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Edited Transcript of ENV earnings conference call or presentation 8-May-19 9:00pm GMT

Q1 2019 Envestnet Inc Earnings Call

CHICAGO May 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Envestnet Inc earnings conference call or presentation Wednesday, May 8, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher Curtis

Envestnet, Inc. - Division CFO & Head of IR

* Judson Taft Bergman

Envestnet, Inc. - Chairman & CEO

* Peter H. D'Arrigo

Envestnet, Inc. - CFO

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Conference Call Participants

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* Christopher Charles Shutler

William Blair & Company L.L.C., Research Division - Research Analyst

* Christopher Roy Donat

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

* David Michael Grossman

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Hugh Michael Miller

The Buckingham Research Group Incorporated - Director

* Oscar D. Turner

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Patrick Joseph O'Shaughnessy

Raymond James & Associates, Inc., Research Division - Research Analyst

* Peter James Heckmann

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Surinder Singh Thind

Jefferies LLC, Research Division - Equity Analyst

* William V. Cuddy

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Envestnet First Quarter 2019 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Chris Curtis, Division CFO and Head of Investor Relations. Please go ahead, Mr. Curtis.

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Christopher Curtis, Envestnet, Inc. - Division CFO & Head of IR [2]

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Thank you, and good afternoon. With me on today's call are Jud Bergman, Chairman and Chief Executive Officer; and Pete D'Arrigo, Chief Financial Officer. Our first quarter 2019 earnings press release and associated Form 8-K can be found at envestnet.com under the Investor Relations section.

During this conference call, we will be discussing certain non-GAAP information. This information is not calculated in accordance with GAAP and may be calculated differently than similar non-GAAP information for other companies.

Quantitative reconciliations of our non-GAAP financial information to the most directly comparable GAAP formation appear in today's press release.

Specific non-GAAP metrics include adjusted revenue, adjusted EBITDA, adjusted net income and adjusted net income per share.

This quarter, we also are introducing adjusted net revenue as a non-GAAP metric. Adjusted net revenue eliminates the effects of asset-based cost of revenue, which is included in both our asset-based recurring revenue and cost of revenue on our income statement.

During the call, we will also be discussing certain forward-looking information. These discussions are not guarantees of future performance and therefore, you should not put undue reliance on them.

These statements are subject to numerous risks and uncertainties that could cause them to differ materially from what we expect.

Please refer to our most recent SEC filings as well as our earnings press release, which are available on our website for more information on factors that could affect these matters.

This call is being webcast live and will be available for replay for 1 month on our website. All remarks made during the call are current at the time of the call and will not be updated to reflect subsequent material developments.

We will take questions after our prepared remarks. And with that, I will turn the call over to Jud.

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [3]

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Thank you, Chris. I add my own welcome to everyone. I want to thank you for joining us today. Envestnet continues to expand and strengthen our financial wellness platform.

Through organic growth, innovation, disciplined acquisitions and the development of marketplace exchanges, we are focused on enabling advisers to deliver unified advice and help advisers achieve better outcomes for their clients.

For the first quarter, Envestnet grew revenue, adjusted EBITDA and adjusted earnings per share and our quarterly results overcame the impact of challenging capital markets in the fourth quarter of 2018 and the December 31 market billing cycle.

In our Wealth Solutions business, gross sales excluding conversions was $30 billion. We also completed $48 billion in conversions. $20 billion in asset-based recurring revenue business and another $28 billion in subscription-based conversions.

We ended the quarter with more than $3 trillion in platform assets and 11 million investor accounts.

Nearly 97,000 advisers now use Envestnet's wealth management technology and at the end of March, Envestnet | Yodlee's data aggregation platform supported more than 24 million active users.

We also continue to expand our client relationships. Edelman Financial Engines, America's largest independent investment adviser, has chosen Envestnet to be the exclusive provider of consolidated reporting, billing, trading, compliance oversight tools and product access.

The $37 billion RIA saw the business solution with greater scale and efficiency in order to consolidate investment platforms.

Edelman Financial Engines believes that the integrated wealth management platform provided by Envestnet will allow them greater scale and provide a better experience for both their adviser and client base.

We are also pleased to announce an extended partnership with Q2 to integrate our newly launched conversational AI platform via Abe AI.

