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Edited Transcript of ENV earnings conference call or presentation 7-Aug-19 9:00pm GMT

Q2 2019 Envestnet Inc Earnings Call

CHICAGO Oct 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Envestnet Inc earnings conference call or presentation Wednesday, August 7, 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

* Devin Patrick Ryan

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* 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, ladies and gentlemen, and welcome to today's Envestnet Second Quarter 2019 Earnings Call. As a reminder, this program is being recorded.

And at this time, I'd like to turn the floor over to Mr. Chris Curtis, Division CFO and Head of Investor Relations. Please go ahead.

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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 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 information appear in today's press release. Specific non-GAAP metrics include adjusted revenue, adjusted net revenue, adjusted EBITDA, adjusted net income and adjusted net income per share.

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. Thank you for joining us today.

Envestnet continues to expand the ways that advisers and financial enterprises deliver unified advice for their clients, whether by leveraging our industry-leading wealth management platform, our expanded financial planning tools or implementing solutions via our various exchanges as we work to enable advisers and financial institutions to deliver financial wellness to their clients.

In the second quarter, Envestnet delivered solid growth in adjusted revenue, adjusted net revenue, adjusted EBITDA and adjusted earnings per share. In our wealth solutions business, gross sales, excluding conversions, were $34 billion. We also completed $171 billion in conversions, $2 billion of which were asset-based recurring revenue and another $169 billion in subscription-based revenue conversions.

We ended the quarter with $3.3 trillion in platform assets and 11.5 million investor accounts. Nearly 100,000 advisers now use Envestnet's wealth management technology. And at the end of June, Envestnet | Yodlee's data aggregation platform supported more than 24 million active users.

Within wealth solutions in the second quarter, Hilltop Securities converted their wealth management assets to Envestnet, which will support their goal of creating holistic wealth management for their advisers, correspondents and end clients.

In addition to the Hilltop conversion, we also completed the next stage of a major subscription-based conversion with the U.S. subsidiary of a leading global wealth management firm.

We also entered into a 5-year contract renewal with Loring Ward. Envestnet will continue to provide the Silicon Valley-based provider of wealth management solutions with our comprehensive platform technology, including financial planning capabilities through MoneyGuide. This agreement is a strong endorsement of Envestnet's unified approach to platform technology and services.

This quarter, we also announced that Merrill Private Wealth Management will access our award-winning Tamarac portfolio management and client reporting solution. Merrill will benefit from aggregated performance reporting, portfolio analytics, a range of interactive reports on performance metrics and a customizable dashboard that includes information held at other financial institution if the client prefers. These solutions will be available to Merrill teams and their advisers later in 2019.

Our data and analytics business signed several new customers across the financial institution, fintech and wealth markets with a variety of solutions, including data aggregation, income and account verification, data enrichment and advanced analytics for advisers and investment managers. And the early returns are very promising with our 2 most recent acquisitions.

Our existing client base is overwhelmingly supportive of the MoneyGuide acquisition. We recently signed our first international client for MoneyGuide, validating our belief that financial planning is a logical expansion of our global offering beyond that which we already have in our data and analytics business.

And initial conversations with portfolio-centered customers have resulted in more than 50 longer-term contracts with Tamarac. Annual subscription revenue will increase meaningfully for these firms once they fully leverage Tamarac's platform offerings.

And while our operating and financial performance has been solid through the first half of the year, we are facing some short-term challenges in the second half. First, within our data and analytics business, we experienced shortcomings in the technology provided by a vendor we relied on to deliver certain credit decisioning analytics to our banking customers. The vendor suspended service, causing a disruption that affected several clients and prospects. This vendor also filed a lawsuit against us. We believe the vendor's allegations are false and without merit, and we will respond appropriately and defend ourselves vigorously. However, we continue to see credit decisioning analytics as a big opportunity for Envestnet, even though our revenue will be negatively impacted at least through the remainder of this year as we work to develop a new solution with a new provider.

Second, the market for investment manager analytics is currently slower than we had anticipated as investment managers focused on near-term profitability and many cut back on external research budgets. And although renewals and new bookings continue, it is at a slower pace than we expected. We also continue to pursue new use cases leveraging our leadership in data analytics.

Also in wealth solutions, a sizable conversion will be onboarded later than we expected. While the onboarding work is currently under way, we are respecting the clients' revised time line and look forward to serving them later this year and beyond.

