Q2 2024 Envestnet Inc Earnings Call

August 12, 2024

[inaudible] James Fox, James Fox, James Fox, James Fox, James Fox

[music]

Operator: Hello and welcome to the Envestnet Second Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. As a reminder, this conference is being recorded. There will be no Q&A session following prepared remarks.

Speaker Change: Hello and welcome to the Investment Second Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. As a reminder, this conference is being recorded. There will be no Q&A session following prepared remarks.

Operator: It is now my pleasure to introduce Josh Warren, Chief Financial Officer. Thank you, sir. You may begin. Good afternoon, everyone.

Operator: It is now my pleasure to introduce Josh Warren, Chief Financial Officer. Thank you, sir. You may begin.

Speaker Change: It is now my pleasure to introduce Josh Warren, Chief Financial Officer. Thank you, sir. You may begin. Good afternoon, everyone. I'm Josh Warren, Chief Financial Officer of Investnet.

Josh Warren: Good afternoon, everyone. I'm Josh Warren, the Chief Financial Officer of Envestnet. Thank you for joining us on today's second quarter 2024 earnings call. Before we begin, I'd like to point out that our earnings press release, supplemental presentation, and associated form 10-Q can be found in the investor relations section of our website at investnet.com. This call will be webcast live, and a replay will be available for one month under the Investor Relations section of our website as well.

Josh Warren: I'm Josh Warren, Chief Financial Officer of Envestnet. Thank you for joining us on today's Second Quarter 2024 Earnings Call. Before we begin, I'd like to point out that our earnings press release, supplemental presentation, and associated form 10-Q can be found in the Investor Relations section of our website, at investnet.com. This call is being webcast live, and a replay will be available for one month in the Investor Relations section of our website as well.

Speaker Change: Thank you for joining us on today's second quarter 2024 earnings call. Before we begin, I'd like to point out that our earnings press release, supplemental presentation, and associated form 10-Q can be found under the investor relations section of our website at investnet.com.

Speaker Change: 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.

Josh Warren: During the call, we will be discussing certain forward-looking information. This information is based on our current expectations and is not a guarantee of future performance. I encourage you to review the cautionary statement on slides 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 statement. Further information can be found in our regular SEC filing.

Josh Warren: During the call, we will be discussing certain forward-looking information. This information is based on our current expectations and is not a guarantee of future performance. I encourage you to review the cautionary statement on slides two and three of the supplemental presentation regarding the potential risks, uncertainties, and other factors that could cause actual results to differ from those expressed by the forward-looking statement.

Speaker Change: I encourage you to review the cautionary statement on slides 2 and 3 of the supplemental presentation for the potential risks, uncertainties, and other factors that could cause actual results to differ from those expressed by the forward-looking statements.

Josh Warren: Further information can be found in our regular SEC filing. During this call, we will be referring to certain as-adjusted financial measures. Please refer to the appendix in our supplemental presentation for a reconciliation of these as-adjusted financial measures to the most directly comparable GAAP measures.

Speaker Change: Further information can be found in our regular SEC filings.

Josh Warren: During this call, we will be referring to certain as-adjusted financial measures. Please refer to the appendix in our supplemental presentation for a reconciliation of these as-adjusted financial measures to the most directly comparable GAAP measures. Joining me on today's call is Jim Fox, our board chair and interim CEO. On our call this afternoon, we'll provide a company update as well as an overview of the company's results during the second quarter. Due to our pending transaction with Bain Capital, we will not be taking questions on today's call and will not be providing guidance for the third quarter. I'll now turn it over to Jim. Thanks, Jim.

Speaker Change: During this call, we will be referring to certain as-adjusted financial measures. Please refer to the appendix in our supplemental presentation for a reconciliation of these as-adjusted financial measures to the most directly comparable gap measures.

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

Speaker Change: Joining me on today's call is Jim Fox, our board chair and interim CEO.

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

Jim Fox: Thanks, Josh. As you know, on July 11th, the company announced that we have entered into a definitive agreement to be acquired by Bain Capital and related parties. Earlier today, Envestnet filed its preliminary proxy statement relating to this pending transaction. It includes comprehensive details of the process conducted by our board, and we encourage you to read the filing for further information. As noted in the proxy, the board and the company's senior management team regularly review the company's business and operations, competitive position, historical performance, future prospects, and long-term strategic plan with the goal of maximizing shareholder value.