Q2 will be offering the new conversational banking solution to their existing banks and credit union customers. We've been active in 2019 implementing our vision for financial wellness. Since our last earnings call, we've progressed on several fronts, including the formal launch of our insurance exchange, closing on the Schwab PortfolioCenter transaction, announcing and closing on the acquisition of investment MoneyGuide and creating the Advisor Credit Exchange. All of these contribute in a meaningful way to the establishment of a powerful financial wellness platform for advisers to deliver increased value to their clients.

We had the opportunity last week to highlight some of these accomplishments at our Annual Advisor Summit in Austin, Texas where nearly 3,000 were in attendance, including more than a dozen from the investor community.

At the summit, our message to advisers focused on expanding the definition of unified advice and how Envestnet is supporting them with innovative technology, data and fiduciary solutions.

Unified advice means supporting our clients' entire financial well-being through a few critical elements; planning and budgeting, investing, managing credit, protecting capital and legacy and delivering that via financial planning-centric and data-centric platform.

These are the elements of financial wellness. On May 1, we welcomed the MoneyGuide team to Envestnet, acquiring the industry leader in Golden State's financial planning, advances our vision to enable financial wellness.

We believe that Envestnet MoneyGuide's intuitive and engaging software is an important enhancement to our platform and will lead to more informed decision making, better client communications and also better outcomes.

In a recent study from the Money Management Institute, 65% of high net worth investors said that they are considering leaving their wealth provider due to a lack of an integrated omni-channel experience. This indicates to us that enterprises and advisers who provide an integrated financial wellness experience will exceed and gain share.

I am also very encouraged by the products coming out of Apprise Labs, the initiative we recently formed.

Apprise will offer innovative tax, legacy and estate planning capabilities to help advisers better collaborate with their clients and their families. It's a next-level solution that builds on our financial planning offering and tackles many of the challenges of intergenerational wealth transfer.

In short, we are creating new and sophisticated planning tools for financial wellness that address complex tax and legacy planning.

We believe the power of delivering unified advice and services across the entire financial life of an adviser's client is a very important trend. Unified tools also benefit the adviser as they automate low-value tasks and enable advisers to focus on high-value work by communicating with their clients and offering sophisticated tax and estate planning and portfolio construction. It's through this unified approach to an expanded definition of advice that financial wellness can be achieved.

I'll turn it over to Pete and in a few moments, be back with some closing remarks

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Peter H. D'Arrigo, Envestnet, Inc. - CFO [4]

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Okay. Thank you, Jud. Thank you, everybody, for joining us this afternoon.

I'll review our first quarter results, our guidance for the second quarter of 2019 and updated guidance for the full year.

As Chris described at the beginning of the call, we are including adjusted net revenues as a new non-GAAP financial metric this quarter.

This non-GAAP metric presents adjusted revenue without manager fees included, which are the sub-advisory fees we pay to third-party asset managers with which we contract to implement investment portfolios. These fees are presented as the primary component of the cost of revenues in our wealth segment.

As Envestnet's business model moves toward a more subscription-based recurring revenue model, excluding the manager fee costs improves the comparability, when we are internally evaluating the growth and operating results of the overall business and in analyzing segment performance.

Briefly summarizing our first quarter results compared to the first quarter of 2018. Adjusted net revenues grew 4% to $146 million overcoming the impact of challenging capital markets in the fourth quarter of 2018.

GAAP revenue grew 1% to $200 million. Subscription-based recurring revenues increased 19% from the prior year period and represented 57% of adjusted net revenues. The increase came from organic growth as well as a change in classification of revenue from certain customers from an asset-based recurring revenue model to a subscription-based recurring revenue model as we discussed on the first -- on the first call in February.

Asset-based recurring revenues decreased 10% from the prior year period and represented 38% of adjusted net revenues when adjusted for manager costs. Decline was driven by the impact of the fourth quarter market, our first quarter billing cycle and the impact of the change in classification to subscription I just described.

Professional services and other nonrecurring revenues increased 7% from the prior year period. Adjusted EBITDA was $34 million, a 4% increase over last year and adjusted earnings per share was $0.39 in the first quarter, $0.02 or 5% higher than the first quarter of last year.

Next, I'll provide our outlook for the second quarter of 2019 and update the full year, which is presented in full in our earnings release.

Please note with the Envestnet MoneyGuide transaction closing on May 1, the contribution is included from that date.

For the second quarter, we expect adjusted revenues to be between $223.5 million and $226.5 million, up 11% to 13% compared to the prior year.

Adjusted net revenues to be between $165 million and $168 million, up 14% to 16% compared to the prior year period.