We believe these challenges are short term in nature. We have updated our revenue outlook accordingly while working hard to maintaining earnings expectations for the remainder of 2019. And Pete will go into more detail on our guidance for the rest of the year.

We remain very focused on expanding our unified advice platform, gaining new enterprise and adviser relationships and deepening our existing relationships. Our insurance exchange is live and our credit exchange has attracted significant interest from both lenders and existing clients.

We recently announced a Tamarac digital account opening solution with TD Ameritrade and Schwab Advisor Services. We also recently announced a strategic integration between MoneyGuide and Jackson National and also unveiled MyBlocks, our next-generation client-facing digital planning tool integrated with Yodlee data aggregation.

These are all examples of the value our financial wellness network is bringing today to our advisers and their clients.

I'll turn it over to Pete at this point and be back in a few moments with some closing remarks.

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

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Thank you, Jud, and good afternoon, everyone. I'll review our second quarter results as well as our guidance for the third quarter and the full year of 2019.

Results for the second quarter include 3 months of contribution from PortfolioCenter, which was acquired and the transaction closed on April 1 and 2 months from the MoneyGuide acquisition, which closed on May 1.

Briefly summarizing Envestnet's results compared to the second quarter of 2018, adjusted revenue grew 13% to $227.9 million. Adjusted net revenues, which exclude asset-based cost of revenue, grew 16% to $167.6 million. Adjusted subscription-based recurring revenues increased 33% from the prior year period. This increase came from organic growth, a reclassification of revenue from certain customers moving from an asset-based recurring revenue model to a subscription-based recurring revenue model as well as the contributions from MoneyGuide and PortfolioCenter.

Subscription-based recurring revenue was 57% of adjusted net revenues for the period. Asset-based recurring revenue increased 2% from the prior year period and represented 36% of adjusted net revenues. Professional services and other revenues increased 8% from the prior year period.

Adjusted EBITDA was $43.2 million, a 24% increase over last year. Adjusted earnings per share was $0.46 in the second quarter, $0.05 or 12% higher than the second quarter of last year.

With that, I'll summarize our outlook, which is presented in full in our earnings release. For the third quarter, we expect adjusted revenues to be between $232.5 million and $235.5 million, up 14% to 16% compared to the prior year; adjusted net revenues between $169 million and $173 million, up 16% to 19% compared to the prior year period; asset-based revenue between $124 million and $125 million or 4% to 5% higher than last year, assuming market neutral from June 30. The implied effective fee rate on our end of June assets under management or administration is roughly 9.7 basis points, consistent with the second quarter of this year.

Subscription-based revenue between $101 million and $102 million on an adjusted basis, up 33% to 34% compared to the prior year. Professional services and other revenue between $7.5 million and $8.5 million.

With cost of revenue between $69.5 million and $70.5 million, adjusted EBITDA should be between $54 million and $54.5 million, up 27% to 28% compared to the prior year. Using a normalized long-term effective tax rate of 25.5% and assuming approximately 54.2 million diluted shares outstanding, this translates into adjusted earnings per share of $0.58.

For the full year, we expect adjusted revenues to grow roughly 9% to 10% to a range of $897 million to $903 million. While we did increase our expectation for asset-based revenue in the second half of the year due to the favorable market in the second quarter, total revenue will be lower than previously expected primarily attributable to the factors Jud described earlier.

As a result of these temporary influences, we are managing our operating expenses in a very disciplined fashion for the remainder of the year, enabling us to reaffirm our midpoints and tighten the ranges for adjusted EBITDA and adjusted EPS.

We expect adjusted EBITDA to grow 22% to 23% to a range of $191.5 million to $193 million and adjusted earnings per share to grow 9% to 10% to a range of $2.10 to $2.12 per diluted share.

Finally, we ended the quarter with $78 million in cash and approximately $663 million in total debt. Our gross leverage is 3.4x EBITDA and our net leverage ratio is 3.0.

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

Thank you again for your support of Envestnet. At this point, I'll 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 second quarter. But as indicated, we faced some challenges in the near term. Meanwhile, we are executing every day on our unified advice strategy, which is receiving widespread, nearly universal validation and endorsement buy-in from our clients, including the additional capabilities we are now offering through Envestnet MoneyGuide.

