U.S. markets open in 2 hours 50 minutes

Edited Transcript of ENV earnings conference call or presentation 20-Feb-20 10:00pm GMT

Q4 2019 Envestnet Inc Earnings Call

CHICAGO Feb 27, 2020 (Thomson StreetEvents) -- Edited Transcript of Envestnet Inc earnings conference call or presentation Thursday, February 20, 2020 at 10:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Christopher Curtis

Envestnet, Inc. - Division CFO & Head of IR

* Peter H. D'Arrigo

Envestnet, Inc. - CFO

* Stuart DePina

Envestnet, Inc. - Chief Executive of Envestnet Data & Analytics

* William C. Crager

Envestnet, Inc. - Co-founder & Interim CEO

================================================================================

Conference Call Participants

================================================================================

* Christopher Charles Shutler

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

* Christopher Roy Donat

Piper Sandler & Co., Research Division - MD & Senior Research Analyst

* David Michael Grossman

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

* 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

* William V. Cuddy

JP Morgan Chase & Co, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, and welcome to the Envestnet Fourth Quarter 2019 Earnings Conference Call. Today's conference is being recorded.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, and good afternoon. I'm joined today by Bill Crager, Interim Chief Executive Officer; Pete D'Arrigo, Chief Financial Officer; and Stuart DePina, Chief Executive of our Data and Analytics Business. 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, including adjusted revenue, adjusted net revenue, adjusted EBITDA, adjusted net income and adjusted net income per share. 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.

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 Bill.

--------------------------------------------------------------------------------

William C. Crager, Envestnet, Inc. - Co-founder & Interim CEO [3]

--------------------------------------------------------------------------------

Thank you, Christopher. Hello, everyone. It is great to be speaking with you again this afternoon. For Envestnet, 2019 will always be remembered. While it was an extraordinary year with strong results, it was also the most difficult year. We experienced a great tragedy. The company, though, stood up, moved forward and remained committed to building the leading financial wellness network powered by our data infrastructure, which enables financial advisers and their firms to help millions of American households achieve their goals.

While this call is about our 2019 results, it's also about the future. We believe that Envestnet is the best positioned provider to drive the future of advice. Here is why. Envestnet has grown by driving the rapid evolution of the wealth advice space, launching a platform that leveled the playing field for all financial advisers, expanding that platform to become a broader, holistic advice engine, including the market's leading financial planning software. And in 2020, with the adoption of our financial wellness network accelerating and its long-term impact will become recognized and more important.

Not only is our addressable market expanding, but our ability to create new, integrated solutions that provide essential value for our clients and also new revenue opportunities for Envestnet, they're growing. Big data, which essentially was an aggregation source when we acquired Yodlee is now emerging as a key source of information for a decision engine that will help recommend next actions for our clients to guide consumers to better achieve their goal, this with quantifiable results. It is these opportunities, we believe, that differentiate Envestnet.

As I said on our last quarter's call, we're executing against our vision, and the company is not taking its foot off the gas. In 2019, we achieved the important milestone of serving more than 100,000 financial advisers and more than 5,000 firms. Also in 2019, we acquired PortfolioCenter and also MoneyGuide. More than 150 PortfolioCenter clients signed on to the higher value Tamarac offerings during the year. We're also actively supporting the 1,000-plus emerging RIAs using PortfolioCenter's Hosted offering.

We are thrilled to have MoneyGuide as part of the Envestnet family. MoneyGuide was named the #1 financial planning software by the 2020 edition of the P3 inside information survey, an astonishing 12 years in a row to earn that recognition. MoneyGuide's popularity remains consistent among firms of all sizes, all experience levels and all business models, including 10 of the top 12 custodial platforms and 8 of the top 15 broker-dealer platforms. Most recently, Morgan Stanley licensed for an additional 3 years; MoneyGuide's entire planning offering, including MyBlocks. Both PortfolioCenter and MoneyGuide are performing well financially. And in terms of progress, each has made in delivering on the strategic rationale for acquiring them.

During 2019, we also launched the Envestnet Insurance Exchange, the Envestnet Credit Exchange. Both are making important progress. The insurance exchange has 8 carriers on board and 40 annuity products on the platform with many more on the way. So far, we have 10 advisory firm partners sign, and they're in various stages of implementation. Our credit exchange has 4 lenders in the process of deep integration we are actively processing loans today.

On the distribution side, 5 advisory partners have signed and 4 are currently onboarding with additional 10 firms evaluating proposals that represent access to over 15,000 of our financial advisers. This is tremendous progress on both fronts in a very short period of time.

Just a few weeks ago, we announced the formation of the Advisor Services Exchange in conjunction with our investment in Dynasty Financial Partners. Feedback from our clients has been extremely positive as we work with Dynasty to provide access to growth capital, business management tools, marketing services and outsourced CFO services to our adviser clients.

In terms of financial results for the fourth quarter, adjusted revenue grew by 15% from last year, adjusted EBITDA grew 30% and adjusted earnings per share grew 13% from a year ago. These results were driven by solid performance in our wealth solutions business. Operating activity for that business remain very strong. Gross sales of $34 billion, asset-based conversions of $8 billion and another $32 billion in subscription-based conversions. We also benefited from favorable market conditions as we headed into the new year.

Investment management continue to be an area where we are innovating and adding value. Assets using our ESG impact platform as well as our tax overlay solutions grew 74% compared to 2018. Our custom direct index portfolio more than doubled. In the index-based low-cost asset management environment, these are value-added growth areas that Envestnet is powering. We're making progress in deploying Envestnet's data cloud solutions and believe we have an emerging opportunity to help our clients adapt to a more agile data environment and will connect them to their proprietary systems as well as to the growing fintech marketplace.