Asset-based revenue between $118 million and $119 million or 0% to 1% higher than last year and 36% of adjusted net revenues when adjusted for manager costs. The implied effective fee rate on our end of March assets under management or administration is roughly 9.6 basis points.

Subscription-based revenue, we expect to be between $95 million and $96 million, up 32% to 34% compared to the prior year, which is approximately 58% of our adjusted net revenues.

Professional services and other revenue between $10.5 million and $11.5 million, which includes revenue-related to the Advisor Summit. Cost of revenue between $72 million and $73 million, including $59 million to $60 million for asset-based cost of revenue.

Note that last week, we had hosted our Advisor Summit in Austin, for which we should recognize roughly $3.5 million of revenue, which will show up in our professional services and other revenue line item and roughly $5 million in cost of revenues in the second quarter.

We invested more into this year's summit, given the long-standing benefits we have gained each year through brand recognition and client goodwill.

Adjusted EBITDA, we expect between $42.5 million and $43 million, up 22% to 24% compared to the prior year. Using a normalized long-term effective tax rate of 25.5% and assuming approximately 52.8 million diluted shares outstanding, this translates into adjusted earnings per share of $0.44.

For the full year, we also include contributions from Envestnet MoneyGuide and therefore, are raising and tightening the range of our revenue and earnings guidance. We now expect adjusted revenues to grow 11% to 12% to a range of $902 million to $912 million.

We expect adjusted net revenues to grow 15% to 16% to a range of $665 million to $676 million. We are increasing our prior guidance on adjusted EBITDA, expecting adjusted EBITDA to grow 21% to 24% to a range of $190 million to $195 million.

We are also increasing our prior guidance for adjusted earnings per share, now expecting a range of $2.08 to $2.15 per diluted share.

This is higher than our beginning of year guidance due to the purchase of Envestnet MoneyGuide. Finally, we ended the quarter with $246 million in cash and $518 million in total debt, based on the cash used to close both the PortfolioCenter and MoneyGuide transactions and drawing down $130 million from our revolver. Post close, our gross leverage ratio is 3.6x and our net leverage ratio is 3.3x.

Priorities for our cash flow for the remainder of 2019 continue to be investing in the business and platform technology to support our long-term growth, investing in new initiatives and acquisitions, paying down debt and ensuring we have capacity to fund the 2019 convertibles that mature in December.

Thank you, again, for your support of Envestnet. And at this point, I will turn it back to Jud for his closing remarks.

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [5]

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Thank you, Pete. We are pleased with our results for the first quarter and our execution thus far in 2019. Beyond this year, we expect our core business growth to be strong relative to the FinTech industry, and we expect to maintain the 1.2x relationship between the growth rate of revenue and the growth rate of our expected adjusted EBITDA for our core business, accelerating the top and bottom line over time, through disciplined acquisition activity.

We see a long runway for organic growth as we expand our platform for financial wellness.

As I mentioned, we believe financial planning is the gateway to financial wellness, especially when fully integrated within a unified data environment.

Our emerging network connects advisers to a universe of solutions, asset managers and strategists, custodians and software providers, insurers who are part of our insurance exchange and lenders who will be part of the credit exchange.

All unified and informing the progress towards the essential goals of an advisers clients.

Envestnet provides the data, the platform technology and the fiduciary solutions powerfully connected and driving continuous unified advice so that advisers and enterprises and their clients can reach their goals and achieve financial wellness.

I want to thank you, again, for your time this afternoon, and thank you for your support of Envestnet.

And with this, the completion of our prepared remarks, we are happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question from Surinder Thind from Jefferies. I do apologize. The name is David Grossman of Stifel.

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David Michael Grossman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [2]

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So just a quick question about the guidance, if I'm understanding that -- your guidance correctly, it seems to imply an acceleration of organic growth in subscriptions and licensing in the second quarter. If that math is correct, what underlies that dynamic? Is it something fundamental? Is it relate to reclass at the end of last year? Or is it something else?

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Peter H. D'Arrigo, Envestnet, Inc. - CFO [3]

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Yes, David, so I think if you go through the earnings release from either this quarter or the previous quarter, you will be able to kind of track the impact of that growth rate from what our growth assumptions are. But primarily, the organic assumption for growth is impacted by the reclasses you mentioned, along with the acquisitions of PortfolioCenter and MoneyGuide -- Envestnet MoneyGuide, which make that line grow faster than the long-term expectation.