Beyond this year, we expect our core business organic growth to be strong relative to the industry, and we expect to maintain the 1.2x or more relationship between the growth rate of revenue and the growth rate of adjusted EBITDA and adjusted earnings for our core business, accelerated from time to time both in the bottom line and the EBITDA through disciplined acquisition activity. We see a long runway for organic growth as we expand our platform for financial wellness. We also see continued consolidating acquisition opportunities where we further leverage our expertise of completing large and complex conversions for financial enterprises.

We believe that our opportunity to enable advisers and financial enterprises to provide unified advice across all elements of their clients' financial life and deliver financial wellness to those clients will create significant value for advisers, financial enterprises, their clients and our shareholders.

Thank you again, for your time this afternoon. Thank you for your support and interest in Envestnet. And with the completion of this are 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) And first, we have Devin Ryan with JMP Securities.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [2]

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First question. Just Jud, you talked about some of the factors maybe affecting business in the near term, and one that you mentioned, investment manager activity, has been a little bit slower as they focus on profitability and are cutting external research budgets. I'm curious here, is that a temporary dynamic that you see? If so, why? And kind of what are you hearing from those clients?

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

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So I would say that it is uncertain whether that in itself is temporary, short term or it's the new, new. I believe that the relative slowness in analytics, however, is short term. And that goes to the additional products that we're introducing, the challenges that I outlined and identified with respect to the credit decisioning product was one of our faster-growing offerings for analytics and we had expected over time would pick up some of the growth, as would the more traditional investment manager analytics that we are pursuing. But within the subset of investment manager analytics where the investment manager has an alpha-producing thesis and the analytics are an important part of that, alpha-producing investment management is experiencing relatively less growth than the factor-based strategies or the index-based strategies. So we expect that the slowdown in analytics revenue is short term. It's not a new, new, if you will. Although I'm not sure if the sub-point with respect to investment manager who are alpha-producing investment managers, that may be more than a short-term dynamic. We just don't know yet.

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Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [4]

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Got it. Appreciate the color there. And then just a follow-up for me on, I guess, the current market backdrop just the last even week or so here, just the extreme level of volatility that we're seeing. And you've weathered a lot of different market backdrops, and I think kind of have some great perspective here. So love to just maybe think about how the business performs both kind of short term and intermediate term when we have pockets of volatility. And typically, I guess the question is how long does volatility have to last where it's really kind of extreme beyond normal before you start to see impacts on business. And then, I guess, on the other side, how long before volatility dies down? Does that effectively reverse or stop, to try and think about your periods of volatility and how the business performs and what type of lag may exist around that?

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

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So we're coming out of a quarter which was positive, of course and not a lot of negative volatility. And therefore, we had below-expectation redemptions, which is -- that all kinds of holds true. In the past, we found that for shorter periods of volatility, days or it may be even a couple of weeks, there is not, generally speaking, an immediate increase in redemptions nor is there an immediate decrease in gross sales of new onboarding. There is -- every market is different, and the last 3 trading days have had volatility. It's too early for us to draw any conclusions on something that's happened over so recently a time. But we've seen that we've been able to grow in virtually every market environment over the last 10 years. And we expect that we'll continue to grow, although the growth rates are affected by that market backdrop. A lot less when net revenue of asset-based sources are around -- actually less than 40% of our overall revenue, where net revenue from subscription-based sources are nearly 60% of our revenue. So the effect is that both the direct and indirect effect is less than it has been in the past, but it's still a factor yet to be determined with this most recent uptick in volatility.

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Operator [6]

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And next question will come from Surinder Thind with Jefferies.

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Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [7]

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Just following up on the question about some of the near-term challenges. Are you guys able to perhaps quantify what the estimated impact of those challenges are at this point?

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Peter H. D'Arrigo, Envestnet, Inc. - CFO [8]

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Well, I think if you track the guidance from last time to the guidance that we provided this time, the delta in that range, adjusting slightly for what would have been the benefit of the market, so without getting too specific, the bulk of it is picked up through those major 2 or 3 items Jud called out, and that's reflected in the adjusted outlook.

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

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Okay. I'll make those adjustments. And then...

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [10]

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And they are indicated in order of magnitude.

