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Edited Transcript of ENV earnings conference call or presentation 7-Nov-19 10:00pm GMT

Q3 2019 Envestnet Inc Earnings Call

CHICAGO Nov 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Envestnet Inc earnings conference call or presentation Thursday, November 7, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher Curtis

Envestnet, Inc. - Division CFO & Head of IR

* 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

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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

* Devin Patrick Ryan

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

* Hugh Michael Miller

The Buckingham Research Group Incorporated - Director

* Patrick Joseph O'Shaughnessy

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

* Peter James Heckmann

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

* Surinder Singh Thind

Jefferies LLC, Research Division - Equity Analyst

* William V. Cuddy

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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

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

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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 Bill Crager, Interim Chief Executive Officer; Pete D'Arrigo, Chief Financial Officer; and Stuart DePina, Chief Executive of our Data and Analytics business. Our third quarter 2019 earnings press release and associated Form 8-K can be found at envestnet.com under the Investor Relations section.

During this conference call, we will be discussing certain non-GAAP information, 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.

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

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Thank you, Christopher, and hello, everybody. As Jud wrapped up last quarter's conference call, he closed saying, "I look forward to our next conversation." Jud relished these updates. He looked forward to sharing our results and articulating our vision. They were important milestones for Envestnet. Sadly, today marks a different milestone. Jud and I worked together for 20 years, building a company that was sparked by vision while fueled by determination, tenacity and commitment. From the first line of code, the first adviser, the first account, to climbing the steps to ring the opening bell on The New York Stock Exchange, beginning a new chapter for a founder, maybe the crowning achievement of a journey, but for Jud and for Envestnet, the beginning of something much more meaningful, creating a company driven by the purpose to empower the delivery of better advice to millions of families. This is important work. This is the work we have been doing. This is what we've been committing ourselves to for nearly 20 years.

On October 3, we lost Jud Bergman and his wife Mary. The incredible life force, incredible energy, incredible light, they both offered our world somehow and devastatingly ended. It's very hard to understand what happened. The word shocked, breathtaking, stunned don't describe it. Jud was not only a business partner, he was a best friend. He and Mary meant so much to so many people, their reach and their humility, their grace and their impact with people feeling close to them, part of them, they left people motivated and they left people hopeful. These have been hard, dark days, but somewhere in the darkness, there is light. Jud and Mary taught us this. It's not enough to endure, it is not enough to muddle through, it is more important to be driven by purpose, to have an impact, to make things better and to use this very powerful world is more important to prevail. It's important that we keep their spirit, their amazing capacity for compassion and sacrifice and determination, all of these things motivated by purpose to achieve the vision that we have been working on. And as we do, the way families will achieve their financial goals, they'll be more complete, they'll be more secure and they'll will be more meaningful. We are incredibly committed to achieving this mission. We have not paused. Today, we are all in.

Our original vision was to empower financial advisers with the tools they needed to better serve their clients. 20 years later, we've become the operating system for financial wellness, helping connect consumers daily financial lives for the fulfillment of their long-term goals. It starts with data, buying a cup of coffee, paying a bill, depositing a check. And that data feeds the financial plan. Planning, so critical. The bridge, gateway for individuals to achieve their goals. This leads towards the answers, the solutions, the strategy to achieve them with the planning software, informing where to invest, how to invest, how to ensure, how to manage credit, all the things that impact the consumer's ability to reach their long-term goals. That vision, making financial wellness a reality, is very, very clear.

We believe we have all the pieces in place today. We have work to do, completing integrations. We have work to do, making it easier for advisers to leverage all that Envestnet brings to bear, but we are making progress. We are sensing the impact of that progress, and we certainly understand how this work sustains growth for our company.

Let me share how in the third quarter we've added clients, expanded what we do, added capabilities and solutions and integrated our offerings. Recently, we expanded our partnership with Capital Group, which will leverage our client onboarding, financial planning, proposal and performance APIs. They utilize something we call our open ENV network, which enabled Capital Group's investors to better plan and manage their American fund accounts. This is an example of how we've become more agile and opened our platform for our clients to utilize our infrastructure to meet the unique needs of their clients.

We recently welcomed our seventh and eighth major carrier to the insurance exchange, Transamerica, an innovator in fee-based annuities; and AIG, currently the #1 provider of annuities in the United States. We're making similar progress with our credit exchange. Several lenders have agreed to participate, with more interested. The credit exchange has launched and today can process security-based loans. Our enterprise customers are pursuing access to both of our insurance and credit exchanges, and we expect steady adoption in the quarters ahead. This is an example of how we're broadening our offerings, extending out toward this vision of integrated advice.