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David Michael Grossman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [4]

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So the number that you reported for the March quarter of 19%, is that -- does that include any acquired content or is that just a pure Envestnet number?

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Peter H. D'Arrigo, Envestnet, Inc. - CFO [5]

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No, both acquisitions closed during the second quarter. So we'll see that impact in the second quarter growth rate, but the first quarter was only impacted by the reclass.

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David Michael Grossman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [6]

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Got it. Okay. And second, just at a higher level, with subscriptions and licenses becoming -- obviously becoming a much larger percentage of the mix, and I'm sure you're not chomping at the bit here to add to your disclosures, but have you given any consideration to introducing some kind of bookings metric or some other metric that will give us a sense of how that business is trending before it actually hits the P&L?

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [7]

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We track that internally, but we don't have any GAAP or financial standard agreement as to how that could be communicated in an effective way to external audiences. We understand that, that would be helpful. It's not going to be something that we would introduce in this year for certain, and it will be something that we will continue to evaluate at the opportune time. But we're a little reluctant to offer yet another disclosure item until we get it nailed down.

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Operator [8]

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(Operator Instructions) We'll now take our next question from Surinder Thind of Jefferies.

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Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [9]

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I guess I'd like to start with the effective fee rate and the guide on that to 9.6. I think if we rewind to last quarter and when I think about the fee rate and where it was, can you talk about what the differences and the decline quarter-over-quarter? It's bigger than I would have expected.

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Peter H. D'Arrigo, Envestnet, Inc. - CFO [10]

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Yes. So, again, it's all reflective of the mix of business that comes on during Q1. And so the new business mix came in at a rate that was a little bit lower and again, when we have asset-based conversions, they tend to come in at a lower rate. And so that is also a part of the impact consistent with what we've seen in previous quarters.

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Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [11]

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And then maybe as a follow-on to that, would the drift lower than perhaps be more modest on a go-forward basis? Is there a Q1 component to it? Or is it really just there's -- it's a big chunk of the conversion activity that comes on at a lower pricing and then just the mix...

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Peter H. D'Arrigo, Envestnet, Inc. - CFO [12]

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So the biggest driver -- again, the biggest driver will be based on conversion activity as it goes live. And so it's hard for us again as we try not to predict the timing because there is a fair amount of unpredictability relative to the rest of the business as to when conversions will go live. It's hard to say whether Q2, Q3 or Q4 might have a greater or smaller impact than we saw in Q1. Do you have more color on that?

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [13]

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Well, I guess, the only other thing I -- obviously, the biggest driver is the conversions and the rate that, that was coming on and this was driven primarily by a fair amount of advisers, portfolio manager or APM and reporting business that came on in the $20 billion of asset-based recurring revenue conversions. We also saw at the start of the quarter heightened redemption levels, which did stabilize by the end of the quarter. So we expect that for the second quarter and the rest of the year, we expect a return to more normal levels. But the only thing that I would add a little bit of color to is that those heightened redemption levels of 2.3%, which I don't believe are going to continue based on what we've seen in the last couple of months would result in a bigger-than-usual effect on the conversion assets that are coming on because the same-store sales net flows were not as strong as what we have seen in the past.

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Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [14]

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Fair enough. And then maybe just related to that comment about the flows in some of the redemption activity levels. Obviously, if we do exclude the new client conversion activity, it was negative for the quarter. Just messaging wise, is the messaging that you're beginning to see that trend reversed or is that you're expecting it to reverse, meaning do we have an update in kind of the first 5 weeks of this quarter at this point, or how should we...

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [15]

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Yes. So the activity was front-end load -- the heightened activity was front-end loaded in the quarter. We believe, in part, a result of the volatility that was in the fourth quarter sort of a delayed response, if you will because those redemption levels in the fourth quarter were not as high as what we might have otherwise expected. So you see some of that in the first quarter and based on what we have seen since then, we expect that redemption rates are going to be for the second quarter and continuing more at normal levels, which we expect to be at 2% is how we drive our forecast.

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Operator [16]

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We have another question from Will Cuddy of JPMorgan.

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William V. Cuddy, JP Morgan Chase & Co, Research Division - Analyst [17]

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So in March, we had talked at a high level about the financial impact from MoneyGuide. Could you break out in more detail the MoneyGuide contribution to the guidance update for 2Q and for the remainder of the year?