In 2015, we acquired Yodlee with a strong sense of its strategic value. In 2020, it is clear that data's essential value is being recognized. By adapting Yodlee's infrastructure, Envestnet is establishing an important use case that connects some individual daily financial behavior with their long-term financial goal, which is transforming. There are other exciting opportunities for our data platform that include expanding the ecosystem into areas that will empower individuals to achieve flexibility, control and success in their integrated financial labs.

As we signaled last year, there are short-term revenue growth challenges as we have seen competitive pressure in our investment manager analytics business, the impact of U.K.'s open banking changes as well as the shift from professional services to integrated offerings for our financial institution clients. That said, our core aggregation business with financial institutions continue to do very well.

Last quarter, we announced a bilateral agreement with JPMorgan Chase governing direct data feeds. We have a full pipeline of similar agreements we're in the process of executing with other institutions. This is important. It is important to the consumer, it's important for our industry. It's important that consumers' financial data be transferred, restored and be aggregated in a way that protects the consumers' privacy and that firms follow standards how to operate in a world where data is essential to driving financial outcomes. We're pleased to be on the leading edge of this important industry change.

We're also seeing growth in our fintech component of our data business as we rolled out our enhanced developer platform. We continue to modern our solution set, which will allow third-party developers access to our solutions from which they will build out new, enhanced financial products. Longer term, it's clear to us that there's tremendous value in the capabilities, infrastructure and scale of what we have built in our Data and Analytics business. We connect to more than 21,000 data sources and aggregate hundreds of millions of accounts, which we believe is more than any other provider in our space. Aggregated data provides the fuel to a unified financial wellness network, driving optimal decisions that advisers and their clients can act on to achieve their financial goals. More tactically, it helps consumers manage their daily financial lives.

Envestnet is executing, and we see tremendous opportunity to continue investing in our business, both in wealth and also in data. It is clear that individually and collectively, there is meaningful value to be unlocked as we position ourselves, and we do the work to capture more and more of the market opportunity before us, which we believe is in the tens of billions of dollars from a revenue perspective.

As an industry leader with about $1 billion in revenue today, we have a long runway for growth and value creation, value for our customers, value for our employees and value for our shareholders.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Bill, and thank you, everyone, for joining us this afternoon. I'm going to review our results for the fourth quarter and full year of 2019 as well as our guidance for the first quarter and full year of 2020.

Envestnet's overall results for the fourth quarter of 2019 beat our guidance expectations set out in November. Briefly summarizing these results compared to the fourth quarter of 2018, adjusted revenue and adjusted net revenue increased 15% and 18%, respectively, to $242.5 million and $177.1 million. Recurring revenue, which comprises asset-based and subscription revenue, was 96% of adjusted revenue. Excluding the contributions from PortfolioCenter and MoneyGuide, adjusted revenue grew 9% from the prior year period.

Adjusted EBITDA was $61.5 million, a 30% increase over last year. And adjusted earnings per share was $0.69 in the fourth quarter, $0.08 or 13% higher than the fourth quarter of last year.

For the full year 2019 compared to 2018, adjusted revenue increased 12% to $909.4 million. Excluding the contributions from PortfolioCenter and MoneyGuide, adjusted revenue grew 7% from the prior year period. Adjusted EBITDA was $193.3 million, a 23% increase over last year. Adjusted EPS was $2.15 for the year, $0.23 or 12% higher than last year. Adjusted earnings per share grew at a slower rate than adjusted EBITDA, reflecting a higher fully diluted share count, interest expense and depreciation expense.

In December, we settled our maturing 2019 convertible notes through a combination of cash on hand and a draw from our revolving credit facility. We ended the year with a net leverage ratio of 2.8x EBITDA, slightly lower than the prior quarter.

Moving on to our outlook for the first quarter and full year of 2020. You'll find our guidance detailed in full in the earnings release, but I'll give a few highlights here. For 2020's first quarter, we expect total adjusted revenue to be between $242 million and $244 million, up 21% to 22% compared to the prior year; asset-based revenue between $134 million and $135 million, up 23% to 24% compared to last year, implying an effective fee rate on our end of December assets under management or administration of roughly 9.8 basis points; subscription-based revenue on an adjusted basis between $102 million and $102.5 million, up 22% to 23% compared to 2019; professional services and other revenue between $6 million and $6.5 million.

Similar to prior years, we expect operating expenses to increase sequentially from the fourth quarter -- for the first quarter due to the seasonal nature of certain items, particularly personnel expenses like payroll taxes and other benefits, all of which are significantly higher in the first quarter compared to the fourth quarter. Adjusted EBITDA should be between $46 million and $47 million, up 35% to 38% compared to 2019. And we expect our normalized long-term effective tax rate to be 25.5%, consistent with 2019. Assuming approximately 55.6 million diluted shares outstanding, this translates into adjusted earnings per share of $0.45 compared to $0.39 a year ago.

For the full year 2020, we expect adjusted revenue in a range of $1.018 billion to $1.028 billion, an increase of 12% to 13% compared to 2019. Contributors to this 12% to 13% growth rate for the year include the first 3 or 4 months of acquired revenue from PortfolioCenter and MoneyGuide. When those acquisitions anniversary, our organic growth rate is expected to be between 10% and 11% for the year.

Asset-based revenue should grow in the mid-teens, aided by overall strength in our wealth solutions business as well as the carryover impact of a strong equity market in 2019. Subscription-based revenue should grow in the low double digits. Stronger growth in subscription revenue within our wealth business, including MoneyGuide, will be partially offset by low-single-digit growth in revenues in our Data and Analytics business, driven by the factors Bill discussed earlier.