Our recent acquisition of PortfolioCenter is progressing well. Since April, nearly 100 of their RIA clients have signed long-term contracts with Tamarac, driving meaningful increases in subscription revenue as these firms migrate to the Tamarac suite of solutions.

In our data and analytics business, we noted some weakness last quarter primarily in our investment manager data analytics offering. In the third quarter, we have signed new clients, and our renewal rates have been very high, but the contract values are lower given the increased number of alternative data sources available for investment managers. We've been working on and making very good progress in new use cases for our data analytics offering, including in different market research areas. And those feel very promising to us, but are early, and this will take time.

Just as we started the call today, we announced a strategic partnership with Equifax. Equifax will use our aggregated data for a new credit decisioning solution. This will empower people to enhance their credit data as they establish themselves as strong candidates for loans and other services. We continue to be bullish on the opportunities in credit decisioning, and this is a very good step towards achieving the opportunities that we see ahead.

Other promising highlights in the data business include how we are elevating our aggregation solutions into data-powered fin apps, especially with larger financial institutions. These are beginning to gain important adoption. And over the course of the last 12 months, we've made significant progress improving the quality of data consumed by our wealth platform. It's essential as the data -- this data fuels our financial wellness solutions.

Earlier this week, we made an exciting announcement about the addition of Yodlee FinApps to MoneyGuide's MyBlocks offering. These will be delivered in our client portals. Why is this so important? It demonstrates the power of integration and what lies ahead for Envestnet strategy. With these tools, advisers will help their clients answer essential questions on their net worth, on their cash flow and really help them understand their ability to spend while remaining on track to achieve their long-term goals. These are consumer applications. Individuals will use them, but they are delivered by their financial adviser. What this does is connect the in-person relationship with advisers to the day-to-day interaction with the technologies that their clients will use. It enhances the scope of how advisers serve clients, how they help them and how they add value. We believe these blocks and the combination of Yodlee into MoneyGuide is an important innovation in financial planning. This is just one example, but it's a great example of how we are making progress in integrating the powerful components of the Envestnet platform.

We're committed to developing a unified advice offering that empowers families to achieve financial wells. We have work to do, but we are beginning to demonstrate the power of what lies ahead.

Let me finally say this. We reached the very important milestone this last quarter. Today, Envestnet serves over 100,000 financial advisers. These advisers oversee nearly 12 million investor accounts with $3.5 trillion in assets on our platform. These advisers benefit from Envestnet's wealth management platform, our data and solutions as they help clients achieve their financial goals. Given that each adviser has the best understanding of their clients' needs and knows how best to serve them, Envestnet has created an increasingly powerful network, which provides unmatched capability and scale. It gives the adviser the amazing ability to focus on each client as a very important individuals that they are.

We believe advice is essential. That's been the case since we started in 1999. Our work continues to be focused on empowering it.

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

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

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Thank you, Bill. Before I review our results and outlook, I would be remiss not to acknowledge the devastating loss of a leader, mentor and a close friend. Many of you know, Jud and I worked together for the better part of the last 30 years, both at Envestnet and before, and I will miss him tremendously. We are inspired by Jud's memory and his spirit to drive us in the company forward, and our hearts go out to Jud and Mary's family.

Turning to our performance for the third quarter. Results were very much in line, if not slightly better than anticipated. Adjusted revenue increased 18% to $239 million compared to the third quarter of 2018. Adjusted net revenues grew 20% to $175 million. Recurring revenue was 96% of adjusted revenue with the components of asset-based revenue and subscription-based revenue in line with historical periods. Asset-based revenue was 53% of adjusted revenue, which is 36% of adjusted net revenue, while subscription-based revenue was 43% of adjusted revenue and 59% of adjusted net revenue.

Excluding the contributions from PortfolioCenter and MoneyGuide, adjusted revenue grew 9% from the prior year period.

Adjusted EBITDA was $54.5 million, a 28% increase over last year. And adjusted earnings per share was $0.60 in the third quarter, $0.07 or 13% higher than the third quarter of last year.

Next, I'll summarize our outlook, which is presented in full in our earnings release, starting with the fourth quarter outlook comparing to the fourth quarter of 2018. Adjusted revenue, we expect to be between $238.5 million and $240 million, which is up about 14%; adjusted net revenues between $173 million and $175 million, which is an increase of 16% to 17%; asset-based revenue of between $128 million and $128.5 million or about 4%, 4.5% higher than last year, and this implies an effective fee rate on our end of September assets under management and administration of roughly 10.1 basis points; subscription-based revenue between $104 million and $104.5 million, up approximately 34% compared to the prior year on an adjusted basis; professional services and other revenue between $6.5 million and $7 million.