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Peter H. D'Arrigo, Envestnet, Inc. - CFO [18]

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So I'll give you kind of run rate numbers which are consistent with what we've talked about in March and then pretty much you can assume 2/3 for the second quarter. So again, it's in the range of $50 million to $55 million of run rate revenue on an annualized basis with an EBITDA margin of about 50% to 55% as well.

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William V. Cuddy, JP Morgan Chase & Co, Research Division - Analyst [19]

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Okay. Great. So essentially, no change from the prior guidance?

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Peter H. D'Arrigo, Envestnet, Inc. - CFO [20]

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No. Very consistent with what the analysis we had completed prior to completing the acquisition, yes.

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William V. Cuddy, JP Morgan Chase & Co, Research Division - Analyst [21]

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Great. And then on the asset flows, digging that -- into that a little bit deeper. So Jud, you'd mentioned that the advisers portfolio manager business coming on, could you maybe elaborate on the types of clients where you're seeing conversions and same-store sales growth?

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [22]

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So with respect to asset-based recurring revenue, we're seeing APM programs, advisers portfolio manager programs, Unified Managed Account programs and separately managed account programs coming in at rates that are less robust than the reporting business and the APM business. And that's a result of -- in the first quarter, some significant regional broker-dealer and regional wealth management firm activity. The subscription-based revenue is coming in, generally speaking in the larger enterprise and the larger RIA marketplace. And they're coming in, again, at 4 packages of our technology that includes performance reporting, or performance reporting plus rebalancing tools. The activity is -- has been strong across all of the channels we serve, but slightly stronger within the registered investment adviser channel or RIA channel.

And then with respect to same-store sales, when you adjust for the market hit in the fourth quarter and that December 31 billing cycle, the asset-based business normalized flows are in the 9% high single-digit range normalized for the subscription reclass and normalized for the market decline in the fourth quarter and that December 31 level. Subscription-based recurring revenue, same-store sales are more in the low to mid-teens rate on a recurring revenue basis growth. So that's some of the breakout that you'll see in the tables provided by the finance team.

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Operator [23]

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We have another question from Peter Heckmann of Davidson.

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Peter James Heckmann, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [24]

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Just a point of clarification, I don't see it in the press release. I didn't hear you say it, but given the issuance of new shares with the MoneyGuide deal, should we be using ending diluted share count of around 55 million?

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Peter H. D'Arrigo, Envestnet, Inc. - CFO [25]

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No. So the 52.8 million incorporates the impact for Q2 being only 2/3. That will go up another 1 million or so for the full quarter of -- in Q3 and Q4, not each quarter, just 1 more million to pick up the full quarter impact. So the 3 million shares issued is impacting only 2/3 of Q2, but then there will be a full impact for Q3 and Q4. So won't go to 55. It won't be an additional 3 to what we're assuming.

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Peter James Heckmann, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [26]

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Got it. Got it. Okay. And then just looking at the segment reporting, Yodlee seemed to decelerate a little bit sequentially and just wanted to see if there was anything to call out there in terms of year-over-year comps? Or any changes that may have happened there?

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [27]

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Yes. No, there is no update on the segment from where we've given in terms of directionally our expectation and then, of course, it all rolls up for the annual results that we've updated and tightened.

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Operator [28]

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We have our next question from Chris Shutler of William Blair.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [29]

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So I guess, first, it felt like the revenue and EBITDA guidance didn't really increase much after you back out the impact of MoneyGuide. I recognized the market rally that you had already incorporated January markets in the guidance, but is there anything else that we need to be aware of obviously, the fee rates ticking down a little bit?

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [30]

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I would -- the only thing that I think is sort of a factor in the modeling and the forecasting is that one of the conversions came in for the quarter at net, not gross. And so basically placed the gross guidance. We came in at the low end of our gross revenue guidance, but slightly ahead of the midpoint of the implied net revenue guidance, and that's just a -- was a Q1 effect on one of the conversions, where the client billed for manager fees on the first quarter, we will do that in subsequent quarters. So there is that. That's a small point. I think, Pete?

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Peter H. D'Arrigo, Envestnet, Inc. - CFO [31]

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No, I think there are things that we did discuss earlier on the call about the mix of assets. We just updated the forecast to reflect what is come out in Q1. And I think we have a pretty reasonable estimate of the rest of the year.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [32]

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Okay. On the -- you mentioned the Edelman Financial Engines deal. I think -- and correct me if I'm wrong but I think there were clients before, maybe just confirm that? And what's new about this new agreement?