Professional services and other revenue is expected to decline in 2020 as we onboard new business with less of an implementation revenue component associated with them. As professional services goes down, our recurring revenue should go up to about 97% of adjusted revenue.

We expect adjusted EBITDA for the year in a range of $220 million to $224 million, reflecting growth of 14% to 16%, and this is consistent with the 1.2x relationship we've discussed in the past between our targeted adjusted EBITDA growth rate and our revenue growth rate.

Finally, we expect adjusted earnings per share in a range of $2.22 to $2.27. As we saw in 2019 Q4, fully diluted shares increasing year-over-year. Interest expense and depreciation expense are the primary reasons EPS growth is lower than EBITDA growth.

Thank you for your support of Envestnet. And at this point, I'll turn it back to Bill for his closing remarks.

--------------------------------------------------------------------------------

William C. Crager, Envestnet, Inc. - Co-founder & Interim CEO [5]

--------------------------------------------------------------------------------

Thank you, Pete. The year 2020 represents our 20th year, but it also represents the beginning of the next transformational age of advice. We've grown our business from product to platform and today in network. And data is fueling everything from service to integrated application and now into the network to drive better decisions that advisers can act on, on behalf of their clients to help them fulfill their financial goals. Envestnet is uniquely positioned to power this next phase of advice. We are moving forward very purposely with our vision and mission in mind. We're focused on expanding the definition of unified advice in continuing to launch services and tools to help advisers grow their businesses and serve more clients efficiently.

As we began the call, I said, we believe Envestnet is best positioned -- is the best positioned provider to do just that, investing along the way to help our clients continue to grow and to create shareholder value.

Thank you, again, for your time this afternoon. Thank you for your support of Envestnet. With that, Pete, Stuart DePina and I are happy to take your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) We will take our first question from Will Cuddy at JPMorgan.

--------------------------------------------------------------------------------

William V. Cuddy, JP Morgan Chase & Co, Research Division - Analyst [2]

--------------------------------------------------------------------------------

So firstly, can you just walk through some of the moving pieces in the 2020 guide? I'm trying to understand a little bit the walk down from EBITDA to EPS. So what assumptions are you using for interest expense and D&A and share count? That would be helpful.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So instead of getting into detail on this call, why don't we save some of those detailed modeling questions for follow-up. There's going to be a lot of calculation there. I don't want to get into that level of depth.

--------------------------------------------------------------------------------

William V. Cuddy, JP Morgan Chase & Co, Research Division - Analyst [4]

--------------------------------------------------------------------------------

All right. Fine. And then I guess turning to the elephant in the room on the media reports on some potential buyers approaching Envestnet for the sale of Yodlee. Could you frame for us how you think about selling parts of your business? Like what framework should we be thinking about that you will be using to consider divestitures, if there is the right price?

--------------------------------------------------------------------------------

William C. Crager, Envestnet, Inc. - Co-founder & Interim CEO [5]

--------------------------------------------------------------------------------

Thanks, Will. This is Bill. And as a public company, we don't comment on rumors or any of the speculation. That said, I would say that there's been a tremendous activity in our marketplace late '19 and early 2020, with some pretty profound announcements whether that was Schwab and TD or that -- Visa and Plaid or that is even today Morgan Stanley with E*Trade or Franklin Templeton and Legg Mason. There is activity in our space that I think is essentially very validating of the strategy we've been pursuing and really recognize the value of the pieces that Envestnet has strategically invested in.

If you go back and you think about the history of our company and the areas that we've anticipated, we did make an acquisition to enter the RIA space when we acquired Tamarac and now have a very substantial position in the RIA space, especially with the $1 billion-plus RIAs with Tamarac. We did last year make the acquisition of MoneyGuide, the leading provider of financial planning. We believe that planning is going to power -- really be the engine that will help us power this future unified advice marketplace. In 2015, we acquired Yodlee ahead of the market's understanding of the value of data.

And as I just kind of outlined in my comments, data is the power that fuels much of our platform and becomes -- creates intrinsic value beyond just the data business. It really creates the value within our entire ecosystem. All of these were very strategic steps with an understanding of where the market is headed. And we believe that we continue to have a very good outlook on where the market will go, and we will continue to assess each component of our business, and we'll continue to assess the ability to invest in our -- every component of our business and the opportunities that we want to invest deeper in for the next strategic moves in our space.

--------------------------------------------------------------------------------

William V. Cuddy, JP Morgan Chase & Co, Research Division - Analyst [6]

--------------------------------------------------------------------------------

Okay. And a quick follow-up. Do you need to own the data? Or is it possible to still benefit from the data without actually owning the underlying pieces?

--------------------------------------------------------------------------------

William C. Crager, Envestnet, Inc. - Co-founder & Interim CEO [7]

--------------------------------------------------------------------------------

There's absolute value for owning the data itself. As you know, we've grown a pretty substantial analytics business. We think that over the last several years, we have optimized to create a very powerful, integrated data environment for wealth. And then when it comes to other areas of the use of the Yodlee infrastructure and platform, we've decided to partner. In areas of credit, last quarter, we announced and we spoke about the partnership with Equifax. And we'll continue to contemplate those sorts of partnerships. And in each case, Will, we're utilizing components of that data infrastructure inside our wealth business that we've optimized.

And so at the end of the day, I think the -- that represents kind of a great use case for the power of data in wealth and these other emerging wealth case -- use cases I'd say in credit with Equifax and other areas that we think is a great utility for our data property in the future.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

We'll take our next question from Peter Heckmann at Davidson.