Jim Fox: As you know, on July 11th, the company announced that it had entered into a definitive agreement to be acquired by Bain Capital and related parties. Earlier today, Envestnet filed its preliminary proxy statement relating to this pending transaction. It includes comprehensive details of the process conducted by our board, and we encourage you to read the filing for further information. As noted in the proxy, the board and the company's senior management team regularly review the company's business and operations, competitive position, historical performance, future prospects, and long-term strategic plan with the goal of maximizing stockholder value.

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

Jim Fox: As noted in the proxy, the board and the company's senior management team regularly reviews

Jim Fox: the company's business and operations, competitive position, historical performance.

Jim Fox: future prospects, and long-term strategic plan with the goal of maximizing stockholder value.

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

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

Jim Fox: As part of these ongoing evaluations, we have, from time to time, considered various strategic alternatives.

Jim Fox: including the execution of the company's strategy as a standalone public company or the possible sale of the company to or in combination of the company with a third party.

Jim Fox: This transaction is the result of a thorough process by the Envestnet board and our advisors and provides certain and immediate value for our shareholders. Our board unanimously concluded that the transaction is in the best interest of the company and our shareholders. We remain on track to close the transaction in the fourth quarter, subject to customary closing conditions, including obtaining approval from Envestnet shareholders and receiving the necessary regulatory clearances. We look forward to engaging with our shareholders in the days ahead. The road ahead is incredibly bright for our clients, our partners, and our associates.

Jim Fox: This transaction is the result of a thorough process by the Envestnet board and our advisors and provides certain and immediate value for our shareholders. Our board unanimously concluded that the transaction is in the best interest of the company and our shareholders. We remain on track to close the transaction in the fourth quarter, subject to customary closing conditions, including obtaining approval from Envestnet shareholders and receiving the necessary regulatory clearance. We look forward to engaging with our shareholders in the days ahead.

Operator: [inaudible] for the uncertainties, The road ahead is incredibly bright for our clients, our partners, and our associates.

Speaker Change: This transaction is the result of a thorough process by the Investment Board and our advisors and provides certain and immediate value for our shareholders.

Speaker Change: Our board unanimously concluded the transaction is in the best interest of the company and our shareholders.

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

Jim Fox: The road ahead is incredibly bright for our clients, our partners, and our associates. As a private company and with the support of Bain Capital, we expect to continue executing our strategy through organic and inorganic initiatives and investing in our platform to make it more customized, connected, and intelligent. Before handing it back to Josh, I'll turn to this quarter's results, which reflect our commitment to deep client relationships. Our Q2 revenue was $348 million, representing 11% growth over Q2 2023 and above the high end of our range.

Speaker Change: The road ahead is incredibly bright for our clients, our partners, and our associates.

Jim Fox: As a private company, and with the support of Bain Capital, we expect to continue executing our strategy through organic and inorganic initiatives and investing in our platform to make it more customized, connected, and intelligent. Before handing it back to Josh, I'll turn to this quarter's results, which reflect our commitment to deep client relationships. Our Q2 revenue was $348 million, representing 11% growth over Q2 2023 and above the high end of our range.

Speaker Change: As a private company and with the support of Bain Capital, we expect to continue executing our strategy through organic and inorganic initiatives and investing in our platform to make it more customized, connected, and intelligent.

Jim Fox: Our adjusted EBITDA was $78 million, also above the high end of our range, representing a 22% adjusted EBITDA margin and nearly 450 basis points of margin expansion compared to Q2 2023. Our adjusted EPS was $0.55, lower than our guidance in connection with certain non-cash charges that Josh will detail, but nevertheless up 20% from the $0.46 reported in Q2 2023.

Speaker Change: Before handing it back to Josh, I'll turn to this quarter's results, which reflect our commitment to deep client relationships.

Speaker Change: Bye.

Josh Warren: Our Q2 revenue was $348 million, representing 11% growth over Q2 2023, and above the high end of our range.

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

Josh Warren: Our adjusted EPS was 55 cents, lower than our guidance in connection with certain non-cash charges that Josh will detail, but nevertheless up 20% from the 46 cents reported in Q2 2023. With that, I'll turn it back to Josh.

Josh Warren: With that, I'll turn it back to Josh.