Cost of revenue, we expect to be between $73 million and $73.5 million. And adjusted EBITDA should be between $60 million and $61 million, which is a 26% to 29% increase compared to 2018. Using a normalized long-term effective tax rate of 25.5% and assuming approximately 54 million diluted shares outstanding, this translates into adjusted earnings per share of $0.68 for the quarter.

For the full year 2019, we are raising the adjusted revenue range and tightening the adjusted EBITDA range relative to what we provided last quarter. For the full year, we expect adjusted revenues to grow roughly 11% to 12% to a range of $905.5 million and $907 million, adjusted EBITDA to grow 22% to 23% to a range of $192 million to $193 million and adjusted earnings per share of about $2.14, growing approximately 11% over last year.

We ended the quarter with $72 million in cash and $618 million in total debt. During the third quarter, we amended our credit agreement, expanding the capacity to $500 million and extending the maturity to 2024. While the pricing tiers are unchanged, the leverage ratios for those tiers are now based on a new definition of net debt. And our net leverage ratio at the end of the third quarter was 2.9x EBITDA, which is consistent with our anticipated progress.

Near-term priorities for our cash flow continue to be investing in the business to support our long-term growth, whether through acquisitions or new initiatives and paying down debt. We expect to settle in cash the $172.5 million of convertible notes, which mature on December 15 through a combination of cash on hand and a draw from our revolver. Thank you again for your support of Envestnet.

At this point, I will turn it back to Bill for his closing remarks.

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

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Thank you, Pete. We are very pleased with our results for the third quarter and are well positioned to finish the year with good momentum going into the year 2020. The Board, our executive team and I are aligned and focused on our financial wellness road map. We are moving forward in executing it. We are committed to following through on Jud's vision. We are committed to driving continued revenue growth while using our scale and operating leverage to grow earnings faster over the long term. We'll be very intentional and very focused in the months ahead, as I believe the stage is set for the industry to enter its next transformational era.

From commission to fees, from fees to planning and now from planning to integrated advice, this is powered by data, powered by software and implemented through solutions across investments, insurance, credit and more. This is where Envestnet is positioned today and is where our industry is headed tomorrow. Envestnet's story is about the future. Our focus and our work remain very much about what lies ahead.

Before I wrap up, I do want to acknowledge the Envestnet team, our employees who have been extraordinary over these last weeks. I'm so proud to work and partner with our team. We're doing great things and that's very much because we've an incredible extraordinary group of people. Jud was so proud, I am so proud. And truly, over these last weeks, I have been amazed. Thank you again for your time this afternoon. Thank you for your support of Envestnet.

With that, Pete, Stuart and I are happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go first to Devin Ryan from JMP Securities.

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

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And I would also like to formally extend condolences to the Bergman family and the entire Envestnet team here. So with that, I guess, the first question would just be with the loss of Jud, obviously, tragic, and then it sounds like from the prepared remarks that the strategy isn't expected to change much. But I'm just curious kind of with the management team in place today, how the decision-making process will change at all just given that he was such a driving force? And then I also think that some believe that outside interest in the company that an acquisition opportunity could increase. So I'm just curious how you would kind of address that possibility today under the circumstances?

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

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Thank you very much, Devin, and very much appreciate your thoughts. We are a tight knit group of people and had worked together for years. Jud and I worked together for 20 years since the beginning of Envestnet and as a core team that's really supported Envestnet since our beginning. Stuart DePina ran Tamarac, that was a transaction that we did about 7 years ago, and has really become a core leader with us as we've kind of established the vision, created the road maps and began to execute towards this very powerful concept of creating a network and a foundation to make financial wellness a reality. We are super focused on that. We are working, as we always have, as a very collaborative management team, leadership team, and we are -- we have a group of people here that know the industry, I think, better or as well, if not better, than anybody else in our industry. And we also have a cohesion or a culture of collaboration. It's just something that is -- we've nurtured and fostered for years, and Jud led that with his vision, but then all of us really contributed to filling in those pieces and making that vision come to life by executing those strategies, and that's how we've been working and that's how we intend to work.

M&A is speculation really, and I have no comment at all on that.

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

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Okay. Got it. And then just a follow-up on the data analytics. Appreciate some of the commentary. It sounds like you're exploring some new opportunities. So if at all possible to maybe expand a little bit about those. I know some of them may not be necessarily near term, but just any more detail you can provide? And then in terms of some of the headwinds you mentioned last quarter, like the investment management headwind, is it fair to think that could continue for the foreseeable future or is there any sign of that abating?

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

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Yes, let's -- happy to answer those questions. I'm going to introduce Stuart DePina who joined the call this afternoon. And Stuart, who is Head of Tamarac, and over the last year has really been the Chief Executive of our data and analytics business. So we asked him to join today. And Stuart, why don't you take that question?