--------------------------------------------------------------------------------

Peter James Heckmann, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [9]

--------------------------------------------------------------------------------

Can you talk about some of the different drivers, both positive and negative, on margins for 2020? And how you think about mix shift going on?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. So one of the bigger drivers of the mix shift is the strength of the market in Q4, which increases the growth rate in terms of our revenue breakdown into the asset-based bucket compared to the other buckets. So we'll see a little bit more mix toward asset base, which, of course, comes along with the cost of revenues. So margin on that revenue is not as direct of a flow-through to the bottom line. That's a little bit more weighted, again, toward asset base in 2020 than towards subscription-based. And we kind of highlighted in the prepared remarks, some of those challenges and why the blended subs base is probably closer to low double digits than the growth rate we're seeing in the asset base.

--------------------------------------------------------------------------------

Peter James Heckmann, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [11]

--------------------------------------------------------------------------------

Okay. And then the non-GAAP tax rate that you're using in 2019, did you say that was 25.5%?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, 25.5%.

--------------------------------------------------------------------------------

William C. Crager, Envestnet, Inc. - Co-founder & Interim CEO [13]

--------------------------------------------------------------------------------

Tax rate is 25.5%, yes. Same in '19 and '20.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

We'll take the next question from Chris Shutler at William Blair.

--------------------------------------------------------------------------------

Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [15]

--------------------------------------------------------------------------------

So maybe first, an update on the executive leadership team, and Bill, you're still having the interim tag. I guess I would have thought by now there would be a decision.

--------------------------------------------------------------------------------

William C. Crager, Envestnet, Inc. - Co-founder & Interim CEO [16]

--------------------------------------------------------------------------------

Thanks, Chris. Board -- I've been working very closely with our Board of Directors. They're being very deliberate with respect to succession, very good conversation with them, very deliberate process. We'll make an announcement as soon as we have further information. But the important thing to note is that the company is in very good hands. We continue to lead the company and drive the company. I think we're creating more and more opportunity for Envestnet. And we're collaborating more closely, I would say, with the Board, who are supporting us and supporting our clients and really supporting our execution of our wellness vision. So that remains a process, and the Board is being very disciplined in that process.

--------------------------------------------------------------------------------

Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [17]

--------------------------------------------------------------------------------

Okay. Got it. Let's see. On the Yodlee low-single-digit growth, could you just reiterate what you felt the incremental headwinds were versus what you were experiencing in the back half of 2020 -- or back half of 2019, rather?

--------------------------------------------------------------------------------

William C. Crager, Envestnet, Inc. - Co-founder & Interim CEO [18]

--------------------------------------------------------------------------------

Yes. So I highlighted them, Chris. And I'll have Stuart just add color to this. But really, they're threefold. One is that data analytics business has just become a more competitive environment. And so that's -- we're keeping our renewal rates pretty high, but have reduced our renewal contracts. That's one.

The other component of that is we are delivering more and more of the integrated Yodlee solution into Envestnet's wealth clients. There's a reduction in our professional services to support those implementations. And so that has a bit of an impact. And as the U.K., we have good presence over in the U.K. market. They transitioned to an open banking environment towards the -- at the end of the year last year. And with that, a lot of the fintech clients that we have in the U.K. weren't necessarily prepared, and that has had a little bit of a headwind in our ability to -- it's been a headwind in that particular component of our U.K. market. But Stuart, any color that you'd provide?

--------------------------------------------------------------------------------

Stuart DePina, Envestnet, Inc. - Chief Executive of Envestnet Data & Analytics [19]

--------------------------------------------------------------------------------

Yes. I think the only thing I'd add to that, Bill, is that -- probably just elaborate a little bit more in terms of our growth patterns. We are actively recognizing that there's a lot of activity beyond as well. Clearly, that's where we've invested heavily over the course of the last 3 to 4 years since we've owned the Yodlee asset, and we've done -- frankly, we made a lot of stride in progress in getting -- in bringing to market for the financial adviser universe that we support, tools and outputs that help them manage their clients more effectively. But areas where we've been not as active happen in credit and in payments and in analytics. And in those areas, we are recognizing that there is a substantial amount of opportunities.

So from that standpoint, I'm going to add on to what Bill said about professional services. We've been very -- over the course of our deployment with a lot of our clients, working with a lot of large finance institutions. Our model has been very heavy on in professional subscription-based or professional support-based model to go into those firms and kind of customize those offers for those firms. The marketplace has it shifting more to working with other clients that are outside of the traditional financial services environment with fintech firms who want the ability to do it themselves. We deployed and are deploying tools for them, and we're trying to capture more market share.

So from that standpoint, we're seeing a bit of a shift, if you will, in the ecosystem because of what fintech is offering, and we're being more opportunistic to grab more market share, if you will, with a lot of those firms. So that's part of what is kind of offsetting, if you will, or I guess, probably putting some pressure on our revenue growth rates, which we'd want to recognize more market coverage, if you will, in some of the deals that we're cutting today. That's probably the other element that I would add to what Bill just mentioned in terms of what our growth rates are at least in 2020.

--------------------------------------------------------------------------------

William C. Crager, Envestnet, Inc. - Co-founder & Interim CEO [20]

--------------------------------------------------------------------------------

And one of the things that I am -- and Stuart and I are both very encouraged by is the progress we made in that developers platform and how we'll be able to -- we will compete in that fintech space. And so that's all -- that's out there in the future, Chris. So as we looked at the year, we realize that it's got a sales cycle, you get an adoption cycle. And then that will help restore our growth rates as we're successful deploying that.

--------------------------------------------------------------------------------

Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [21]

--------------------------------------------------------------------------------

Okay. And then maybe lastly, just on that same topic with Yodlee, sort of going back to one of the prior questions, but what do you feel are the main benefits of owning Yodlee for the wealth business, specifically? And do you see those changing? And the reason I ask now is with Visa owning Plaid, I would think there would be more of an accelerated move towards APIs and away from screen scraping. So maybe there's going to be less need down the road for all the data scrubbing and all the work that it takes to get the data clean. So any comments there would be great.