Josh Warren: At our annual Envestnet Elevate client conference in May, nearly 2,000 advisors and professionals experienced firsthand the growth and productivity made possible by our leading wealth management platform. Consistent with other second quarters, this conference caused slightly higher professional services revenue, which offset the associated direct expenses incurred. During Q2 2024, our advisor count increased to over 110,000, representing 3% growth year-over-year. Additionally, we reported 4% account growth compared to Q2 2023. Accounts on our platform declined during Q2 to over $19.4 million, driven by a programmatic effort to reduce unfunded dormant accounts among certain clients that won't have a meaningful revenue impact.

Josh Warren: Thanks, Jim. At our annual Envestnet Elevate client conference in May, nearly 2,000 advisors and professionals experienced firsthand the growth and productivity made possible by our leading wealth management platform. Consistent with other second quarters, this conference caused slightly higher professional services revenue, which offset the associated direct expenses incurred. During Q2 2024, our advisor count increased to over 110,000, representing 3% growth year-over-year. We reported 4% account growth compared to Q2 2023. However, accounts on our platform declined during Q2 to over $19.4 million, driven by a programmatic effort to reduce unfunded dormant accounts among certain clients that won't have a meaningful revenue impact.

Josh Warren: Thanks, Jim.

Josh Warren: At our annual InvestNet Elevate client conference in May, nearly 2,000 advisors and professionals experienced firsthand the growth and productivity made possible by our leading wealth management platform.

Josh Warren: Consistent with other second quarters, this conference caused slightly higher professional services revenue, which offset the associated direct expenses incurred.

Josh Warren: During Q2 2024, our advisor count increased to over 110,000, representing 3% growth year-over-year.

Josh Warren: We reported 4% account growth compared to Q2 2023. Accounts on our platform declined during Q2 to over $19.4 million, driven by a programmatic effort to reduce unfunded dormant accounts among certain clients that won't have a meaningful revenue impact.

Josh Warren: In our wealth solution segment, across diversified client channels, the extent of our platform and both asset and subscription-based pricing constructs provide the breadth of solutions to fit the industry's needs. Traditionally, we've defined asset-based revenues as primarily consisting of variable fees for providing access to our platform. Our asset-based revenues include both fiduciary and technology services, and our offerings range from consolidated performance reporting to higher touch, tailored solutions, such as full discretionary portfolio management that blends traditional indexing with the customization of managed accounts to improve after-tax and risk-adjusted results.

Josh Warren: In our wealth solution segment across diversified client channels, the extent of our platform and both asset and subscription-based pricing constructs provide the breadth of solutions to fit the industry's needs. Traditionally, we've defined asset-based revenues as primarily consisting of variable fees for providing access to our platform. Our asset-based revenues include both fiduciary and technology services, and our offerings range from consolidated performance reporting to higher touch, tailored solutions, such as full discretionary portfolio management that blends traditional indexing with the customization of managed accounts to improve after-tax and risk-adjusted results.

Josh Warren: In our Wealth Solutions segment, across diversified client channels, the extent of our platform, and both asset and subscription-based pricing constructs, provide the breadth of solutions to fit the industry's needs.

Josh Warren: Traditionally, we have defined asset-based revenues as primarily consisting of variable fees for providing access to our platforms.

Josh Warren: Our asset-based revenues include both fiduciary and technology services.

Josh Warren: and our offerings range from consolidated performance reporting to higher touch, tailored solutions such as full discretionary portfolio management that blends traditional indexing with the customization of managed accounts.

Josh Warren: to improve after-tax and risk-adjusted results.

Josh Warren: We have experienced structural inflows into Wealth Solutions' asset-based revenue account. During Q2, our total inflows of nearly $11 billion reflected expanded relationships with existing clients. While there are always specific events in any quarter that impact flows, strong and consistent growth with our clients is at the center of our strategy. We delivered over 13 billion AUM flows in Q2. Our 26 billion AUM flows during the first half of 2024 compares to approximately 30 billion AUM flows for all of 2023.

Josh Warren: We have experienced structural inflows into Wealth Solutions asset-based revenue accounts.

Josh Warren: During Q2, our total inflows of nearly $11 billion reflects expanded relationships with existing clients. While there are always specific events in any quarter that impact flows, strong and consistent growth with our clients is at the center of our strategy.

Josh Warren: We delivered over 13 billion of AUM flows in Q2.

Josh Warren: Our 26 billion of AUM flows during the first half of 2024 compares to approximately 30 billion of AUM flows for all of 2023.

