delivery of enhancements of our technology, tools, and solutions, drive discrete revenue opportunities, and create a competitively advantaged leading platform. We've connected the components to meet client needs and drive holistic client relationships. Now, let me turn the call back over to Josh. Thank you.
Thomas Michael Sipp: What we're doing is impacting our clients and driving our results the continuous.
Josh Warren: <unk> delivery of enhancement of our technology tools and solutions drive discrete revenue opportunities and create a competitively advantaged leading platform.
Josh Warren: We've connected the components to meet client needs and drive holistic client relationships.
Thomas Michael Sipp: Now, let me turn the call back over to Josh.
Josh Warren: Thank you Tom.
Josh Warren: I'd like to focus my remarks on three things, how the strength of our business translates into our attractive growth algorithm, the operating leverage in our business, and our balance sheet. Our client foundation supports our growth algorithm. The result is growing and durable free cash flow as we expand our offerings and extend through the value chain. Our strategy is consistent, to focus on expanding our footprint among our existing advisor base by delivering mission-critical technology, including both software and solutions. As I've mentioned previously, we do not depend on advisor count growth to drive our growth algorithm or to continue to expand our margin.
Josh Warren: I'd like to focus my remarks on three things, how the strength of our business translates into our attractive growth algorithm.
Josh Warren: Operating leverage in our business and our balance sheet.
Josh Warren: Our client foundation supports our growth algorithm. The result is growing and durable free cash flow as we expand our offerings and extend through the value chain.
Josh Warren: Our strategy is consistent to focus on expanding our footprint among our existing advisor base by delivering mission critical technology, including both software and solutions.
Josh Warren: I've mentioned previously we do not depend on advisor count growth to drive our growth algorithm or continue to expand our margins.
Josh Warren: As the advisor landscape continues to evolve, we are implementing differentiated pricing strategies to better focus on growing with our clients and delivering an integrated platform across products. As a reminder, our wealth solution segment generates both asset-based and subscription-based revenues, while our data and analytics segment generates subscription-based revenues only. Envestnet has traditionally defined asset-based revenues as primarily consisting of variable fees for providing our platform. In our wealth solutions segment, across diversified client channels, these pricing constructs provide the breadth of solutions to fit the industry and enable Envestnet to grow. Investment has delivered strong and structural organic acid growth, measured by our consistent net inflows.
Josh Warren: As the adviser landscape continues to evolve we are implementing differentiated pricing strategies to better focus on growing with our clients and delivering an integrated platform across products. As a reminder, our wealth solution segment generates both asset based and subscription based revenues, while our data and analytics segment generate subscription based revenues.
Josh Warren: <unk>.
Josh Warren: Investment has traditionally defined asset base revenues as primarily consisting of variable fees for providing our platforms in our wealth solutions segment across diversified client channels. These pricing construct provide the breadth of solutions to fit the industry and enable investment to grow.
Josh Warren: We believe that structural growth from consistent inflows represents one of the most enduring features of our franchise, despite variability from cyclical or seasonal factors. We view the inflows into Wealth Solutions asset-based revenue accounts during Q1 of nearly $33 billion as a confirmation of our strategy to expand our relationships with existing clients. Q1 flows demonstrate both Envestnet's positioning as a market leader, as well as specific actions we are taking to grow wallet share with our clients.
Josh Warren: Investment has delivered strong and structural organic asset growth measured by our consistent net inflows, we believe that structural growth from consistent inflows represents one of the most enduring features of our franchise despite variability from cyclical or seasonal factors.
Josh Warren: We view the inflows into well solutions asset based revenue accounts during Q1 of nearly 33 billion as a confirmation of our strategy to expand our relationships with existing clients.
Josh Warren: Q1 flows demonstrate both investments positioning as a market leader as well as specific actions, we are taking to grow wallet share with our clients.
Josh Warren: Although mix will vary from quarter to quarter, we have significant opportunities to continue to go deeper and grow with our longstanding clients through our connected ecosystem of comprehensive capabilities. A couple of call-outs regarding our net flows. Approximately $17 billion of Q1 inflows were related to a long-standing enterprise client, a top-10 regional banking firm, extending their use of our platform to replace an in-house reporting tool late in the quarter. These low-fee assets appear as AUA flows and create a mixed headwind to our overall effective fee rate, which is reflected in our outlook.
Josh Warren: Although mix will vary from quarter to quarter, we have significant opportunities to continue to go deeper and grow with our long standing clients with our connected ecosystem of comprehensive capabilities are.
Josh Warren: A couple of callouts regarding our net flows.
Josh Warren: Approximately $17 billion of Q1 inflows were related to a longstanding enterprise clients a top 10 regional banking firm extending their use of our platform to replace an in house reporting tool late in the quarter. These.
Josh Warren: These low fee assets appear as flows and create a mix headwind to our overall effective fee rate, which is reflected in our outlook.
Josh Warren: Our March quarter-end numbers also reflect one approximately $10 billion hybrid RIA, in other words, a firm operating as both an RIA and a broker-dealer that has been in the process of leaving our platform for several months. This firm used Envestnet for reporting only and was not a significant contributor to our revenue.
Josh Warren: Our March quarter end numbers also reflect one approximately $10 billion hybrid.
Josh Warren: In other words, a firm operating as both in RA and the broker dealer that has been in the process of leaving our platform for several months. This firm used investment for reporting only it was not a significant contributor to our revenue we had anticipated. This deconversion away from our platform during Q1, given the longer than anticipated timing, we carry the asset.
Josh Warren: We had anticipated this deconversion away from our platform during Q1. However, given the longer-than-anticipated timing, we carried the assets as part of our March results. The net outflow from this idiosyncratic event should be reflected during Q2. During Q1 2024, total asset-based revenues generated by Wealth Solutions were over $202 million, a 15% increase from Q1 2023, supported by improving market conditions. Year-to-date equity markets have continued to be strong, while the yield curve has shown signs of normalization, despite remaining inverted as it has been since 2022.
Josh Warren: As part of our March results. The net outflow from this idiosyncratic events should be reflected during Q2.
Josh Warren: During Q1 2024 total asset based revenues generated by wealth solutions was over 202, Million% to 15% increase from Q1 2023 supported by improving market conditions.
Josh Warren: Year to date equity markets have continued to be strong while the yield curve has showed signs of normalization. Despite remaining inverted as it has been since 2022 <unk>.
Josh Warren: Investors often keep cash in their portfolios for liquidity needs and defensive reasons. However, cash balances have remained at all-time high levels given attractive short-term rates, where investors are being paid to wait. Investors with large cash on the sidelines run the risk of missing a longer opportunity. As research suggests, time in the market leads to better results than attempts to time the market. Client propensities to hold more assets in cash have created a headwind to our results. I'll be at one review as a temporary replacement.