--------------------------------------------------------------------------------

William C. Crager, Envestnet, Inc. - Co-founder & Interim CEO [22]

--------------------------------------------------------------------------------

Yes, Chris. And I think that's kind of a twofold because I do think the reconciliation, the data cleanup all that process that we do have extraordinary value, and that's -- we've leveraged the investment chassis and platform to bring -- for investment accounts reconciliation rates on aggregated data from the 60-something percentile up into the mid-90s, and that is competitively differentiated and very advantaged as we look at the work we've done to kind of optimize the wealth environment. And so again, that work has been done, and we're leveraging the Envestnet infrastructure to do that reconciliation.

All of that then -- all that data then sits in our cloud-based services that can then be utilized through micro services and APIs to be pumped out to different applications. Let's use an example of the announcement that we made in -- at Schwab's IMPACT conference last fall, in which we're taking the Yodlee data set through the Envestnet platform highly reconciled into FinApps. Those FinApps are part of now the MoneyGuide ecosystem and delivered to our client portal. That's a great example of how that ecosystem or process is working and optimized absolutely in the wealth business.

As we looked at -- as we continue to look at other opportunities for our data business is notable that we announced our partnership with Equifax last quarter from a credit standpoint. And Stuart and I and the team continue to evaluate other partnerships that are available for the Yodlee business. Stuart, I don't know if you want to add any color or any other comments to that?

--------------------------------------------------------------------------------

Stuart DePina, Envestnet, Inc. - Chief Executive of Envestnet Data & Analytics [23]

--------------------------------------------------------------------------------

I don't think I have much to add there, Bill. I think you've covered all those bases.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

We'll now take our next question from Chris Donat at Piper Sandler.

--------------------------------------------------------------------------------

Christopher Roy Donat, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [25]

--------------------------------------------------------------------------------

Wanted to ask another one around the Yodlee business, Bill. You've mentioned the agreement with JPMorgan, the bilateral agreement, that you expect to do other bilateral agreements. I guess 2-part question. One is, can you give us sort of a historical context because I think of JPMorgan years ago has been somewhat critical of third-party data aggregators? And it seems like you -- I don't know if you persuaded them, but can you give us sort of a sense of what's changed over time?

And then just let us know if there's any financial implications from these kind of bilateral agreements so that -- does it change anything? I think I heard that you expect data and analytic to grow sort of mid-single digits. But anyway, just wondering if there's any implication on the financial side from them.

--------------------------------------------------------------------------------

William C. Crager, Envestnet, Inc. - Co-founder & Interim CEO [26]

--------------------------------------------------------------------------------

No. And Chris, it's a great question. And I think it's an important question because the way the data will be collected and then utilized by financial institutions, we believe, is going to change materially. I think that the JPMorgan announcement is very progressive around data use. And so I think, again, it's a validation of the Yodlee platform and our ability to create a unilateral kind of connectivity through JPMorgan and serve that data in a way that's protected, and use from a privacy standpoint that upholds the standards that JPMorgan -- the high standards that JPMorgan has. I believe, again, it is -- and they've been very exclusive, JPMorgan, about account aggregation. And to the point, I believe, Jamie Dimon announced in the last earnings update that they're going to turn off aggregators at some point in 2020.

So this is the beginning of a new highway system that is going to connect our financial institution with data providers, and really enable a new ecosystem for the way data is utilized by firms. And so there are other firms that are in that same process. But again, I think it's notable and important that JPMorgan has been a leader here. Stuart, any update or comments about that?

--------------------------------------------------------------------------------

Stuart DePina, Envestnet, Inc. - Chief Executive of Envestnet Data & Analytics [27]

--------------------------------------------------------------------------------

Yes. I'd add a couple of things here. First of all, we do have several and over a dozen other agreements, like agreements that are literally insight, meaning we're rushing to the finish line here. We'll be announcing some of those over the course of the next several months. But a lot of this, from a trend standpoint, is really driven by some factors in the marketplace. The biggest one of which we, Yodlee are the only data aggregator in the space, who is regulated -- is regulated, period, end of sentence. We have substantial regulatory bodies, federal, who monitor our actions and what we do in terms of privacy and security. We are aligned with the financial institutions primarily large banks.

In that regard, we have over 200 audits on an annual basis against our platforms and systems from a security and privacy perspective, both at the Federal level, state level and then with individual -- the individual institutions that we partner with. So the -- we're in an aligned ecosystem, if you will, in that sense because of the movement of data and all the elements that go around data. So I'd make that as a real core point of -- we know from our conversations with financial institutions, when they look at us, they look at us as a partner in that sense. So that's one element.

I think another aspect that I'd call out is, our reach, our simple reach because we've been in the marketplace for over 20 years. And by the way, I should come back and say, what we've been doing from being regulated isn't a new occurrence within -- when the [nail] and the founders of this business built the business, they crossed that threshold years ago, and we've been in this environment for quite some time. But for the last 20 years or so as we've kind of been working and adopting the team and building out our ecosystem, when you heard Bill talk earlier, we've got 21,000 plus different interfaces, both from large and small and medium-sized institutions, many who have capabilities to have automated APIs for us to access data. There are many who don't. They don't have an infrastructure. So they look at us as being, if you will, to partner with them in that context as well. So that's part of the reason why the financial institutions are migrating and gravitating towards us as well.