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

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Okay. That's helpful as well. And then in terms of some of the comments around just kind of a bit more on the expense control, can you talk a little bit about the restructuring that's been going on and how you guys are kind of managing that part of the expenses?

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [12]

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Well, by restructuring, do you mean the forming of 2 business units from 4 and then now we've also got MoneyGuide? Is that what you're talking about?

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Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [13]

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I apologize. I guess perhaps I shouldn't have used the term restructuring. Unless I misheard, I thought that there were some sort of initiatives or a little bit of belt tightening around expenses in relationship to perhaps the short-term challenges.

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [14]

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So we announced an organization structure early in the year around creating 2 business units from 4. We've since added on Envestnet MoneyGuide as a third business unit. There is ongoing efficiency exercises as we bring what were 4 business units into 2. And so that's an ongoing part of our overall expense management. We also -- and also, in a year when we are not performing with respect to revenue as we had expected, we don't expect compensation levels for incentive compensation to be what had originally been budgeted. So there is a variable cost to our incentive compensation that if we were performing from a revenue standpoint like what we had expected, the incentive comp would be higher. So there's a -- we're benefiting from the variability of that as well. And then we are being very careful about any discretionary additional expenses given our outlook for the rest of the year. So that's really what you should take away. There's no restructuring going on or a restructuring activity. We've got the business organizations headed on a path that's been in motion for since the start of the year to become more efficient. And given the outlook that we've just outlined, we're taking steps to do all we can to uphold expectations on cash flow and earnings for the balance of the year.

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Operator [15]

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And moving on, we have Chris Donat with Sandler O'Neill.

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Christopher Roy Donat, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [16]

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Just digging through the numbers, I see that when we look at your AUM/AUA for licensing on a per account basis, that number has been growing pretty steadily and it's now just under $300,000. I'm guessing what's going on is that you're adding bigger accounts with some of your new licensing relationships, but could you tell me what's sort of going on there with the growth there? Or is it something organically with the accounts like assets per account license counts growing? Just trying to understand.

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [17]

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No, I -- it's pretty clear what's going on. I'll try to explain it. And looking back, traditionally our subscription versus AUM client base was somewhat barbelled. You would have the largest RIAs, registered investment advisory firms, and the larger financial enterprises opting for subscription-based pricing, as in all cases is the case with the Yodlee client base, always subscription-based pricing. Whereas, the asset-based pricing was more the midsized or smaller RIA or the midsized broker-dealer or insurance subsidiary of a broker-dealer.

As we continue to gain share with larger RIAs and we've got a very strong share of market with billion-dollar RIAs, there's an uptick in terms of the average yield part of that size of the practice, but also a meaningful part of it is the expansion of our product offering. 6 years ago, we basically had 1 product offering to our high-end RIA offering -- high-end RIA client base. It was a rebalancing software. Today, we have rebalancing software performance reporting, a client portal, CRM, as well as a managed account module. So as we expand the offering set, we get a broader opportunity per adviser. And then the final thing that's happening is that at the enterprise level, as we go from a typical profile client, which would be a smaller broker-dealer that may clear at a larger custodian, as we evolve to a mix that includes larger self-clearing firms of regional or even national prominence, they more often opt for licensing arrangements than they do asset-based arrangements. So this is, in our view, a normal evolution of our business as we move from smaller clients to larger clients.

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Christopher Roy Donat, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [18]

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Okay. And then just to make sure I get it as it impacts your income statement, so you guys have been talking for a few quarters about the mix of subscription-based revenue increasing, where you just talked about, Jud, that's one of the factors behind that increase in addition to growth in Yodlee and MoneyGuide. Is that fair to say?

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [19]

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I'm sorry?

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Christopher Roy Donat, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [20]

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Just trying to...

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [21]

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Up until the last part.

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Christopher Roy Donat, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [22]

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The dynamic where your subscription-based revenue has been growing faster than your asset-based revenue, this was one factor and there are multiple..

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [23]

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Oh, that's -- it's one factor. But it's happening, I believe, in all of our businesses. It's happening. Enterprise subscription revenue is growing faster than enterprise AUM/AUA okay? And then, of course, Tamarac is virtually all subscription based, Yodlee is all subscription based and MoneyGuide is all subscription based.

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Operator [24]

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And next from William Blair, we have Chris Shutler.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [25]

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On the investment manager analytics slowdown, what gives you confidence that the slowdown was due to the cutting of research budgets as opposed to competitor solutions gaining traction or pricing pressure?