Josh Warren: During Q2 2024, total asset-based revenue generated by Wealth Solutions was over $219 million, an 18% increase from Q2 2023, supported by improving market conditions. Subscription-based revenue represents our software-as-a-service-oriented offering. During Q2, we delivered WealthSolutions subscription-based revenue of over $84 million, representing 6% growth over Q2 2023. Additionally, during Q2, we deconsolidated FIDEX from our results in connection with the recent funding round led by insurance company partners and Envestnet clients. During 2023, Fidex contributed approximately $9 million of consolidated revenue to Envestnet, with approximately 90% of this contribution in subscription revenue. Envestnet is the largest shareholder in Fidex, despite not participating in this funding round.

Josh Warren: During Q2 2024, total asset-based revenue generated by Wealth Solutions was over $219 million, an 18% increase from Q2 2023, supported by improving market conditions. Subscription-based revenue represents our software-as-a-service-oriented offering. During Q2, we delivered WealthSolutions subscription-based revenue of over $84 million, representing 6% growth over Q2 2023. Additionally, during Q2, we deconsolidated FIDEX from our results in connection with the recent funding round led by insurance company partners and Envestnet clients. During 2023, Fidex contributed approximately $9 million of consolidated revenue to Envestnet, with approximately 90% of its contribution in subscription revenue. Envestnet is the largest shareholder in FIDEX, despite not participating in this funding round.

Josh Warren: During Q2 2024, total asset-based revenue generated by Wealth Solutions was over $219 million, an 18% increase from Q2 2023, supported by improving market conditions.

Josh Warren: Our subscription-based revenue represents our software-as-a-service oriented offerings.

Operator: As a private company and with the support of Bane Capital, we expect to continue executing our strategy through organic and inorganic initiatives and investing in our platform to make it more customized, connected, and intelligent.

Josh Warren: During Q2, we delivered WealthSolutions subscription-based revenue of over $84 million, representing 6% growth over Q2 2023.

Josh Warren: During Q2, we deconsolidated FIDEX from our results in connection with the recent funding round led by insurance company partners and investment clients.

Jim: Before handing it back to Josh, I'll turn to this quarter's results, which reflect our commitment to deep client relationships. Our Q2 revenue was 348 million representing 11 percent growth over Q2 2023 and above the high end of our range. Our adjusted EBITDA was 78 million, also above the high end of our range, representing a 22 percent adjusted EBITDA margin and nearly 450 basis points of margin expansion compared to Q2 2023.

Josh Warren: During 2023, Fidex contributed approximately $9 million of consolidated revenue to InvestNet, with approximately 90% of this contribution in subscription revenue. InvestNet is the largest shareholder in Fidex, despite not participating in this funding round.

Josh Warren: In total, WealthSolutions segment revenue grew to over $312 million during Q2, representing 13% growth over Q2 2023. Turning to our data and analytics business, which generates subscription-based revenues across open banking and alternative data offerings. During Q2, our DNA revenue was $36.2 million, representing a 1% decline from Q2 2023. Q2 revenue represented a 3% revenue increase from Q1, with professional services as the primary driver. Recurring subscription revenue of $33 million has been approximately flat during the last four quarters, consistent with our stabilization effort.

Josh Warren: In total, WealthSolutions segment revenue grew to over $312 million during Q2, representing 13% growth over Q2 2023. Turning to our data and analytics business, which generates subscription-based revenues across open banking and alternative data offerings. During Q2, our DNA revenue was $36.2 million, representing a 1% decline from Q2 2023. However, Q2 revenue represented a 3% revenue increase from Q1, with professional services as the primary driver. Our recurring subscription revenue of $33 million has been approximately flat during the last four quarters, consistent with our stabilization effort.

Josh Warren: In total, Wealth Solutions segment revenue grew to over $312 million during Q2, representing 13% growth over Q2 2023.

Josh Warren: Turning to our data and analytics business which generates subscription based revenues across open banking and alternative data offerings.

Jim: Our adjusted EPS was 55 cents, lower than our guidance in connection with certain non-cash charges that Josh will detail, but nevertheless, up 20 percent from the 46 cents reported in Q2 2023.

Josh Warren: During Q2, our DNA revenue was $36.2 million, representing a 1% decline from Q2 2023.

Josh Warren: Q2 revenue represented a 3% revenue increase from Q1, with professional services as the primary driver.

Jim: With that, I'll turn it back to Josh. Thanks, Jim.