Josh Warren: Investors, often keep cash in their portfolios for liquidity needs and defensive reasons. However, cash balances have remained at all time high levels, given attractive short term rates, where investors are being paid to wait.
Josh Warren: Investors with large cash on the sidelines run the risk of missing a longer opportunity as research suggests time in the market leads to better results than attempts to time the market.
Josh Warren: <unk> propensity is to hold more assets and cash has created a headwind to our results, albeit one we view as temporary we believe money invested in the debt and equity markets will help investors accomplish their objectives and be more accretive to investments financial results.
Josh Warren: We believe money invested in the debt and equity markets will help investors accomplish their objectives and be more creative in investing in its financial results. During Q1, our Wealth Solutions subscription-based revenue of $84 million represented a 5% growth over Q1 2023. Q1 Wealth Subscription Based Revenue included approximately $3 million of Fidex revenue. FIDEX, a leading marketplace for annuities, was formed in 2018 to enable financial advisors to provide insurance and income protection products to their clients.
Josh Warren: During Q1, our wealth solutions subscription based revenue of $84 million represented a 5% growth over Q1 2023.
Josh Warren: Q1, while subscription based revenue included approximately $3 million of <unk> revenue.
Josh Warren: <unk>, a leading marketplace for annuities was formed in 2018 to enable financial advisors to provide insurance and income protection products to their clients.
Josh Warren: Fidex is integrated into the Envestnet platform. In accordance with GAAP, Envestnet has historically consolidated Fidex's operations in our financial statements. In connection with the recent funding round for Fidex, with new capital led by insurance company partners and Envestnet clients during Q2, we anticipate deconsolidating Fidex in accordance with accounting rules, reflecting updated governance of that entity. While Envestnet did not participate in this funding round, we remain the largest shareholder in Fidex, owning approximately 38% of the company.
Josh Warren: <unk> is integrated into the investment platform.
Josh Warren: In accordance with GAAP investment has historically consolidated Fedex operations on our financial statements.
Josh Warren: In connection with the recent funding round for Fedex with New capital led by insurance Company partners and investment clients. During Q2, we anticipate deconsolidation Fedex in accordance with accounting rules, reflecting updated governance of that entity.
Josh Warren: While investment did not participate in this funding round, we remain the largest shareholder in Fedex owning approximately 38% of the company.
Josh Warren: During 2023, Fidex contributed approximately $9 million of consolidated revenue, with approximately 90% of this contribution in subscription revenue. On an overall basis, Wealth Solutions revenue grew to over $289 million during Q1, representing 11% growth over Q1 2023. Turning to our data and analytics business, which generates subscription-based revenues across open banking and alternative data offerings, during Q1, our DNA revenue was $35.1 million, representing an 8% decline from Q1 2023
Josh Warren: During 2023, Fedex contributed approximately $9 million of consolidated revenue with approximately 90% of this contribution in subscription revenue.
Josh Warren: On an overall basis wealth solutions revenue grew to over $289 million during Q1, representing 11% growth over Q1 2023.
Josh Warren: Turning to our data and analytics business, which generate subscription based revenues across open banking and alternative data offerings. During Q1, our DNA revenue was $35 1 million, representing an 8% decline from Q1 2023 as mentioned on previous calls the March 2023 regional banking turmoil created a headwind for that business.
Josh Warren: As mentioned on previous calls, the March 2023 regional banking turmoil created a headwind for that business, and the comparison is relative to a primarily pre-tornado base. Overall, this business continues its path to stabilization. Some actions we have taken include improving the quality of API exchanges, improving uptime, reducing incident response time, and securing several contract renewals.
Josh Warren: This and the comparison is relative to a primarily pre turmoil base.
Josh Warren: Overall this business continues its path to stabilization. Some actions. We have taken include improving the quality of API exchanges, improving uptime reduced incident response time and securing several contract renewals, we will keep all stakeholders updated as this transformation progresses.
Josh Warren: We will keep all stakeholders updated as this transformation progresses. For DNA, sequentially, Q1 represents a modest decline from Q4. The primary source of that decline was in professional services revenue, which has been higher than historical trends during the last few quarters. Relative to Q4, DNA had a less than 1% sequential decline in subscription revenue, consistent with our stabilization efforts.
Josh Warren: DNA sequentially Q1 represents a modest decline from Q4.
Josh Warren: The primary source of that decline was in professional services revenue, which has been higher than historical trends during the last few quarters.
Josh Warren: Relative to Q4, DNA had a less than 1% sequential decline in subscription revenue consistent with our stabilization efforts. We believe the actions taken will stabilize and orient that business for future growth.
Josh Warren: We believe the actions taken will stabilize and orient that business for future growth. Now, moving on to expenses. As a reminder, the platform infrastructure investments we have made over the last few years enable us to achieve operating leverage by growing revenues ahead of costs to expand our profitability and grow our free cash flow. As previously detailed, Envestnet's costs consist of a combination of non-controllable and manageable expenses. Our non-controllable expenses include asset-based payments to third parties, which move in tandem with revenue growth and are common for the wealth industry. During Q1, our direct expenses were nearly $127 million, including $118 million of these asset-based costs. However, most of our cost base is manageable. The manageable costs fall into three general categories.
Josh Warren: Now moving on to expenses.
Josh Warren: As a reminder, the platform infrastructure investments we've made over the last few years enable us to achieve operating leverage by growing revenues ahead of costs to expand our profitability and grow our free cash flow as previously detailed investments costs consist of a combination of non controllable and manageable expenses.
Josh Warren: Our non controllable expenses include asset based payments to third parties, which move in tandem with revenue growth and our common for the wealth industry. During Q1, our direct expenses were nearly $127 million, including $118 million of these asset based costs. However, most of our cost base is manageable manner.
Josh Warren: Manageable costs fall into three general categories compensation related whether delivered in the form of cash or stock non.
Josh Warren: Compensation related expenses, whether delivered in the form of cash or stock, non-compensation expenses, and capital expenditures. Because of our scale, we expect an overall year-over-year decrease in these manageable expenses in the mid-to-high single digits for 2024. Let me walk through the components.
Josh Warren: Non compensation expenses and capital expenditures.
Josh Warren: Because of our scale, we expect an overall year over year decrease of these manageable expenses in the mid to high single digits for 2024.
Josh Warren: Me walk through the components.