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [26]

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I'm not sure. I can't say definitively that the investment analytics from investment managers is only a short-term solution or short-term phenomenon. I believe that the slowdown in overall analytics is a shorter-term phenomena, but that's because of the growth of a number of the other offerings that we've got. What we see is a slowdown in the uptake among alpha-producing investment managers. We're not seeing that they're going to competitive solutions. And if we were, we'd say that. So we've eliminated the competitive piece. There may be a new, new, as I indicated, with research budgets within alpha-producing or alpha-seeking investment managers, but we haven't seen it going to new competitors. And so the area that we look at -- and while we characterize the 3 -- of the 3 areas, data analytics we see as a short-term slowdown. The conversion is just a timing question. On the investment management piece, on the investment manager analytics, at this point, our view is that it's a short term, but we're not certain about that for that particular segment.

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Peter H. D'Arrigo, Envestnet, Inc. - CFO [27]

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So we do continue to diversify the markets we're addressing and the products we're offering within that segment beyond just investment managers.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [28]

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Okay. And then regarding the lawsuit piece, just how confident are you that you can get the data from another provider?

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [29]

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So this is an important market for us. It's a big opportunity. And I am highly confident that eventually we will find a new solution with a new provider that enables us to address this market opportunity. Whether that's months or quarters, I can't say right now, but my expectation is that it's closer to months.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [30]

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Okay. Fair enough. And then lastly, Jud, I want to ask about the insurance exchange. Just how should we think about the usage of the insurance exchange evolving, recognizing it's still early? I'm curious, any sense, through your conversations with broker-dealers, to what extent do you think those broker-dealers are looking to really encourage or push their advisers into using the exchange versus leading it up to each individual adviser to do insurance on platform versus off platform?

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [31]

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So the insurance exchange is an important evolution of our platform kind of dynamics. We're already generating some very nice run rate revenue with only having opened up a few accounts as insurance carriers seek access to the type of adviser that's interested in the offering. Now among our client base, there are going to be a number of clients that aren't interested in it because they have their own insurance offerings, but that's a minority of our client base. Within the RIA offering space, within the smaller and midsized independent broker-dealer space, within the regional broker-dealer space and within the national broker-dealer space, we expect that there will be a number of advisers within each of those channels that want to have the use of an integrated insurance product that had the same onboarding technology, the same building technology, the same performance reporting technology as the rest of their businesses.

So we expect that over a longer period of time, any exchange that we add on has TAMs, or target addressable markets, incrementally of over $100 million and in some cases, as high as $500 million. And we expect that over time, that we will gain shares of market that approximate where we are already in our other businesses. So that might be 5% to 10% in the early years, 10% to 20% of that TAM in the middle years and maybe as high as 30% at maturity many years out. But that's how we think about it. And we think about with the insurance exchange and the credit exchange, very significant additional addressable markets that, that brings to the adviser base that's looking for Envestnet for solutions. And we expect that we're going to introduce additional exchanges in the relatively near term because we've got demand for advisers that want the same exchange dynamic around additional services for additional products.

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Operator [32]

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Next, we have Will Cuddy from JPMorgan.

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William V. Cuddy, JP Morgan Chase & Co, Research Division - Analyst [33]

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Tamarac supporting now private wealth. How are you thinking about the opportunities to sell Tamarac into more high net worth channels beyond a traditional large RIA focus? And more specifically, do you think this relationship is kind of a one-off opportunity? Or are there more opportunities like this for Tamarac to expand its client set?

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [34]

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So what we have -- I won't say perfected because that's too strong. What we have refined and battle tested is a reporting solution that works for high net worth individuals and the advisers that support them. And what we've been able to work through over these last years are easy-to-use, easy-to

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adviser and their high net worth client and enables them to, through a client portal which is hosted by Envestnet, really expand the ways they touch that client and provide dynamic reporting. It integrates very nicely with MoneyGuide on a financial planning basis showing updates on performance. But it also integrates with 5 or 6 of the most common financial applications that Yodlee -- fin apps that Yodlee provides which have proven very popular with high net worth individuals, things like net worth tracking, budgeting apps, cash flow forecasting. The end client benefits from this unified presentation of their net worth, their investments, their held-away holdings, including 401(k) accounts, cash value of insurance accounts. It's presented in a very systematic, easy-to-use way. And what we found is that with the end client base of the users of the portal, first of all around over 90% of RIAs using the solution have adopted it as their primary means of communication with their end client. So that's a very impressive number. But what's even more impressive