Josh: At our annual Envestnet Elevate Client Conference in May, nearly 2,000 advisors and professionals experienced firsthand the growth and productivity made possible by our leading wealth management platform. Consistent with other second quarters, this conference caused slightly higher professional services revenue, which offset the associated direct expenses incurred. During Q2 2024, our advisor count increased to over 110,000, representing 3 percent growth year over year. We reported 4 percent account growth compared to Q2 2023, a count on our platform declined during Q2 to over 19.4 million, driven by a programmatic effort to reduce unfunded dormant accounts among certain clients that won't have a meaningful revenue impact.

Josh Warren: Our recurring subscription revenue of $33 million has been approximately flat during the last four quarters, consistent with our stabilization efforts.

Josh Warren: In connection with business conditions, we recorded a non-cash impairment charge of $96 million during Q2, writing off the remaining goodwill related to the DNA business created by Envestnet's 2015 acquisition of Yodla. Now, moving on to expenses. As previously detailed, Envestnet's costs consist of a combination of non-controllable and manageable expenses. Our non-controllable expenses include asset-based payments to third parties common in the wealth industry that move in tandem with revenue growth. Our Q2 direct expenses of $144 million included $130 million of these asset-based costs. Our manageable costs fall into three general categories.

Josh Warren: In connection with business conditions, we recorded a non-cash impairment charge of $96 million during Q2, writing off the remaining goodwill related to the DNA business created by Envestnet's 2015 acquisition of Yodla. Now, moving on to expense. As previously detailed, Envestnet's costs consist of a combination of non-controllable and manageable expenses. Our non-controllable expenses include asset-based payments to third parties common in the wealth industry that move in tandem with revenue growth. Our Q2 direct expenses of $144 million included $130 million of these asset-based costs.

Josh Warren: Now moving on to expenses.

Josh Warren: As previously detailed, Investnet's costs consist of a combination of non-controllable and manageable expenses.

Josh Warren: Our non-controllable expenses include asset-based payments to third parties common in the wealth industry that move in tandem with revenue growth.

Josh: In our wealth solution segment, across diversified client channels, the extent of our platform and both asset and subscription-based price and constructs provide the breadth of solutions to fit the industry's needs. Traditionally, we have defined asset-based revenues as primarily consisting of variable fees for providing access to our platforms. Our asset-based revenues include both fiduciary and technology services and our offerings range from consolidated performance reporting to higher touch tailored solutions, such as full discretionary portfolio management that blends traditional indexing with the customization of managed accounts to improve aftertacks and risk-adjusted results.

Josh Warren: Our Q2 direct expenses of $144 million included $130 million of these asset-based costs.

Josh Warren: Our manageable costs fall into three general categories, compensation-related, non-compensation expenses, and capital expenditures. Regarding compensation expenses, as a reminder, during 2023, Envestnet reduced its headcount by 10%, consistent with the conclusion of a period of elevated platform infrastructure investment. We expect our headcount to be roughly flat during 2024, as discussed on previous calls.

Josh Warren: Our manageable costs fall into three general categories, compensation related, non-compensation expenses, and capital expenditures.

Josh Warren: Compensation-related, non-compensation expenses, and capital expenditures. Regarding compensation expenses, as a reminder, during 2023, Envestnet reduced its headcount by 10%, consistent with the conclusion of a period of elevated platform infrastructure investment. We expect our headcount to be roughly flat during 2024.

Josh Warren: Regarding compensation expenses, as a reminder, during 2023, investment reduced its headcount by 10 percent, consistent with the conclusion of a period of elevated platform infrastructure investment.

Josh Warren: As discussed on previous calls, despite increased variable compensation in connection with improved results, we expect a decline in total compensation-related costs, which include all salary, benefits, stock-based compensation, and other allowances, regardless of accounting treatment regarding software development. The second major area of total costs is non-compensation expenses, which encompasses all other operating expenses, including capitalizable software development, consistent with our focus on free cash flow. As discussed on prior calls, despite inflationary headwinds, we continue to anticipate our non-compensation costs will be modestly lower versus 2023 given our scale.

Josh Warren: We expect our headcount to be roughly flat during 2024. As discussed on previous calls,

Josh Warren: Despite increased variable compensation in connection with improved results, we expect a decline in total compensation-related costs, which include all salary, benefits, stock-based compensation, and severance, regardless of accounting treatment regarding software development. The second major area of total costs is non-compensation expenses, which encompasses all other operating expenses, including capitalizable software development, consistent with our focus on free cash flow. As discussed on prior calls, despite inflationary headwinds, we continue to anticipate our non-compensation costs will be modestly lower versus 2023 given our scale.