And then the last thing I'd say is, aggregation is certainly key. It's a critical element for our financial institution partners and they recognize the value of that. But because of the legacy of the organization, the things that we've been able to add to aggregation, the value-added components that we built in terms of having a platform that these financial institutions can use to manage their own consumer relationships is a critical element. And that has come over a very long period of time. So we've added the ability to enrich the data that we get and then create analytics and tools and help those financial institutions serve their customers better. So I would say that those are the components that are really are kind of that Chase and others are gravitating and embracing with us.

And to answer the last part of your question, does it impact the economics? There are -- not different terms, per se, but there's a broader use case. I'd probably say it best by saying we're getting more deeply integrated into these banks and more broadly [accelerating in] these banks because we're going from the retail side to the institutional side. So there's lots of different pockets that we are working with, with a lot of the large banks. So the unit economics don't change in as much as the reach within the institution are changing, which are giving us more upside. That's how I'd answer that question.

--------------------------------------------------------------------------------

Christopher Roy Donat, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [28]

--------------------------------------------------------------------------------

Got it. And then at the risk of asking the question that I don't think you can answer, I'll try it anyway. You guys were singled out by the -- by 2 senators and a member of Congress for asking for a Federal Trade Commission investigation. Is there anything you can say on that one or anyway...

--------------------------------------------------------------------------------

William C. Crager, Envestnet, Inc. - Co-founder & Interim CEO [29]

--------------------------------------------------------------------------------

No. I think -- yes, Chris. Yes. No. Obviously, we received the letter and being very responsive to lawmakers and the commission with any questions that they have. And most of those questions centered around the terms and conditions, the understanding of the consumer, as that data is being utilized. And as a B2B provider, it's really up to us to ensure that our customers have the proper terms and conditions, and we have a pretty comprehensive process in understanding how our terms and conditions are being published to those consumers. So again, they're having a conversation with lawmakers about that.

The other issue has to do with identification of an individual's data. And really, what we do is the data is de-identified. So it goes from personal data to nonpersonal data as we go through the de-identification process. In the kind of regulation or oversight of data from a national standpoint, there isn't a single standard. And what Envestnet has done is we have -- we're complying with -- what we believe and I think many believe is the most progressive standard in the United States, and that's the California Consumer Protection Act, (sic) [California Consumer Privacy Act], CCPA, which we just instituted here at the end of the year on protecting an individual's data and identification.

So we're having an engaged conversation with Washington. I think there's a lot education that goes into it. I think at the end of the day, it's good to be having these conversations. I think it's good to be driving towards our standards. I think that standards will help the industry and standards will certainly help the consumer. And that's something that we're continuing to push and advocate for.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

(Operator Instructions) We'll take our next question from David Grossman at Stifel.

--------------------------------------------------------------------------------

David Michael Grossman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [31]

--------------------------------------------------------------------------------

So I think you've answered to a certain extent most of the questions I had. But just getting back to Yodlee, perhaps you could just anchor all of this. You've talked about a lot of tailwinds driving that business but also some headwinds. And I'm just trying to get my head around when the growth rate of that business should normalize and kind of the timing of when some of these factors either roll off or start to accelerate the growth of that business.

--------------------------------------------------------------------------------

William C. Crager, Envestnet, Inc. - Co-founder & Interim CEO [32]

--------------------------------------------------------------------------------

Sure, David. Good to speak with you. So as we began to indicate, I guess it was mid-year last year, it was Jud who indicated that we're going to face some headwinds. And again, it's in that data and analytics business. I'll ask Stuart to update on some of the innovative things we're beginning to develop there. We had some regulation coming through our European business in the U.K. And then it was a business decision to reduce our use of professional services and then implementing to large financial institutions. When you take those, it really created kind of strain on our overall growth rate.

What we have done, David, since then, is we've published our developers' portal for the fintech space. We're putting in place these agreements with large financial institutions. JPMorgan Chase is a good example of that. We're making progress that, again, Stuart will speak to on the analytics front. We are integrating more deeply and improving our reconciliation rate of aggregated data in the wealth market.

So I think all of those things begin to concentrate Yodlee in a way that have resumed strong growth in that business, but it required kind of -- couple of environmental things that were occurring and a couple of business decisions that we've made to make sure that was our long-term grower there. Stuart?

--------------------------------------------------------------------------------

David Michael Grossman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [33]

--------------------------------------------------------------------------------

Actually, before Stuart kind of adds his comments, Bill, what -- when you roll all of that up, when does some of those headwinds diminish enough that some of these growth initiatives start supersede then that we'd see a more normalized growth rate? And what is a normalized growth rate in your view once all this stuff settles out?

--------------------------------------------------------------------------------

William C. Crager, Envestnet, Inc. - Co-founder & Interim CEO [34]

--------------------------------------------------------------------------------

So I think in our guidance, we're indicating low single growth in 2020 for subscription in the Yodlee business. So we think this is a year of kind of working through, and towards the back half of the year, we're anticipating that we're going to begin to get some traction. We're also going to see our relationship with Equifax begin to kind of gain traction towards the latter part of the year.

So, David, I think this is a 2020 story. I think that the work that we're doing positions our data business to resume a healthy growth rate that contributes to the overall kind of objectives that Envestnet has to maintain -- be a strong grower ahead of our peers as the business that we are. And again, Stuart, you can elaborate and kind of be more specific than I am.

--------------------------------------------------------------------------------

Stuart DePina, Envestnet, Inc. - Chief Executive of Envestnet Data & Analytics [35]

--------------------------------------------------------------------------------

Yes. I would just say on your question, I see that part of the headwinds and maybe headwinds isn't the right word to use, but we've -- we know that we've set that bar, so to speak. The headwinds I would probably characterize more in terms of the business that we have, which we call analytics, which is where we've seen more of the headwinds. We're seeing more opportunity and tailwind in the sense of getting more adoption with our solution. We feel that a bit of a bottleneck for us to gain that adoption has been the fact that you have not had a platform, which enables fintech companies specifically to easily integrate our application into whatever offering that they're delivering. We refer to this phrase we use, the developer experience, which is a set of intelligent APIs that any firm can use to deploy their platform, whether it's payments, credits, wealth or otherwise.