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [33]

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Well, Edelman was a client before. We're expanding that now to include as you know that, that was a big transaction that took place, Financial Engines went private. So now we've expanded that relationship to the Financial Engines portion.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [34]

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Okay. Got it. And last one, Jud, for Yodlee. Can you just -- can you talk about the progress that you've made with APIs and making a lot easier for developers to work with Yodlee? And how confident are you that you can kind of meaningfully improve your win rates with the FinTechs?

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [35]

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So the -- we're making significant investment, are continuing to in the data and analytics business on the Yodlee platform. We're focused and have been for the last several years on really 2 things. One is setting the industry standard for accuracy and data integrity, and we have made tremendous progress there. Custodial data that we aggregate and consolidate by the time market opens is at 99.6% accuracy level. And for the held-away data, that data that's not at the 80% or 90% largest custodians by has had a variety of banks and other financial institutions now applying machine learning and applying our own data reconciliation and data normalization techniques. We're now getting that up into the low to mid-90s, which is a significant improvement from where it had been. That's a positive.

The second thing that we are working and investing in is making the functionality available through APIs so that the developer community can more easily access the capabilities of the data aggregation platform. And we expect that, that will continue to make a lot of progress for us. We're focused primarily on the Wealth Management segment for data, wealth advisers, wealth managers, asset managers, but we are expecting that with the improvement on the API layer that we will be -- become more competitive within credit and within FinTech. We expect that, that will be an ongoing investment, and we expect to get some results later this year from that.

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Operator [36]

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We have our next question from Oscar Turner of SunTrust.

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Oscar D. Turner, SunTrust Robinson Humphrey, Inc., Research Division - Associate [37]

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I just have one question related to the new insurance and credit exchanges. How should we think about the cross-sell potential within your adviser base? And do you think those products could be material to revenue growth over the long term?

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [38]

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So the insurance exchange is further along. The credit exchange was just announced and the insurance exchange is essentially a 100% cross-sell. It's to a segment of our adviser base. The adviser base that uses Envestnet that doesn't have access to no load or fee-based insurance product. And so we expect that it's not all advisers. Number of advisers are already in ecosystems where they have complete access to insurance. But it's an important segment, and we think that the -- we think that the long-term revenue potential is significant. We've gone from essentially no revenue, we expect that we'll end the year probably in 8 -- a low 8-figure run rate that will be -- that we've incorporated into our overall guidance. It's an important element of revenue. We expect that it will realize both in the form of research and subscription fees coming from the providers as well as some asset-based fees coming from the advisers, who place assets in various insurance products. So we expect that it will be significant.

We think that the credit exchange could also be a significant revenue source for us, 3, 4, 5 years down the line, and that's why we're investing in these exchanges. It not only makes the platform more relevant. It not only makes the adviser more relevant with an expanded useful definition of what they do but through subscription revenue and through asset-based recurring revenue, we expect that it will be an important accelerator of our overall revenue per adviser.

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Operator [39]

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We have another question from Chris Donat of Sandler O'Neill.

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Christopher Roy Donat, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [40]

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Want to ask one question related to the fee rate just because of things I've heard from other sources. I'm just wondering if you had any higher mix of cash from some end clients just because of changes in the tax code and if that might have affected the fee rate. And if that is the case, it seems like it will be a transitory thing, so that's part of the reason I'm asking. Just anything unusual there with this unusual tax season?

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [41]

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So we did see marginally higher levels of cash in new accounts. We saw very little rebalancing into cash from existing accounts. We saw some, but it was not enough to affect that fee rate significantly to the detriment. The new business that came on did have more conservative allocations, but that wasn't enough to affect that rate. The major factor in that rate was the converging business that came on during the first quarter.

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Christopher Roy Donat, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [42]

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Okay. And then just looking at the account growth, it looks like a pretty strong quarter up about 7% from the fourth quarter. Any call outs there? Is that related to Edelman Financial Engines? Or is there something else like migration from AUA? And I'm looking at AUM accounts, not AUA, but any migration from AUA to AUM? Or just trying to understand what's the strong...

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [43]

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Yes, yes. Again, any change, I don't think you should plot as a trend because it's a result of the conversion activity, primarily the result of the conversion activity.

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Operator [44]

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Our next question is from Hugh Miller of Buckingham.