Josh Warren: As a reminder, during 2023, Envestnet reduced its headcount by 10 percent, consistent with the conclusion of a period of elevated platform infrastructure investment. For 2024, while we expect our stock-based compensation to be approximately flat year-over-year, we expect total 2024 compensation-related costs, regardless of accounting treatment, regarding software development, to be down in the mid-to-high single digits year-over-year. This includes all salary, benefits, severance, and stock-based compensation. The second major area of total cost is non-compensation expenses, which encompasses all operating expenses, including, first, any direct expenses unrelated to our previously described non-controllable asset-based costs. Second, the GNA.
Josh Warren: As a reminder, during 2023 invest in and reduced its head count by 10% consistent with the conclusion of a period of elevated platform infrastructure investments.
Josh Warren: For 2024, while we expect our stock based compensation to be approximately flat year over year. We expect total 2020 for compensation related costs, regardless of accounting treatment regarding software development to be down in the mid to high single digits year over year. This includes all salary benefits severance.
Josh Warren: And stock based compensation.
Josh Warren: Third, non-compensation-related software development costs that are capitalizable based on the stage of development or deployment. Fourth, consistent with our emphasis on free cash flow, we consider manageable expenses comprehensively and include several non-discretionary items, including income taxes, our net cash interest expense, and any other economic or cash costs. We expect a reasonably similar level of these non-discretionary expenses in 2024 as in 2023. Overall, given our scale, we anticipate our 2024 non-compensation costs will be modestly lower versus 2023 despite inflationary headwinds, and we will continue to focus our expense efforts on this area going forward.
Josh Warren: The second major area of total costs as non compensation expenses, which encompasses all operating expenses, including first any direct expenses unrelated to our previously described non controllable asset based costs second G&A third non compensation related software development costs that were capitalized <unk>.
Josh Warren: Based on the stage of development or deployment.
Josh Warren: Fourth consistent with our emphasis on free cash flow, we consider manageable expenses comprehensively and includes several non discretionary items, including income taxes, our net cash interest expense and any other economic or cash costs. We expect a reasonably similar level for these non discretionary expenses in 2024.
Josh Warren: As in 2023.
Josh Warren: Overall, given our scale, we anticipate our 2024 non compensation costs will be modestly lower versus 2023, despite inflationary headwinds and we will continue to focus our expense efforts on this area going forward.
Josh Warren: The remainder of our total expenses are CapEx, which for Q1 was approximately $2 million, reflecting the timing of spend rather than any variance from our 2024 expectation of approximately $10 million. When we aggregate the three components of our manageable costs, compensation related, all non-compensation costs, and capital expenditures, we expect our 2024 total manageable costs to decrease overall in the mid to high single digits. As a reminder, this includes both all cash costs, whether capitalized or treated as operating expenses, as well as stock-based compensation.
Josh Warren: The remainder of our total expenses are capex, which for Q1 was approximately $2 million, reflecting the timing of spend rather than any variance from our 2020 for expectation of approximately $10 million.
Josh Warren: When we aggregate the three components of our manageable costs compensation related all non compensation costs and capital expenditures, we expect our 2024 total manageable costs to decrease overall in the mid to high single digits. As a reminder, this includes both all cash costs, where the capitalized are treated as operating <unk>.
Josh Warren: Fences as well as stock based compensation.
Josh Warren: In addition to adjusted EBITDA, which is a useful metric to track our performance, we are committed to providing greater transparency regarding our free cash flow. Free cash flow for Q1 2024 was negative $20 million, reflecting seasonality and an improvement over the negative $62 million during Q1 2023. My and our focus will continue to be on improving this number in 2024. Turning to our balance sheet, consistent with the seasonality observed in previous years, Envestnet's cash position declined during Q1 to $61 million.
Josh Warren: In addition to adjusted EBITDA, which is a useful metric to track our performance we are committed to providing greater transparency regarding our free cash flow.
Josh Warren: Free cash flow for Q1, 2024 was negative $20 million, reflecting seasonality and an improvement over the negative $62 million during Q1 2023.
Josh Warren: And our focus will continue to be on improving this number in 2024.
Josh Warren: Turning to our balance sheet consistent with the seasonality observed in previous years investments cash position declined during Q1 to $61 million.
Josh Warren: As of the end of Q1, our leverage ratio, defined as total debt less cash over trailing adjusted EBITDA, was approximately 3.1 tons. This ratio represents another modest decline quarter over quarter and approximately a full turn of reduction from this point during the prior year.
Josh Warren: As of the end of Q1, our leverage ratio defined as total debt less cash over trailing adjusted EBITDA was approximately three one times. This ratio represents another modest decline quarter over quarter and approximately a full turn of reduction from this point during the prior year.
Josh Warren: A tranche of convertible debt, which we pay 75 basis points of interest on, is due in Q3 of 2025. Given our low cost of carry, we intend to continue to be patient and prudent regarding our capital structure. Our fully undrawn $500 million revolver provides optionality as we patiently evaluate market conditions and look for further opportunities to enhance our capital structure.
Josh Warren: A tranche of convertible debt, which we paid 75 basis points of interest on his due in Q3 of 2025.
Josh Warren: Given our low cost of carry we intend to continue to be patient and prudent regarding our capital structure.
Josh Warren: Our fully undrawn $500 million revolver provides optionality as we patiently evaluate market conditions and look for further opportunities to enhance our capital structure. In total we believe our strong liquidity position and continue deleveraging give us flexibility as we pursue our strategy.
Josh Warren: In total, we believe our strong liquidity position and continued deleveraging give us flexibility as we pursue our strategy. We are modestly ahead of schedule with respect to our deleveraging as we continue to look forward from our period of necessary and elevated platform infrastructure investment. We expect to further reduce our leverage ratio during 2024, and beginning in Q2, we expect to account for Fidex as an equity method investment. In connection with our expected deconsolidation of FIDEX, we have moved those assets and liabilities into separate line items on our Q1 balance sheet.
Josh Warren: We are modestly ahead of schedule with respect to our deleveraging as we continue to look forward from our period of necessary an elevated platform infrastructure investments.
Josh Warren: We expect to further reduce our leverage ratio during 2024.
Josh Warren: As mentioned previously beginning in Q2, we expect to account for Fedex as an equity method investment in connection with our expected deconsolidation of Fedex, we've moved those assets and liabilities into separate line items on our Q1 balance sheet.
Josh Warren: Looking ahead for the second quarter of 2024 and consistent with how we've provided information previously, we expect revenues to be between $337 and $345 million, representing 9% growth over Q2 2023, assuming the midpoint of the range. Adjusted EBITDA is expected to be between $71 and $75 million. The midpoint of our guided range would represent approximately 350 basis points of margin improvement versus Q2 2023 and adjust the DPS to be between 60 and 65 cents.