So that has really been, in my view, a bit of a bottleneck for us to get to that. And as I mentioned on our last quarter's call, we were behind it because I would honestly tell you in full candor what we've learned from Plaid is that they were able to -- here is a bad analogy, if you will, but I'll use it anyway. We and Yodlee have been working with a lot of large banks primarily over the course of the last 20 years. And then building those relationships and delivering the service, we're kind of working on 1 gene, if you will, for lack of a better term, really in technology. But Plaid was able to come into the marketplace with a 5G solution which really was a bit more modern -- a modern platform. And we've adopted, if you will, and we watched and saw what they've done.

So we've adopted and modified our platform differently not only mimic, but we believe in certain areas, certainly in wealth, revolving credit, we believe that we have a solution that's in place. It's going to be more impactful for the clients that are in those particular channels. So I would say that having been behind the eight ball for the last 12 to 15 months as Plaid has really kind of planted themselves in the payment space primarily as having the market share to a much more modern technology, we believe that -- we knew we had to make up some room. We believe we've made up that room. So I think that we're now at the point of breaking through that bottleneck.

So that's a long way of telling you that we think that we're at the position now that over the course of the next, I'd say, 18 to 24 months as we get more distribution and more -- and capture more market share, not only in our traditional wealth space, but also in credits, payments, conversation with -- in other channels, if you will, we think that we're going to get further adoption. So -- and I would also say that we believe that we -- that a normalized growth rate looks more like a double-digit growth rate. It's probably a low double-digit growth rate. After that, we get to -- I'm not going to forecast as to when that will be because a lot of that is going to be how the market matures. But that's how we see things when we play things out over the long term.

In terms of answering Bill's (sic) [David's] specific question, we are doing a lot of things, obviously, and also I won't bore you with the application. I think everyone on the phone is well aware of what we do in wealth. But I'm really interested in what we're doing outside of the wealth channel, in the wealth segment, by taking some components such as the blocks capabilities through our acquisition of MoneyGuide as well as some of the analytics that we're building to supplement the block's capabilities for a lot of the retail banks and other nonwealth management firms that are using those tools, and we're creating some very effective dashboards so that the nontraditional financial adviser can support end consumers, to give them insights into their spending habits, their spending patterns; to help them understand as they get raises, where should they be putting the incremental dollars that they have? Is there -- as credit gets more challenging for them, where there are better opportunities for them to get better decisions from a credit perspective? Whether that's on a retail credit perspective or mortgage or otherwise, insurance capabilities.

And frankly, what's to come, but there are opportunities for us to kind of bridge, if you will, or bridge into capabilities for insurance offerings, whether that's from a health perspective or life perspective and you are aware of what we're doing around the insurance exchange. But we see an ability with [dads], if you will, to what we call next best action for a consumer to get insights into their daily personal life to understand. But regardless of where they are in the economic ecosystem, whether they're starting out their careers and they don't have a lot of money or they have a lot of money and they're looking for a financial adviser, we believe that working with nontraditional wealth firms who are leveraging our technology that we can provide through technology insights that gives them analytics to help them make better decisions. And those are the areas where, I think, that we can supplement in a meaningful way what we're doing in wealth to drive more -- ultimately to drive more consumers into the wealth side to help advisers have more access to more potential investors and more clients themselves. So I'll leave it at there.

--------------------------------------------------------------------------------

David Michael Grossman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [36]

--------------------------------------------------------------------------------

It's a very useful insight. I just have 1 follow-up. So in the context of you kind of getting back to an equilibrium, is it more of the platform from a technology standpoint has to get there? Or is the gating item right now really more what you said, I think you said channel and market awareness? So I just want to make sure I understand the distinguishing between kind of where the gating factor is near term, if you will.

--------------------------------------------------------------------------------

Stuart DePina, Envestnet, Inc. - Chief Executive of Envestnet Data & Analytics [37]

--------------------------------------------------------------------------------

Bill, I'll take that. To answer your question, the gating factor for us was the platform. Yodlee was built by working with large financial banks, finance institutions primarily. We work with one at a time. We had a heavy professional services implementation. And that kind of -- it was a slow roll, for lack of a better term. So the platform was what we needed to enhance and evolve. So that was the bottleneck that we've addressed.

--------------------------------------------------------------------------------

David Michael Grossman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [38]

--------------------------------------------------------------------------------

Okay. So going forward -- but going forward, I think was the question, Stuart. So you feel like you've got the platform where you want it now, if I'm understanding it correctly, and that the gating factor to accelerating is really more market awareness and distribution, if I heard you right.

--------------------------------------------------------------------------------

Stuart DePina, Envestnet, Inc. - Chief Executive of Envestnet Data & Analytics [39]

--------------------------------------------------------------------------------

Yes. Yes, right.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

We'll take our next question from Patrick O'Shaughnessy at Raymond James.

--------------------------------------------------------------------------------

Patrick Joseph O'Shaughnessy, Raymond James & Associates, Inc., Research Division - Research Analyst [41]

--------------------------------------------------------------------------------

So, Pete, the guide for asset-based cost of revenues suggests that's going to tick up a decent amount in the first quarter of 20% relative to the last quarter of 2019. Can you talk about what's going on there? Is the revenue share to the third-party managers increasing? What's kind of driving that increase?