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end clients of those advisers are logging on once a week or more to look at things like client accounts, what's happened to net worth, how are they doing, how are they tracking against their big goals and their big objectives, are they on track with their financial plan. So the use of this capability is powerful, and it's a case where the RIA community has really led -- they blaze the trail. They've been the early adopters. And they've really -- they've been able to be the disruptors, if you will, in this whole wealth management ecosystem. And as more RIAs use that solution, the high net worth practices in other firms are looking to get the same benefits. So we're already working with several prominent regional brokerage firms, one right here in the Midwest, and in their private wealth businesses. We have others in the pipeline. So we do not expect this to be a one-off thing. We again expect it to be a natural progression of a market-leading capability that we've been able to develop over time working closely with our best clients.

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William V. Cuddy, JP Morgan Chase & Co, Research Division - Analyst [35]

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Great. Switching gears a little bit. Like, we've had a quite good amount of market volatility this year. And we've talked in the past on valuations in your space limiting acquisition opportunities. How are you thinking about the market volatility this year and the potential for that market volatility to make some of the targets potentially more attractively valued?

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Peter H. D'Arrigo, Envestnet, Inc. - CFO [36]

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We find with the -- in the M&A space that there is -- with what's largely privately held companies and private transactions, there is less direct tie to what might be a short-term market swing and what happens with the valuation. Certainly, we would look to do the best we can with that, and we've spent a lot of time, which I won't reiterate the return profile that we have for both consolidating and strategic transactions. So we would stick to that discipline. And if the market volatility impacts one way or the other either the performance of the business or may affect the valuation, then that would increase the number of opportunities that are available to us. But again, I think it's that overriding discipline that is the top criteria for us.

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [37]

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I'd say it a little differently. I'd be a bit more positive about being able to find opportunities that fit our return on investment threshold in this market than there have been over the last 1.5 years or so.

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William V. Cuddy, JP Morgan Chase & Co, Research Division - Analyst [38]

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Okay. That's helpful. And just a quick one. In the press release, there's commentary about the $2 million impact from PortfolioCenter and the $6.6 million for PIEtech. Is that a GAAP revenue impact? Or is that a adjusted revenue impact?

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Peter H. D'Arrigo, Envestnet, Inc. - CFO [39]

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That's GAAP.

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Operator [40]

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And next, we have Peter Heckmann with Davidson.

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Peter James Heckmann, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [41]

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Jud, can you give us an update on the BlackRock relationship and the integration with their solutions? Have we seen anything tangible in the numbers so far yet this year? Or -- and/or how might we see that manifest into growth in the back half?

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [42]

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So we're making good progress on the technology integration. We've got progress on the iRetire piece, and we've got progress on a couple of the other things that we're looking to integrate more closely into the platform. We're seeing that firms that we do joint product planning with, and BlackRock is, of course, a very important one, but they're not the only one, do receive the benefits of kind of streamlined onboarding in the proposal fund or strategist selection process and then just going through to the paperwork automation in the onboarding piece.

And so if you look through the numbers, you're going to see some -- I believe you're going to find indications of some faster growth within assets under management and some slightly beneficial fee rates because of that. Not saying that that's directly or even majorly due to the BlackRock relationship, but what we're doing with BlackRock and some other firms has an effect on the type of business that's been onboarded. And what that means is more unified managed account business and relatively less advisers portfolio manager, or APM, business. So we expect that -- we had anticipated that, even maybe planned for that, and the early results are encouraging from what we're seeing there.

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Peter James Heckmann, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [43]

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Great. Okay. And then, Pete, just I apologize if it's in the press release, I'm in transit, but what is the level of total acquired revenue contemplated in the third quarter and full year guidance?

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Peter H. D'Arrigo, Envestnet, Inc. - CFO [44]

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So the contribution is about 5 to 6 percentage points of growth. I think the total per quarter is around $15 million.

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Peter James Heckmann, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [45]

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And that's on an adjusted revenue basis?

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Peter H. D'Arrigo, Envestnet, Inc. - CFO [46]

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Adjusted, yes.