Josh Warren: Looking ahead for the second quarter of 2024 and consistent with how we provided information previously we expect revenues to be between 337% and $345 million, representing 9% growth over Q2 2023, assuming the midpoint of the range.
Josh Warren: <unk> EBITDA to be between 71% and $75 million the.
Josh Warren: The midpoint of our guided range would represent approximately 350 basis points of margin improvement versus Q2, 2023, and adjusted EPS to be between 60 and 65.
Josh Warren: Investment continues to be in its leading position because we are executing on what our clients need and delivering shareholder value. We have unmatched scale that the leading wealth management firms across channels rely on to power their businesses. Our first quarter results are a testament to our differentiated products, deepening client relationships, and inherent operating leverage in our business. We see tremendous runway for future continued growth and margin expansion from here and look forward to updating you in future quarters.
Josh Warren: Investment continues to be and its leading position because we are executing on what our clients need and delivering shareholder value.
Josh Warren: We have unmatched scale that the leading wealth management firms across channels rely on to power their businesses.
Josh Warren: Our first quarter results are a testament.
Josh Warren: Two our differentiated products deepening client relationships and inherent operating leverage in our business.
Josh Warren: We see tremendous runway for future continued growth and margin expansion from here and look forward to updating you in future quarters before.
Josh Warren: Before we take your questions, I would be remiss if I didn't say thank you to our shareholders, analysts, and the entire Envestnet team. These calls are important milestones for us to share our progress and articulate our vision. Thank you for your support, and we look forward to your questions.
Speaker Change: Before we take your questions I'd be remiss, if I didn't say, thank you to our shareholders analysts and the entire investment team. These calls are important milestones for us to share our progress and articulate our vision. Thank you for your support and we look forward to your questions.
Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. And you may press star 2 if you'd 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 start button. Our first question comes from the line of Devin Ryan with Citizens JMP. Please proceed with your question.
Speaker Change: Thank you we will now be conducting a question and answer session. If you would.
Devin Patrick Ryan: Like to ask a question. Please press star one on your telephone keypad.
Operator: A confirmation tone will indicate that your line is in the question queue.
Operator: And you May press star two if you'd like to remove your question from the queue.
Operator: All participants using speaker equipment may be necessary to pick up your handset before pressing the star keys.
Operator: Our first question comes from the line of Devin Ryan with citizens JMP. Please proceed with your question.
Devin Patrick Ryan: Okay, great. Hi Josh, Jim, and Tom. Thanks so much for taking the question. Hey Devin.
Devin Patrick Ryan: Okay, Great Hi, Josh Jim and Tom Thanks, So much for taking the question.
Devin Patrick Ryan: Hey, Devin.
Devin Patrick Ryan: Hey, so I guess I just want to start on the flows, and you gave a lot of good background there around the strength in the quarter. And I appreciate, you know, there's going to be some nuance between quarters around different things. And you hit the enterprise win and then the RIA outflow that will impact 2Q. But it sounds like, more broadly, you guys are feeling really good about how the strategy is coming together around flows.
Devin Patrick Ryan: Hey, So I guess I just want to start on the flows and you gave a lot of good background there around the strength in the quarter and I appreciate there's going to be some nuances quarter to quarter around different things and you hit the enterprise win in the.
Devin Patrick Ryan: Outflow that will impact <unk>, but it sounds like more broadly you guys are feeling really good about how the strategy is coming together around flows.
Devin Patrick Ryan: And even if we adjust for the enterprise win, it would still be, you know, a good quarter there. So I just want to dig in a little bit more and just get a sense of, is there something changing in the environment where you're just seeing maybe more momentum or deals are accelerating in the pipeline because counterparties are feeling more comfortable? Or is it really just the strategy is winning out? I'd love to get more of your perspective on that and then just the sustainability, you know, forgetting that there's going to be some lumpiness quarter to quarter with different idiosyncratic events.
Devin Patrick Ryan: And even if we adjust for the enterprise when it would still be a good quarter. There. So I just wanted to dig in a little bit more and just get a sense of like is something changing in the environment.
Devin Patrick Ryan: Were you just seeing maybe more momentum or deals are accelerating in the pipeline because counterparties are feeling more comfortable or is it really just the strategy is winning out I'm just love to just get more of your perspective on that and then just a sustainability forgetting that theres going to be some lumpiness quarter to.
Devin Patrick Ryan: A quarter with different idiosyncratic events.
Josh Warren: Sure. Yeah, Devin, thanks for the question. I really appreciate it.
Speaker Change: Sure Yes.
Devin Patrick Ryan: Kevin Thanks for the question really appreciate it.
Josh Warren: I mean, and first off, you're right. I mean, let me first point out how proud we are of our flows, you know, during Q1. We did $32.7 billion of net flows, you know, purely at a headline level. You've been covering investment for a long time. That's our biggest flow quarter since 2015. It's a reflection, as you say, of the focus and commitment that we have to our clients. But one thing I just want to, maybe a couple of things to call out your question.
Speaker Change: And first off you're right I mean, let me let me first point out how proud we are of our flows during Q1, we did $32 7 billion of net flows in a purely at a headline level you've been covering investment for a long time, that's our biggest flow quarter since 2015.
Josh Warren: It's a reflection as you say of the focus and commitment that we have that we have to our clients, but one thing just I want to maybe a couple of things to call out to your question. The first is I just wanted to make sure that one thing that we are focused on not losing sight of even with a substantial number of $33 billion is.
Josh Warren: The first thing is, I just want to make sure that, you know, one thing that we are focused on not losing sight of, even with a substantial number of $33 billion, is that each and every dollar of flow is an advisor who's using the Envestnet platform to drive their business or help someone achieve an objective. But, you know, like I mentioned in my prepared remarks, structural inflows are one of the most enduring features of our wealth franchise.
Josh Warren: Each and every dollar of flow is an advisor who is using the investment platform to drive their business helps someone achieving an objective.
Josh Warren: But like.
Josh Warren: Like I mentioned in my prepared remarks structural inflows are one of the most enduring features of our wealth franchise.
Josh Warren: The composition, to get into it a bit, that gives us confidence that our clients are doing more with us, and that momentum, in our view, creates a nice setup for future growth. So in the first quarter, to break it down, $12.5 billion of those flows were AUM. That tends to be a higher fee, and then there's an additional $20-plus billion of flows which were AUA. These are lower fees, but they're incrementally profitable business for us.
Josh Warren: The composition to get into it a bit.
Josh Warren: That gives us confidence that our clients are doing more with us and that momentum in our in our views creates a nice setup for future growth. So in the first quarter to break it down $12 5 billion of those flows AUM that tends to be a higher fee.