--------------------------------------------------------------------------------

Peter H. D'Arrigo, Envestnet, Inc. - CFO [42]

--------------------------------------------------------------------------------

As a percentage of the total, I don't think it's changing all that dramatically. So I think the increase is just related...

--------------------------------------------------------------------------------

Patrick Joseph O'Shaughnessy, Raymond James & Associates, Inc., Research Division - Research Analyst [43]

--------------------------------------------------------------------------------

Right. Okay. Maybe I'll follow up with you after the call. And then we've obviously spent a lot of time talking about the data and analytics segment for obvious reasons, but wealth is still obviously pretty important to the company. So a question on that side. Can you talk about the credit and insurance exchanges that you've launched and now you have a couple of quarters under your belt? How are you thinking about the long-term revenue opportunity in these areas and the time line to realize that opportunity?

--------------------------------------------------------------------------------

William C. Crager, Envestnet, Inc. - Co-founder & Interim CEO [44]

--------------------------------------------------------------------------------

Thanks, Patrick. I hope you're doing well. Yes. No, we're excited about it. And there are a couple of elements that I think are important to recognize. One is that these are pretty comprehensive platforms. They're not just product shelves where adviser is able to pick a solution off the shelf and put in a proposal. They're actually tied back into the insurers and the banks to help us execute on these transactions. We're really optimizing the ability for advisory growth and plan to execution of the plan, have the product choice and then go transact it and have all the data come back up so that we can do a comprehensive planning.

So the elements of revenue to keep an eye on would be -- the solution providers themselves are providing license fees to be part of our universe of solutions. We are doing a rev share as we hit certain scale on many of those solutions, especially on the security-backed lending program and then firms' advisers will have a service fee from a platform standpoint to have access to the solutions. So, Patrick, they are well thought out. They're very comprehensive components. Think of them each as a platform for that individual product suite, insurance, credit. And that -- with the adoption, I highlighted advisory firms are beginning to utilize these solutions, and we have a growing network of solution providers.

I neglected to add that on the credit exchange, we're probably going to pursue a second syndicate of banks. We currently have 4 banks from the first syndicate, probably other banks that would be part of it based on needs and feedback from our clients is the -- to where they see these opportunities in the profile of banks that we're working with.

So we see these as instrumental for the future of this unified advice engine. The other thing to realize is that it is not an insignificant workload, and it's not an insignificant kind of investment in time and resources to have built these things. And so in my mind, they offer a very distinct competitive advantage for Envestnet today. And the fact that these platforms are integrated into the investment platform and sit under the market-leading financial planning engine, and how all those pieces are connected, I think, is very competitively advantaged.

--------------------------------------------------------------------------------

Operator [45]

--------------------------------------------------------------------------------

We'll now take our last question from Will Cuddy at JPMorgan.

--------------------------------------------------------------------------------

William V. Cuddy, JP Morgan Chase & Co, Research Division - Analyst [46]

--------------------------------------------------------------------------------

I know it is early but could you -- just a little bit more on the advisory services exchange. First, could you maybe talk us through a little bit more about the rationale and the minority investment in Dynasty? And second, are there more opportunities for Envestnet to pursue partnerships and relationships like this with RIA firms and wealth management firms?

--------------------------------------------------------------------------------

William C. Crager, Envestnet, Inc. - Co-founder & Interim CEO [47]

--------------------------------------------------------------------------------

Yes. Thanks, Will. It's a great question. It's something that we're super excited about. And I think we've chosen a great partner. It's a team that we've respected for a long period of time, Shirl Penney, Ed Swenson who run Dynasty, I think, understand this space and their ability to recruit top advisers at very established infrastructures and bring them to an independent environment has really been extraordinary and important work that they have done.

And so we've recognized that, and we believe that not only is the transition of an adviser, say from a captive environment, but the RIA marketplace itself is seeking to network to acquire, to merge and to grow, both organically and inorganically. We believe that traditionally, the Envestnet platform has been a great tremendous organic growth engine for RIA. We've helped them reduce cost to maintain, helped them to be more compliant and give them the technology and the tools and service support to help them engage their clients at a new level. And you can see their assets' values and the number of clients grow, the longer that they're on the Envestnet platform. So we've helped them provide that.

But the advisor service exchange is helping to grow their business, and we're doing that again in helping RIA firms who are very interested in utilizing capital to merge with other firms or to make investments to really help their businesses grow. We're providing a suite of business analytic tools. We're also providing -- as part of the service exchange, will ultimately provide outsourced access to CFO services and also to marketing services. It's not -- as I look at it, it isn't really exclusive to the RIA market, but that's an obvious place for our Advisor Services Exchange. More and more, our broker-dealer partners as well are very interested in the space, and they're interested in setting up the environment for their top advisers who have the ability to network and grow outside of their firms by making acquisitions and folding those firms into their teams.

And so the advisor service exchange really is an enabler of that. And I believe, kind of, again, helps our clients, both broker-dealers, banks as well as RIA grow. We do it from a technology and advice standpoint, and now we're doing it from a business standpoint.

--------------------------------------------------------------------------------

Operator [48]

--------------------------------------------------------------------------------

This concludes today's question-and-answer session. I will now turn the conference over to Bill Crager for any additional or closing comments.

--------------------------------------------------------------------------------

William C. Crager, Envestnet, Inc. - Co-founder & Interim CEO [49]

--------------------------------------------------------------------------------

Thank you very much, everybody. We really appreciate you joining this afternoon, and we really appreciate your support of Envestnet, and we're looking forward to speaking to you in the next quarter. So thank you, and I hope everybody has a good evening.

--------------------------------------------------------------------------------

Operator [50]

--------------------------------------------------------------------------------

This concludes today's question -- pardon. This now concludes today's call. Thank you for your participation. You may now disconnect.