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Operator [47]

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(Operator Instructions) And next from Raymond James, we have Patrick O'Shaughnessy.

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Patrick Joseph O'Shaughnessy, Raymond James & Associates, Inc., Research Division - Research Analyst [48]

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So embedded within your full year revenue guide change, is there any chance to outlook for subscription revenue within your wealth management segment in light of the really strong conversion number that you guys did in the second quarter?

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Peter H. D'Arrigo, Envestnet, Inc. - CFO [49]

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I'm sorry, was the question is there any change in the guidance?

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Patrick Joseph O'Shaughnessy, Raymond James & Associates, Inc., Research Division - Research Analyst [50]

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So there's some moving parts in your full year revenue guide. You talked about higher asset-based revenues because of the market. You talked about lower kind of Yodlee analytics revenues. Any change to the subscription-based revenues within your wealth management segment, I think, in particular because you put up a really good quarter in terms of conversions during the second quarter?

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [51]

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Oh, I understand the question, Patrick. It's not material. It's not significant because the -- we expected the conversion -- it was contracted. It had been an under -- it's been agreed upon deployment date, everything. So while we're happy that it was a big conversion, it was fully expected.

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Patrick Joseph O'Shaughnessy, Raymond James & Associates, Inc., Research Division - Research Analyst [52]

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All right. Got it. And then within the data and analytics segment, is that going to be where most of your expense management efforts are really focused for the duration of the year given that's where the revenue headwinds tend to be? And then, I guess, bigger picture, what do you see as kind of the acceptable long-term margin for that segment?

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [53]

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So those are great questions. The longer-term margin for that business, we expect as we apply -- and this is longer term -- as we apply data science and machine learning to our data normalization, data reconciliation and data integrity efforts, we expect that, that could be a 40% EBITDA margin business or more longer term. And we've been investing heavily in that business. Again, since we acquired Yodlee, there's been roughly a doubling of revenue in just a little over 3 years and like a sixfold increase in EBITDA. So we expect that, that is going to -- we expect the growth to be strong, but we don't expect it to be as strong as it has been. And we expect that there can be the balancing of investing for growth with investing for the markets that are more appropriately ours. And by that, I mean wealth management, banking and credit are what we are going to invest mostly in for that analytics business. Then more of the efficiencies -- relatively more of the efficiencies are coming from analytics than from wealth, but wealth also is generating more efficiency as a result of the organization changes we announced in January.

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Operator [54]

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And next, we have David Grossman with Stifel.

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David Michael Grossman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [55]

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Just a couple of quick clarifications. First, on the revenue guidance. Is that including or excluding the deferred revenue adjustment for the acquisitions? And just on a second point, does the deferred adjustment materially change in the back half of the year from what you reported in the second quarter?

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Peter H. D'Arrigo, Envestnet, Inc. - CFO [56]

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So we provided it in the press release both on a GAAP basis and a non-GAAP basis. So you can see the guidance in both, and you'll see that it does start to decline toward the second half of the year slightly.

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David Michael Grossman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [57]

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Right. So maybe I'm -- and I'm sorry if I missed this, but it has a lot of moving pieces. Obviously, in the back half of the year, it looks like, obviously, the subscription growth rate -- organic growth rate is moderating a little bit. Is all of that due to the kind of analytics kind of items that you kind of talked about earlier? Or is there more to it than that?

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [58]

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No. The vast majority of the net effect goes to those 3 factors. And those 3 factors are -- the first one is probably a little over half of what the overall effect is, the second one is maybe 35% and the third one is the balance of that.

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David Michael Grossman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [59]

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Okay. Got it. And then I guess just kind of a longer-term question just about the model. You've done a lot to expand the breadth of your platform over the last couple of years, some of it organic and some of it through acquisition. And as you -- you're clearly signing, obviously, larger customers with more complex needs, but is there any signpost that you can give us to help us think through what the impact is on the revenue per client by virtue of adding this expanded kind of capabilities to the platform?