Josh: We have experienced structural inflows into wealth solutions asset-based revenue accounts. During Q2, our total inflows of nearly 11 billion reflects expanded relationships with existing clients. While there are always specific events in any quarter that impact flows, strong and consistent growth with our clients is at the center of our strategy. We delivered over 13 billion of AUM flows in Q2. Our 26 billion of AUM flows during the first half of 2024 compares to approximately 30 billion of AUM flows for all of 2023.

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

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

Josh Warren: Finally, CapEx was $3 million for Q2, consistent with our annual planning cycle. Our free cash flow during Q2 2024 was $67 million, a sequential improvement from negative $20 million during Q1 and up from $37 million during Q2 2023. During the first half of 2024, Envestnet generated approximately $47 million of free cash flow, more than it generated in all of 2023. Cash on our balance sheet increased to $122 million, driven by our improved free cash flow generation, efficiency, and conversion. As of the end of Q2, our leverage ratio, defined as total debt less cash over trailing adjusted EBITDA, was approximately 2.7 times, representing more than a full turn of leverage reduction relative to a year ago.

Josh: During Q2 2024, total asset-based revenue generated by wealth solutions was over 219 million, an 18% increase from Q2 2023 supported by improving market conditions. Our subscription-based revenue represents our software as a service-oriented offerings. During Q2, we delivered wealth-solution subscription-based revenue of over 84 million, representing 6% growth over Q2 2023. During Q2, we de-consolidated FedEx from our results in connection with a recent funding round led by insurance company partners and investment clients.

Josh Warren: Our free cash flow during Q2 2024 was $67 million, a sequential improvement from negative $20 million during Q1 and up from $37 million during Q2 2023.

Josh Warren: During the first half of 2024, investment generated approximately $47 million of free cash flow, more than it generated in all of 2023.

Josh Warren: Cash on our balance sheet increased to 122 million, driven by our improved free cash flow generation, efficiency, and conversion.

Josh: During 2023, FedEx contributed approximately 9 million of consolidated revenue to InvestNet, with approximately 90% of this contribution in subscription revenue. InvestNet is the largest shareholder in FedEx despite not participating in this funding round. In total, wealth-solution segment revenue grew to over 312 million during Q2, representing 13% growth over Q2 2023.

Josh Warren: As of the end of Q2, our leverage ratio, defined as total debt less cash over trailing adjusted EBITDA, was approximately 2.7 times, representing more than a full turn of leverage reduction relative to a year ago.

Josh Warren: In addition to our previously described impairment charge, during Q2, our financial results were impacted by non-cash items in connection with our continued efforts to enhance our operations. These include accounting gains from our minority investments of $20 million, primarily related to the FIDEX deconsolidation. These gains are partially offset by losses of $13 million from writing off previously capitalized software development in connection with streamlining our platform accounting efforts. There is no cash or cash flow impact from these items.

Josh Warren: In addition to our previously described impairment charge, during Q2, our financial results were impacted by non-cash items in connection with our continued efforts to enhance our operation. These include accounting gains from our minority investments of $20 million, primarily related to the FedEx deconsolidation. These gains are partially offset by losses of $13 million from writing off previously capitalized software development in connection with streamlining our platform accounting efforts. There is no cash or cash flow impact from these items.

Josh Warren: In addition to our previously described impairment charge, during Q2 our financial results were impacted by non-cash items in connection with our continued efforts to enhance our operations.

Josh Warren: These include accounting gains from our minority investments of $20 million, primarily related to the FedEx deconsolidation.

Josh: Turning to our data and analytics business, which generates subscription-based revenues across open banking and alternative data offerings. During Q2, our DNA revenue was 36.2 million, representing a 1% decline from Q2 2023. Q2 revenue represented a 3% revenue increase from Q1 with professional services as the primary driver.

Josh Warren: These gains are partially offset by losses of $13 million from writing off previously capitalized software development in connection with streamlining our platform accounting efforts.

Josh Warren: There is no cash or cash flow impact from these items.