Josh Warren: And then there's an additional 20 plus billion of flows which were.
Josh Warren: These are lower fee, but they're incrementally profitable profitable business for us there as you say always ins and outs.
Josh Warren: They're, as you say, you know, always ins and outs, but being a structural grower means having that track record of net inflows. And look, regarding the AUA. Many times, AUA activity gives us a foot in the door that could lead to other higher revenue-margin products down the road. This situation in Q1, the one I described, may be a little different from that pattern.
Josh Warren: But being a structural grower means having that track record of net inflows.
Josh Warren: And look regarding the EUA.
Josh Warren: Many times.
Josh Warren: Activity gives us a foot in the door that could cause other higher revenue margin products down the road. This situation in Q1. The one I described maybe a little different from that pattern.
Josh Warren: The $17 billion was a current client outsourcing more to Envestnet, retiring an in-house tool. So think of it as a client using our scale. Very natural for a platform business, one with long-standing clients who are just looking to do more with us. So I'd say, in aggregate, Devin, we view that case study, and the other case studies that underlie our flows, as evidence of our strategy working. I would just add that this is Tom.
Josh Warren: The $17 billion was it.
Josh Warren: Current client outsourcing more to investment retiring an in house tool. So think of it as a client using our scale very natural for our platform business one with long standing clients. We're just looking to do more with us so.
Tom: I'd say in aggregate Devin we view that case study the other case studies that underlie underlie our flows as evidence of our strategy working.
Thomas Michael Sipp: I would just add, this is Tom. I talked about the $12.5 billion in AUM flows. That compares to $30 billion for all of last year.
Josh Warren: Just add this is Tom.
Tom: I talked about the 12 5 billion of AUM flows that compares to $30 billion for all of last year, that's a combination of our asset manager marketplace.
Thomas Michael Sipp: That's a combination of our asset manager marketplace, and we have very solid growth. And by partnering with the biggest asset managers in the marketplace, they're leaning in more and more with our platform and deploying their sales force and driving flows onto our platform. And then our proprietary products, we're starting to hit scale. And we've talked about high-net-worth solutions, direct indexing, and tax overlay products. And those cross-sells and delivering those solutions in an integrated way throughout our technology is working.
Thomas Michael Sipp: And we have very solid growth and partnering with the biggest asset managers in the marketplace. They are leaning in more and more with our platform and deploying their sales force and driving flows onto our platform and then our proprietary products.
Thomas Michael Sipp: We're going to hit scale.
Thomas Michael Sipp: We've talked about high net worth solutions direct indexing tax overlay products and those.
Thomas Michael Sipp: Those cross sells and delivering those solutions.
Thomas Michael Sipp: In integrated way throughout our technology is working.
Thomas Michael Sipp: Okay.
Devin Patrick Ryan: Okay, terrific color. Thank you all.
Speaker Change: Okay terrific color. Thank you and then a follow up just on data and analytics trends haven't heard too much quantitative on the outlook. There last couple of quarters I. Appreciate theres been some press headlines around maybe strategic things youre thinking about there but.
Devin Patrick Ryan: And then a follow up just on data and analytics trends. You haven't heard too much quantitative on the outlook there in the last couple quarters. I appreciate there were some impressive lines around maybe strategic things you're thinking about there. But if possible, it'd be great to just get a little bit of an update around some of the business drivers and things you've been doing to kind of better position that business and, just more broadly, how you're thinking about the outlook there as well. Thank you.
Devin Patrick Ryan: It's possible it would be great just get a little bit of an update around.
Devin Patrick Ryan: Some of the business drivers.
Devin Patrick Ryan: <unk> been doing to kind of better positioned that business and just more broadly how you're thinking about the outlook there as well. Thank you.
Josh Warren: So I tried to cover a couple of them in my remarks, several initiatives that we're excited about, really with all sorts of focus on helping to drive growth going forward. So the first step is stabilization. And then secondly, we're reorienting that business for future growth. Um, I'd say we have a variety of opportunities in front of us, uh, and we're certainly going to keep you updated as these initiatives continue to play out.
Speaker Change: Sure. So I tried to cover a couple of them in my remarks.
Josh Warren: But we have.
Josh Warren: Several initiatives.
Josh Warren: We're excited about.
Josh Warren: Really with all toward a focus of helping to drive growth going forward. So first step is stabilization and then secondly, we are reorienting reorienting that business for future growth.
Josh Warren: I'd say, we have a variety of opportunities in front of us and just we're certainly going to keep you updated as these initiatives continue to play out but some of the ones I mentioned.
Josh Warren: But some of the ones I mentioned, you know, uh, improved uptime, improved API exchanges, just generally, a higher quality business, a higher quality franchise, you know, we're, we're excited about the transformation journey that we're on. And, um, you know, we view, uh, this quarter's results, particularly on subscription revenue, which has been generally flat over the last couple of quarters, as an early return that we are stabilizing that franchise and, and, and we'll return it to future growth. Yeah, this is Tom. I was
Josh Warren: <unk>.
Tom: Improved uptime improved API exchanges just generally.
Tom: A higher quality business of higher quality franchise.
Tom: We're excited about the transformation journey that we're on.
Josh Warren: And we view.
Tom: This quarter this quarter's results, particularly on subscription revenue, which has been generally flat over the last couple of quarters as an early return that we are stabilizing that franchise and we will return it to future growth.
Thomas Michael Sipp: Yeah, this is Tom. I would just add that we are focused on stabilizing the business, stabilizing the data sources from our client base, and innovating and creating new products. The underlying client activity throughout 2023 was down, consistent with overall market activity. But we've seen some slight recovery if you look at some of the usage or underlying usage data, but it's really stabilized the business that we have, stabilized the data set, and then we've actually, you know, reduced the cost base to improve the operating margins, and then gradually, you know, grow it from here.
Josh Warren: Yes. This is Tom I would just add we are focused on stabilizing the business stabilizing the data sources from our client base and innovating and creating new products.
Thomas Michael Sipp: <unk>.
Thomas Michael Sipp: The underlying client activity throughout 2023 was down.
Thomas Michael Sipp: Consistent with overall market activity that we've seen some slight recovery. If you look at some of the usage or underlying usage data, but it's really stabilize the business that we have stabilized the dataset and then we've actually we've reduced the cost base to improve the operating margins and then gradually grow it from here.
Devin Patrick Ryan: Okay, terrific. Thanks so much, everyone.
Speaker Change: Okay terrific. Thanks, so much everyone.
Speaker Change: Thank you.
Michael Cho: Our next question comes from the line of Michael Cho with J.P. Morgan. Please proceed with your question.