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [60]

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Yes. I can give you -- I mean, we don't report this, but we look at it. The average revenue per RIA client 6 or 7 years ago was less than $20,000 per advisory firm per year. Today, the average is north of $90,000 and new clients are coming on at nicely over $100,000 per advisory firm per year in terms of the subscription revenue per year. That would be one picture of it over a 6- to 7-year period. And that's the result of bringing out new products, new offerings. And we expect that that's going to continue. We think that there is significant upside in the revenue per adviser on the subscription side. The asset-based side has grown as well. Over a longer period of time, the average asset-based revenue per adviser has gone from around $4,000 or $5,000 to around $12,000 or $13,000 per adviser. But that's asset based and there are other sources of revenue that we are getting that are subscription based from the firms that employ those advisers. So you're seeing that growth coming up in the incremental growth rates, which are higher for subscription revenue that's being derived from the enterprise clients. So we don't expect to provide metrics on that anytime in the near future, but we look at that and we are encouraged by the growth of revenue -- growth in revenue per adviser and growth in revenue per adviser at the firm.

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David Michael Grossman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [61]

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Great. And just to follow up one thing on that. So when you say over $100,000 on some of the newer clients, is that a pretty good metric to use on the new sales then if new clients coming on are coming on at that higher rate?

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [62]

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If it's subscription based, yes, the new clients are coming -- the new clients coming on have ACV equivalents, annualized contract value equivalents, of over $100, 000, and that's been trending up very nicely for a long time. And part of that is -- the biggest part of that is a more dynamic and broad product offering. It's part of going deeper with existing clients. But there's also a factor that the size and sophistication of the client is growing as well.

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David Michael Grossman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [63]

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Right. Great. And then just finally, and I can't -- I don't know if you covered this earlier or not, but the conversions have gotten a little more lumpy in the asset-based business. Is there anything to read into that? Or is that just kind of the typical ebb and flow of conversions that you've always experienced?

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [64]

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No. I think that there might be some -- I think that for the foreseeable future, the conversion -- the enterprise conversions within the wealth solutions business are going to skew more towards subscription based as a function of the size of the conversion.

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David Michael Grossman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [65]

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All right. So as we think about modeling out the asset-based business, we should assume the conversions are going to skew down basically, and you're going to just add on -- you're going to see an uptick in the subscription-based conversions. Is that -- I mean, we've been seeing that...

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [66]

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Wait, we have not guided on that. We have not thought through that completely. But based on what we know of the pipeline today looking out 2, 3, 4, 5, 6 quarters, it's going to -- over the, let's call that, the near to the middle term, we expect it will continue to skew towards subscription-based pricing.

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David Michael Grossman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [67]

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Okay. And -- sorry, we can take this up off-line, but just one follow-up to that is on the gross sales, right, extra conversions. They seem to have been staying at a reasonable rate in the asset-based business. So while you're seeing it on the conversion side, you haven't necessarily seen it on the gross sales side. Is that a logical outcome here or am I missing something obvious?

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [68]

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No. I don't think it is a logical outcome, and I'll tell you why. The gross -- the non-conversion gross sales are highly reflective of current programs with current advisers. So as we add a new manager, a new strategist, as we add a new family of impact portfolios to PMC's quantitative portfolio offering, then you're seeing that the existing sales are holding up very nicely because we continue to bring new product set. So that's heavily tied to our existing adviser activity. Subscription-based conversions are tied to the kinds of new enterprises we're bringing on through conversions, and that is skewing towards larger conversions.

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David Michael Grossman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [69]

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Well, so then, the pricing is -- or not pricing, but revenue per client or adviser is what's helping keep that gross sales number up because, like I said, it looks like it's trending very nicely relative to the trending conversions?

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [70]

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Right. Revenue -- there's 2 things that are holding it up. Revenue per -- that kind of the share per existing adviser and then getting -- going -- getting more advisers with existing customers. So yes. Yes.

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David Michael Grossman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [71]

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Got it. Got it. Great. I appreciate that.

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [72]

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You're welcome. But I do think it underscores the organic growth strength of the core business.

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Operator [73]

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All right. Ladies and gentlemen, it looks like that does conclude our question-and-answer session. I'd like to turn the floor back to Mr. Bergman for any additional or closing remarks.

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Judson Taft Bergman, Envestnet, Inc. - Chairman & CEO [74]

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I want to thank you for the questions, very insightful questions, and I look forward to our next conversation, which will be in about 90 days unless sooner. Thank you, and this ends the call.

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Operator [75]

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And once again, ladies and gentlemen, that does conclude our call for today. Thanks for joining us. You may now disconnect.