Josh Warren: Before closing, I'd like to convey a sincere thank you to all our stakeholders, particularly our clients, our employees, and our shareholders. Investment has been on an incredible journey during the last 25 years. We're pleased to have announced this transaction with Bain, and we look forward to embarking on this new chapter. We are confident that our firm's best days are ahead, as we continue to grow and evolve the company and capitalize on the substantial opportunities for our industry.

Josh Warren: Before closing, I'd like to convey a sincere thank you to all our stakeholders, particularly our clients, our employees, and our shareholders. Investment has been on an incredible journey during the last 25 years. We're pleased to have announced this transaction with Bain, and we look forward to embarking on this new chapter. We are confident that our firm's best days are ahead as we continue to grow and evolve the company and capitalize on the substantial opportunities for our industry. Thank you for your interest in Envestnet.

Josh Warren: Before closing, I'd like to convey a sincere thank you to all our stakeholders, particularly our clients, our employees, and our shareholders.

Josh: Our recurring subscription revenue of 33 million has been approximately flat during the last four quarters, consistent with our stabilization efforts.

Speaker Change: Investment has been on an incredible journey during the last 25 years.

Josh: In connection with business conditions, we recorded a non-cash impairment charge at 96 million during Q2, writing off the remaining goodwill related to the DNA business created by InvestNet's 2015 acquisition of YODELY. Now moving on to expenses. As previously detailed, InvestNet's costs consist of a combination of non-controllable and manageable expenses. Our non-controllable expenses include asset-based payments to third parties common in the wealth industry, then move in tandem with revenue growth. Our Q2 direct expenses of 144 million included 130 million of these asset-based costs.

Speaker Change: We're pleased to have announced this transaction with Bain, and we look forward to embarking on this new chapter.

Speaker Change: We are confident that our firm's best days are ahead as we continue to grow and evolve the company and capitalize on the substantial opportunities for our industry.

Operator: Thank you for your interest in Envestnet. Thank you. And with that, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Any Questions For The Viewers? [inaudible]

Speaker Change: Thank you for your interest in investment.

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

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

Josh: Our manageable costs fall into three general categories, compensation-related, non-compensation expenses, and capital expenditures. Regarding compensation expenses, as a reminder during 2023, InvestNet reduced its headcount by 10%, consistent with the conclusion of a period of elevated platform infrastructure investment. We expect our headcount to be roughly flat during 2024. As discussed on previous calls, despite increased variable compensation in connection with improved results, we expect a decline in total compensation-related costs, which include all salary, benefits, stock-based compensation, and severance, regardless of accounting treatment regarding software development.

Operator: [music]

Josh: The second major area of total costs is non-compensation expenses, which encompasses all other operating expenses, including capitalizable software development, consistent with our focus on free cash flow. As discussed on prior calls, despite inflationary headwinds, we continue to anticipate our non-compensation costs will be modestly lower, versus 2023, given our scale. Finally, CapEx was $3 million for Q2, consistent with our annual planning cycle. Our free cash flow during Q2 2024 was $67 million, a sequential improvement for negative $20 million during Q1, and up from $37 million during Q2 2023.

Josh: During the first half of 2024, Envestnet generated approximately $47 million of free cash flow, more than it generated in all of 2023. Cash on our balance sheet increased to $122 million, driven by our improved free cash flow generation, efficiency and conversion. As of the end of Q2, our leverage ratio defined as total debt less cash over trailing adjusted EBITDA was approximately 2.7 times, representing more than a full turn of leverage reduction relative to a year ago.

Josh: In addition to our previously described impairment charge, during Q2, our financial results were impacted by non-cash items in connection with our continued efforts to enhance our operations. These include accounting gains from our minority investments of $20 million, primarily related to the FedEx deconsolidation. These gains are partially offset by losses of $13 million from writing off previously capitalized software development in connection with streamlining our platform accounting efforts.

Josh: There is no cash or cash flow impact from these items. Before closing, I'd like to convey a sincere thank you to all our stakeholders, particularly our clients, our employees and our shareholders. Investment has been on an incredible journey during the last 25 years. We're pleased to have announced this transaction with Bain, and we look forward to embarking on this new chapter. We are confident that our firm's best days are ahead as we continue to grow and evolve the company and capitalize on the substantial opportunities for our industry.

Operator: Thank you for your interest in investment.

Operator: Thank you, and with that, this concludes today's teleconference. You may disconnect your lines at this time.

Operator: Thank you for your participation.

William Crager: [inaudible] William Crager,

William Crager: [music]

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Q2 2024 Envestnet Inc Earnings Call

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