Devin Patrick Ryan: Our next question comes from the line of Michael Cho with Jpmorgan. Please proceed with your question.
Michael Cho: Hi, good evening. Thanks for taking my question. Josh, I just wanted to touch on one of the topics you highlighted. I think you called out, you know, Envestnet's approach to differentiated pricing as you grow your client base. I think there's been some news during the quarter about maybe some competitors raising prices for some of their products to the RIA client base. I'm just curious how Envestnet is thinking about this competitive dynamic, and maybe you could just kind of help unpack or flush out what you mean by a differentiated pricing approach for Envestnet's solution.
Michael Cho: Hi, good evening. Thanks for thanks for taking my question.
Michael Cho: Jonathan I just wanted to touch on one of the topics you highlighted I think you called out.
Michael Cho: Thats approach towards differentiated pricing as you as you call it.
Michael Cho: I think there's been some news during the quarter about maybe some competitors raising prices for some of their products into that client base I'm, just curious how <unk> thinking about the competitive dynamic and maybe you could just kind of help unpack a flush out what's your.
Michael Cho: What you mean by differentiated pricing approach for investment solutions.
Thomas Michael Sipp: Michael, this is Tom. I'll start, and maybe Josh can add something.
Michael Cho: Yeah. Michael This is Tom I'll start and maybe Josh can add so we in the <unk> space, we have changed our pricing we're considered a premium product and we our pricing is premium compared to our competitors.
Thomas Michael Sipp: In the REA space, we have changed our pricing so that we're considered a premium product. Our pricing is premium compared to our competitors. We do have pricing leverage based on the investments that we've made over the past couple of years. We really have the best trading platform in that space, and the overall platform and client service feedback is really, really positive. Our approach has been to bundle mainly analytics and then integrate and cross out managed accounts and create a more holistic relationship with the REA versus just the technology or software relationship.
Thomas Michael Sipp: <unk>.
Speaker Change: We do.
Thomas Michael Sipp: Do you have pricing leverage based on the investments that we've made over the past couple of years, we have.
Thomas Michael Sipp: Really the best trading platform in that space and the overall platform and client service feedback is really really positive and our approach has been to bundle.
Thomas Michael Sipp: Mainly analytics, and then integrate and cross sell managed accounts.
Thomas Michael Sipp: A more holistic relationship with U.
Thomas Michael Sipp: Versus just a technology or a software relationship. So if you look at just the software youre seeing higher rates higher pricing bundling with analytics, but more importantly, we're cracking open a very very different holistic relationship with the firm that has meaningful upside opportunities as you then integrate.
Thomas Michael Sipp: If you look at just the software, you're seeing higher rates, higher prices, bundling with analytics, but more importantly, we're cracking open a very, very different holistic relationship with the firm that has meaningful upside opportunities as you then integrate and scale the fiduciary opportunity.
Thomas Michael Sipp: And scale of the fiduciary opportunity.
Josh Warren: Maybe I would just add to Tom's point of bundling that which is previously sold separately or that which our competitors need to sell separately. That's a major differentiator for us.
Thomas Michael Sipp: Maybe I would just add to Tom's point of bundling that which is previously sold separately or that which our competitors need to sell separately.
Josh Warren: A major differentiator for us, but as far as some of the.
Josh Warren: But as far as some of the ins and outs of pricing, things like minimums, things like breakpoints, you know, we've been taking a fresh look at it, and most of the quarter-to-quarter stuff you see is generally a function of mix. As you know, Michael, our contracts are long-dated. Our clients are on long-term contracts, and a lot of these initiatives are going to play out over the course of the next couple of years, and that's why we're so enthusiastic about the runway we have in front of us.
Josh Warren: <unk> announced pricing things like minimums things like breakpoints, we've been taking a fresh look at it.
Josh Warren: And most of the quarter to quarter.
Josh Warren: <unk> is generally a function of mix as you know Michael our contracts are long dated our clients are on long term contracts and a lot of these initiatives are going to play out over the course of the next couple of years ahead, and that's why we're so enthusiastic about about the runway we have in front of us.
Michael Cho: Okay, no, great. Thank you for all that color.
Speaker Change: Okay, great. Thank you for all that color and then just a quick follow up on on free cash flow you.
Michael Cho: You highlighted the seasonality from <unk>.
Michael Cho: Just kind of thinking through how we should frame kind of cadence of free cash for the remainder of 'twenty four and any kind of.
Michael Cho: I realize it's early but any kind of initial thoughts or framework around how we might be thinking about normalized conversion.
Michael Cho: Ratio Thats, when you kind of look beyond that maybe.
Michael Cho: Maybe the 25% margin.
Josh Warren: Sure. Well, you're right. I mean, Q1, like we mentioned, obviously, has some seasonality there. That was evident in the first quarter of 23, the first quarter of 22, and was evident again in the first quarter of 24. But what we were able to deliver as far as improving our free cash flow of $42 million relative to where we were in Q1 is something we're proud of. We're proud of the fact that we are leaving Q1 with more cash on hand and a lower leverage ratio than we were a year ago.
Michael Cho: Once we get there.
Josh Warren: And then just a quick follow-up on pre-cash flow, you know, you highlighted the seasonality from 1Q, just kind of thinking through how we should frame the kind of cadence of pre-cash flow for the remainder of 24 and any kind of, I realize it's early, but any kind of initial thoughts or framework around how we might be thinking about normalized conversion ratios as we kind of look beyond the, you know, maybe the 25% Sure, Well, you're right. I mean, Q1, like we mentioned.
Michael Cho: Sure.
Speaker Change: Right I mean Q1, we mentioned obviously.
Josh Warren: Some seasonality there.
Josh Warren: That's been evident in.
Josh Warren: In the first quarter of 'twenty three the first quarter 'twenty, two and was evident again in the first quarter of 'twenty four but what we were able to deliver as far as improving our free cash flow of $42 million relative to where we were in Q1 is something we're proud of we're proud of the fact that we are leaving Q1 with cash on hand, and a lower level.
Josh Warren: <unk> ratio than we were a year ago.
Josh Warren: With regard to the general flow-through, you know, the guidance that I provided as far as our overall cost outlook, you know, that's everything. That's a fully cash-based approach, which is consistent with how we think, consistent with how we budget, consistent with how we are thinking about the company and thinking about the opportunity ahead. So as far as conversion going forward, you know, some of the cash consumers, things like severance, things like one-time restructuring, you should all expect 2023 numbers to not be appropriate run rates going forward, and we'll just keep you updated as we continue to make progress there.
Josh Warren: With regard to the general flow through the guidance.