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Hugh Michael Miller, The Buckingham Research Group Incorporated - Director [45]

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Just if I heard you correctly I think in the prepared remarks, you mentioned that a key area for your cash flow was not only invest in the platform but also investing in acquisitions. And I was wondering if you can just provide a little color on your appetite for M&A now that you've completed the PIEtech deal, and what you're seeing in that market.

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [46]

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So we have seen planning as central. And so we saw the acquisition of MoneyGuide as an important strategic transaction. We don't see a high likelihood of -- in fact, let's put it this way, see a low likelihood of a major strategic acquisition in the near term.

We continue to look at consolidating acquisitions and if you're consolidating acquisitions, different than strategic acquisitions, strategic acquisitions bring new capabilities or expanded or enhanced capabilities on a product or platform or bring adjacent marketplaces into our business. Consolidating transactions, on the other hand, are of companies that are already in a market that we're in and that we're able to generate an acquisition of new customers and over time, reduce the operating expenses and the tech spend of that business so that the consolidating transactions are financially accretive once the conversion is complete.

We expect that there is going to be a regular -- that we will regularly be -- we're looking at consolidating acquisitions consistently and if they meet our screening process and they meet our return on invested capital requirements and they don't overleverage the business, we expect that we're going to continue to do consolidating transactions.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [47]

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That's helpful. And I guess maybe just a follow-up on your comment about overlevering the business. If you could you just provide a little color on your comfort level and what metrics we should be thinking about in terms of that leverage?

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [48]

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Well, on a net basis, I'm certainly comfortable at 2.5 to 2.8x. Of course, for an acquisition like MoneyGuide, we are higher than that, but we expect to end the year below 3 on a net leverage basis. I'm comfortable at levels in that mid-2 to high 2 ratio. I'd like to keep it below 3 and really like to get it down below 2.5 over the longer term. But there is a -- we're in a space. FinTech was tremendous investment going into it, and we believe that we are the logical consolidator of this wealth tech space. And so we are going to be very disciplined on our returns hurdle, and we expect that, that we'll see a fair amount of activity over the coming years of consolidating acquisitions that hit those thresholds or that exceed those thresholds.

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Hugh Michael Miller, The Buckingham Research Group Incorporated - Director [49]

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Definitely helpful. And then with the rollout of the adviser analytics, was wondering if you could provide just some color on the feedback that you're receiving and whether or not there's any change in kind of the longer-term conversion pipeline, given that, that's a helpful tool for larger potential conversions?

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [50]

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So you're referring to the adviser analytics offering that we introduced last week at the summit. There's a fair amount of enthusiasm about it, whether it's at the enterprise level, the home office, product, executives and marketing executives or whether it's more share of market-oriented registered investment advisers, there is a huge appetite for data and for analytics. And of course, they don't want the raw data. They want the actionable intelligence.

So as we grow our platform business, one of the intentional byproducts of that is growing our data set. And that data set consists of some very valuable metrics as to peer benchmarking for account growth for fees or for asset allocation or for even returns profile. And what types of asset classes are being used by the most successful advisers and what does the practice management profile look like of top quartile advisers or top 50% advisers and what kind of anomalies are there between advisers that may be underperforming with -- against their peers. So there is tremendous appetite for this data. We have a very good challenge in that. Some of this is readily available and is disseminated to the clients of Envestnet and Yodlee on the platform side. Said differently, it comes with the platform. But there are some opportunities to do some more customized and frankly, more valuable and deeper analytics, and we're able to do that as well, whether it's for asset managers or insurance companies, broker-dealers, banks or RIAs. And so over time, we are going to be -- we're going to be fortifying and strengthening both the standard platform offerings that come to anybody, who is a client of Envestnet as well as the more targeted and research-intensive versions of our data analytics. And that's an important part of our business going forward.

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Hugh Michael Miller, The Buckingham Research Group Incorporated - Director [51]

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Okay. Great color there. I appreciate the insight. And then just one housekeeping one for me. If we think about the quarter-over-quarter reduction in the AUA adviser, any insight you can provide if you kind of adjust for the reclassifications production and how that metric would look?

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [52]

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So I think that the only thing that's going on there is the reclass.

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Christopher Curtis, Envestnet, Inc. - Division CFO & Head of IR [53]

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Nothing notable here.

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Peter H. D'Arrigo, Envestnet, Inc. - CFO [54]

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Probably not. Yes. It's not a big quarter of growth if you adjust for that.

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Christopher Curtis, Envestnet, Inc. - Division CFO & Head of IR [55]

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Stronger growth in the subscription advisers in the quarter.