Josh Warren: That I provided as far as our overall cost outlook, that's everything Thats a fully cash based approach, which is consistent with how we think consistent with how we budget consistent with how we are thinking about the company and thinking about the opportunity ahead, so as far as conversion going forward some of the <unk>.
Josh Warren: Cash consumers things like severance.
Josh Warren: Things like onetime restructuring are you should all expect.
Josh Warren: 2023 numbers to not be appropriate run rates going forward and we'll just we'll just keep you updated as we as we continue to make progress there.
Speaker Change: Wonderful. Thank you so much.
Alexander Kramm: Our next question comes from the line of Alex Kramm with UBS. Please proceed with your question.
Josh Warren: Our next question comes from the line of Alex Kramm with UBS. Please proceed with your question.
Alexander Kramm: Good evening, everyone. Just following up on the pricing question, but specifically, I guess, related to the guidance for the second quarter, it looks like a pretty steep decline in implied fee rates, quarter over quarter. I assume that some of the one-time changes here in terms of the flows that you pointed out, those two items, I'm just wondering, are those the bulk of it, or would you highlight any other specific mixed items that this is contributing to?
Alexander Kramm: Yeah, Hey, good evening, everyone. Just following up on the pricing question, but specifically I guess related to the guidance for the second quarter. It looks like a pretty steep decline in the implied fee rates quarter over quarter I assume that some of the one time.
Alexander Kramm: Changes here in terms of the flows that you pointed out those two items.
Alexander Kramm: Just wondering is that the bulk of it or would you highlight any other specific mix items that is contributing and I'm asking because really if I look at the last three quarters.
Alexander Kramm: And I'm asking because, really, if I look at the last three quarters, the deceleration in pricing, again, implied pricing has accelerated a little bit. So just wondering, are there any other underlying trends you would point out?
Alexander Kramm: Deceleration in pricing again implied pricing has accelerated a little bit. So just wondering is there any other underlying trends you would point out.
Josh Warren: No, Alex, you've got it. I mean, the fee rate is declining, but I would say it's declining for the right reasons. These are new revenue opportunities that are consistent with our strategy. From quarter to quarter, mix is the primary variable. And I would say the blended fee rate is probably two things, the two headlines. One is just clients holding assets in cash, number one, and then this higher mix of reporting assets that I referred to earlier. Those are the major drivers.
Speaker Change: No Alex you've got it I mean, the fee rate is declining.
Josh Warren: But I would say it's declining for the right reasons. These are new revenue opportunities, which are consistent with our strategy.
Josh Warren: From quarter to quarter.
Josh Warren: Yes.
Josh Warren: Mix.
Josh Warren: Is the primary variable.
Josh Warren: And I would say the blended fee rate is probably to two things. The two headlines one is just clients holding assets in cash number one and then this higher mix of reporting assets.
Josh Warren: That I referred to earlier those are the major drivers.
Josh Warren: I figured I'd ask anyways. Thank you and then just another one on the kind of first party managed.
Alexander Kramm: And then just another one on the kind of first party managed, you know, products. I've asked about this in the past.
Speaker Change: Now products they've asked about this in the past I mean, you certainly highlighted some of the high net worth some of the managed accounts here as is growing faster, but if I look at that number in aggregate, that's 40 billion that you're standing at its core.
Thomas Michael Sipp: I mean, you certainly highlighted some of the high net worth, some of the managed accounts here as growing faster. But if I look at that number in aggregate, that 40 billion that you're standing at, it's kind of been, on a quarter to quarter, year over year basis, very much in line with your overall AUM and AUA growth. So look, it's keeping up. But at the end of the day, I think this was supposed to be a big focus area.
Thomas Michael Sipp: Kind of been both on a quarter to quarter year over year basis very much in line with your overall AUM and AUC growth. So look it's keeping up but at the end of the day I think this was supposed to be a big focus area. So just just wondering what you need to do to really accelerate that and having those growth rates Dan allergens.
Thomas Michael Sipp: So just wondering what you need to do to really accelerate that and have those growth rates stand out. And, you know, if there's anything else going on where maybe those products are just not getting the right traction in the marketplace for whatever reason.
Thomas Michael Sipp: If there is anything else going on where maybe those products are just not getting the rights traction in the marketplace for whatever reason thanks.
Alexander Kramm: Yeah, I would say when you look at the data, the high net worth tax overlay and direct indexing growth rates, as I said in my remarks, are very strong, and if anything, they're accelerating. The 38% plus growth rates in advisors, assets, flows, and accounts. Where we're seeing net outflows is in our proprietary models business, and these are models that we created 10 plus years ago, and we created the marketplace and then opened it up with third party managers, which thus created more competition, if you look at it just from that lens.
Thomas Michael Sipp: Yes, I would say there is when you look at the data the high net worth tax overlay and direct indexing growth rates are as I said in my remarks are very strong and if anything they're accelerating.
Alexander Kramm: 38% plus growth rates in advisors assets flows accounts.
Alexander Kramm: Yes.
Alexander Kramm: Where we're seeing net outflows is in our proprietary models business and these are models that we created.
Alexander Kramm: 10, plus years ago, and we created the marketplace and then open it up with third party managers, which thus created more competition.
Alexander Kramm: If you look at it just from that lens. So those third party those proprietary models have been in net outflows. We've just recently launched our proprietary Etfs and we're recapturing some of those assets instead of them, leaving the firm.
Alexander Kramm: So those third-party, those proprietary models have been in net outflows. We've just recently launched our proprietary ETFs, and we're recapturing some of those assets instead of them leaving the firm. And they're just less competitive over time, just based on the broad marketplace and other options that are available. But now that we're launching the ETF business or products, and we've created an ability to recapture those assets, those outflows will decrease. And then you're going to see the growth from the other initiatives really take hold because we see this high net worth DI tax overlay as very sustainable, persistent growth. So it's really the drag from that long term proprietary models business that's impacting Fair enough. Thanks, guys.
Alexander Kramm: And there is just less competitive over time, just based on the broad marketplace and other options that are available, but now that we are launching the ETF business or products and creating an ability to recapture those assets. Those outflows will decrease and then youre going to see the growth from the other initiatives really take hold because.
Alexander Kramm: We see this high net worth the I tax overlay as very sustainable persistent growth. So it's been really the drag from that long term.
Alexander Kramm: Terry models business, that's impacting the numbers.
Alexander Kramm: Fair enough thanks, guys.
Speaker Change: Youre welcome.
Surinder Singh Thind: And our next question comes from the line of Surinder Thind with Jeffreys. Please proceed with your question.
Alexander Kramm: And our next question comes from the line of surrender thin with Jefferies. Please proceed with your question.
Surinder Singh Thind: Thank you.
Surinder Singh Thind: Thank you. I'd like to start with a question about just the data insights engine and the 20 million insights that you're generating daily. Any color on what you're seeing in terms of, from an advisor perspective, change of behavior, and interactions, how we should interpret that metric, and how it's kind of been helping the business.
Surinder Singh Thind: I'd like to start with a question about just the data insights engine and the 20 million insights that you're generating daily any color on what youre seeing in terms of.
Surinder Singh Thind: From an advisory perspective and change of behavior interactions.
Surinder Singh Thind: How we should how we should interpret that metric and how that's kind of been helping the business so far.
Thomas Michael Sipp: Surinder, I would like to say a couple of things. So, you know, we're generating about 80 different use cases across those 20 million insights, and there's a handful that are really taking hold. So, you know, a couple examples would be tax opportunities, accounts, or positions that we're serving up to the advisor where they could be, you know, who would benefit from a tax overlay capability or accounts that the advisor is managing, and there may be ways to manage them more efficiently, and we're serving that up both to the home office and to the advisor. And then annuities that may be outside of the surrender time period and maybe at a higher fee, and there are replacement products that are more suitable for the client.
Speaker Change: Yes, Surinder I would say a couple of things so.
Thomas Michael Sipp: We're generating about 80 different use cases across those $20 million in sites and there's a handful that are really taking hold so a couple of examples would be tax opportunities accounts or positions that.
Thomas Michael Sipp: We're serving up to the advisor where they could be.
Thomas Michael Sipp: Who they would benefit from a tax overlay capability or accounts that the advisor is managing and.
Thomas Michael Sipp: There may be ways to manage it more efficiently and we're serving that up both to the home office entity adviser and then annuities that may be out of the surrender time period.
Thomas Michael Sipp: And maybe at a higher fee and there are replacement products that are more suitable for the client. So when you dive in there is probably five to 10 use cases that are resonating and advisors are using more and more and then.
Thomas Michael Sipp: So, when you dive in, there are probably five to ten use cases that are responding, and advisors are using them more and more. And then another important aspect is delivering these insights where the advisor does business. So, it's one thing to develop the insight and then send them an email.
Thomas Michael Sipp: Another important aspect is delivering these insights where the adviser does business. So it's one thing to develop the insight and then sentiment E mail, we're actually delivering the insights within their core.
Thomas Michael Sipp: We're actually delivering the insights, you know, within their core, you know, wealth user experience and operating platform, and that will make a big difference over time, you know, around the advisor's ability to take action against that insight. And then we've done a lot of work to deliver those analytics within our financial planning engine. So, create a financial plan, come up with a recommendation, and then connect the plan to our wealth ecosystem, where you can then transact and deliver more fiduciary solutions.
Thomas Michael Sipp: User experience and operating platform and that will make a big difference over time.
Thomas Michael Sipp: The the advisers ability to see an action against that insight and then we've done a lot of work to deliver those those analytics within our financial planning engine.
Thomas Michael Sipp: <unk> create a financial plan come up with a recommendation and then connect planning to our wealth ecosystem, where you can then transact and deliver more fiduciary solutions. So the combination of the <unk>.
Thomas Michael Sipp: So, the combination of the insight driving the, you know, tying up the advisor to deliver against the financial plan but then making it easy to follow that financial plan. And for us, the benefit is more AUM, you know, over time. So, we're seeing traction. There is still, you know, a lot of opportunity, a lot of green field, and we think there is a lot of interest in the insights as we, you know, continue to deliver them throughout the platform.
Thomas Michael Sipp: Insight driving the.
Thomas Michael Sipp: Teeing up the advisor to deliver against the financial plan, but then making it easy to follow that financial plan and for US. The benefit is more AUM over time. So we're seeing traction it's still a lot of opportunity a lot of Greenfield and we think there's there's a lot of interest in the insights as we continue.
Thomas Michael Sipp: Deliver them throughout the platform.
Speaker Change: Thank you.
Surinder Singh Thind: And then in terms of just, um, when I think about it, follow up on some of the pricing questions here, or just on the AUMA side of the business. The fee rate's been relatively stable when we look at the last, New Year. But one of the things is that the AUM percentage has gone up kind of materially from roughly 40% a few years ago to 50% today, but the fee rate hasn't really moved.
Thomas Michael Sipp: And then in terms of just.
Surinder Singh Thind: When I think about a follow up on some of the pricing questions here just on the <unk> side of the business.
Surinder Singh Thind: On the fee rate has been relatively stable when we look over the last few years.
Surinder Singh Thind: But one of the things is that the AUM percentage has gone up kind of materially from roughly 40% a few years ago to 50% today, but the fee rate Hasnt really moved.
Surinder Singh Thind: Any color there is, there is a certain makeshift underneath in the product set that you're selling where, you know, it's just slightly lower-fee AUM type products that are in that mix now, or what should I help understand? No, Surinder, I would think of it as...
Surinder Singh Thind: Any color there are there is there a certain mix shift underneath in the product set that youre selling where.
Surinder Singh Thind: It's just slightly lower fee AUM type products that are in that mix now or what should what should I help understand that.
Josh Warren: Thank you. Thank you. We have reached the end of our question and answer session.
Josh Warren: No, Surinder, I would think of it as even though the mix is moving, as you correctly surmised, between AUM and AUA, you know, AUA and, in particular, some of our big blocks of assets that are reporting only are really low fees, and then when you look at it all together on a blended basis, you start to see that phenomenon. The reporting assets, you know, those are essential, they enable successful client relationships, they provide a foundation in many respects for clients to do more business with us, but you should think of that as, to a certain extent, dragging down the blended fee rate when you sort of lump everything together in terms of AUMA into a mix.
Surinder Singh Thind: No.
Surinder Singh Thind: Sundar I would think of it as as even though the mix is moving as you correctly surmised between M&A.
Josh Warren: And in particular, some of our big blocks of assets that are reporting only.
Josh Warren: Our really.
Josh Warren: And then when you look at it all together on a blended basis, you start to see that phenomenon.
Josh Warren: The reporting assets those are those are a central.
Josh Warren: They enable successful client relationships.
Josh Warren: They enable our foundation in many respects for clients to do more business with us, but you should think of that as.
Josh Warren: And to a certain extent dragging down the blended fee rate.
Josh Warren: When you sort of lump everything together in terms of.
Josh Warren: Into into our mix.
Speaker Change: Thank you.
Operator: Thank you. We have reached the end of our question and answer session, and with that, this will conclude today's teleconference.
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Speaker Change: Thank you.
Speaker Change: We have reached the end of our question and answer session.
Operator: This will conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
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