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Operator [56]

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We have our next question from Patrick O'Shaughnessy.

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Patrick Joseph O'Shaughnessy, Raymond James & Associates, Inc., Research Division - Research Analyst [57]

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Just a quick one for me. On your balance sheet, your liabilities, we saw a nice tick up of your deferred revenue in the first quarter. Is that just kind of one big large client that is national, or is taking a while for you to onboard? Or is there something else going on there?

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Peter H. D'Arrigo, Envestnet, Inc. - CFO [58]

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No, it's related to a few different clients that are in the process of on-boarding and again, that will start to amortize through to the income statement as those clients get implemented.

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Operator [59]

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And we have one question from Surinder Thind.

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Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [60]

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Just a follow-up on the subscription licensing business. Is there any additional color you can provide on maybe the subsegments within that if you think about -- it appears that maybe there's a bit of bifurcation in growth between like what we're seeing at Tamarac versus Yodlee and other and maybe even in the Enterprise business. Any color there that you can provide?

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [61]

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No. So the subscription business today, the subscription pricing model is -- let's take a step back, is preferred by large RIAs and large enterprises. That being Yodlee's client base historically has been large enterprises. Tamarac's client base, large RIAs, enterprises. On the wealth side's client base is a combination of large enterprises and smaller and midsized enterprises. So there is -- as scale happens and there is a consolidating aspect of this wealth tech industry. There is just a stronger demand for subscription-based priced than asset-based pricing from a high level.

There are over time many occasions where a midsized firm starts with asset-based revenue and then at some point, they graduate to subscription-based revenue. So whether that's happening within data and analytics, the Tamarac RIA business or the enterprise wealth business, the rates are pretty clustered in the low teens to mid- to high teens depending on that, but none of those activities falls out of that range, Surinder. Just to say it that way.

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Peter James Heckmann, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [62]

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Okay. That's fair. That's helpful. And then maybe a really quick one on FolioDynamix here. I guess we're approaching about 1.5 years since the deal closed. Maybe any kind of an update on where things stand? Maybe progress on the, I guess, I think it was $20 million in cost synergies maybe and then just maybe at the same time, when that deal first closed, there was the thought that maybe at some point in the future, there might be an opportunity for revenue synergies, so any color or update there would be helpful.

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [63]

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So thank you for that question. Yes, Surinder. So when we did the acquisition, we identified initial synergies in that $20 million range in addition to what the EBITDA was at the time in the mid-single-digit range, and we are on track for the conversion activity. You'll remember, well, just to remind everyone that when we do a consolidating transaction, we expect there to be essentially flat top line revenue for the period of 1, 2 as long as 3 years, while we consolidate and then convert on to the Envestnet platform.

So we're on scale, on schedule with that. The first tranche of activity we realized of those efficiencies we realized last year. The second tranche, we're experiencing this year and it's in our guidance. It's one of the reasons that EBITDA growth year-over-year is as high compared to some of the other metrics, and we expect that the third tranche of that savings will be -- we will begin to realize that in early 2020. So that's all on schedule.

In terms of the cross-sells, the client base we expect will stabilize and will begin to grow, again, in some time in 2020, and it's then that we would expect there to be some nice cross-sell opportunities where the folio tool may be incorporated more broadly within the Envestnet client base, FolioDynamix trading tool. And we're beginning to meet more regularly with legacy FolioDynamix clients about ways that we can do more with them. For example, on the research side through Envestnet P&C or through the data side through our data and analytics offering. So we expect that, that -- if we look back and look at the consolidated transactions we've done in the past, FundQuest, Prudential, WMS, Placemark, are examples. Then those businesses start to look very much like the rest of the Enterprise business 2, 3, 4 years after the acquisition, and we expect that's going to be the case with FolioDynamix as well, and we're encouraged by that.

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Operator [64]

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Thank you. It appears there are no further questions. At this point, I would like to turn the conference back over to Mr. Bergman for any additional or closing remarks. Please go ahead, Mr. Bergman.

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [65]

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I want to thank, everyone, for their -- your participation. I want to thank you for the good questions, the solid homework and I see that we're at the top of the hour. So I will say goodbye for now and look forward to joining -- rejoining you, I guess, in -- when will that be, early August. Okay. Thank you so much. Bye.

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Operator [66]

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Ladies and gentlemen, the conference has now ended. Please disconnect your lines at this time. Thank you for your participation.