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Stuart DePina, Envestnet, Inc. - Chief Executive of Envestnet Data & Analytics [6]

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Yes, I'll go backwards on that, Devin. First and foremost, on the data, on the work that we're doing with the investment management piece, we certainly did see some headwinds. A lot of that was driven at the tail end of 2018 going into 2019, where a lot of the managers were suffering, if you will, from a budgeting perspective because the market was pretty tight. And they've been slow to reengage on a full basis. As Bill did mention in his comments, we have been very successful in renewing the engagements that we have with those firms. So it really is less an issue with that. What we're trying to focus on is how do we continue to deliver incremental value adds to those firms. We're using alternative data. We are extremely bullish on alternative data and its use, not only in investment management community, but now I'm going to go to the first part of your question, which is what are some of the other options and other opportunities that we're exploring? We see a pretty broad opportunity in the marketplace. We are -- frankly, our pipelines have never been as full simply because we're much more active now that we have new solutions and new insights from our analytics products that we're introducing into the marketplace. It's too early to tell whether and how successful we're going to be. We do believe that we're going to be successful. We actually have some, I'm going to call it, minimal revenue from deals that we closed that are outside of the investment management community. So it's certainly an early indication, but it's one that we have a lot of confidence in. And a lot of that really today is working with marketing research firms who are looking to use some insights from the data that we have and that we collect on our platform.

I think the other area that I'd call out is a relationship that we did announce with respect to Equifax. We certainly see, from a data perspective, credit and credit decisioning solutions being a very fruitful and a very successful opportunity for us. Equifax and we actually decided to take a different approach, if you will. Obviously, we made a mention earlier this year of some of the challenge that we had with the prior vendor. We ended up abandoning our initial approach, and we decided to go down a different path and a different route. And we've identified a new partner, frankly, in that regard with a completely new solution as well as a new approach to how we're going after credit. So I would say one of the great benefits that we have in ending up where we ended up was the Equifax sales organization and distribution channel is much greater than we would have been able to accomplish on our own. So we're extremely bullish on with the prospects of that -- the opportunities that, that brings to us well. Thank you, Devin.

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Operator [7]

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Next, we'll go to Peter Heckmann from Davidson.

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Peter James Heckmann, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [8]

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Stuart, just on that last point, can you talk a little bit about the time line with Equifax in terms of developing the new solution, starting to market it and maybe do some pilots? Do you think you can be in the market with that early in 2020?

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Stuart DePina, Envestnet, Inc. - Chief Executive of Envestnet Data & Analytics [9]

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Yes, I'll answer that question 2 ways. So it's a bit of a versioning, if you will. Version 1 will be out in early 2020. The work has been -- we've been working on that solution. While we just signed the agreement, we've been working on that solution for about the last 30 days. We believe that -- we believe to jump start that in the latter part of Q1 of next year with not the full complement of functionality that we'll have ultimately, which we believe that will be in place by the end of 2020, so that we'll be in full mode, distribution mode by 2021.

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Peter James Heckmann, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [10]

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Got it. Got it. Okay. And then just as a second question, can we talk about how you anticipate seeing the contribution from the lending exchange and the insurance exchange, manifesting them in the results? Just a little bit of a thought about the ramp and maybe the margin characteristics of it.

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William C. Crager, Envestnet, Inc. - Co-founder & Interim CEO [11]

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Yes. Thank you, Peter. We've made a lot of progress on the insurance and credit exchange. And if I could just kind of go a little deeper on what these are, I think it's really helpful in understanding what the revenue opportunities will be. These are -- we've been working closely with providers, insurers and banks to provide solutions up through our platform to our advisers. It is not simply a marketplace, it is a full end-to-end kind of execution engine that is integrated into the Envestnet environment. So as an adviser goes to make a propose -- creative proposal or a financial plan and it indicates as part of the strategy to utilize an insurance solution or a credit solution, now the inventory of those solutions are sitting right inside that platform and with one click, that adviser is able to execute the investments components of it, the insurance component or the credit component. All that information kind of sits in our platform comes back up, and we'll be able to create performance reporting for that individual, that looks at the holistic view of their financial picture. So we've invested a lot from a technology standpoint to make that possible. And in the third quarter, we began activity on the insurance exchange to open accounts. We have early clients who are utilizing that insurance exchange and with promising results. So we're seeing a lot of our proposal activity. We're beginning to see the opening of accounts. We will, in 2019, also begin to engage credit solutions for our advisers as well.

As part of our strategy, revenue strategy, really, it's seen in 2 different ways. One is that the carriers and the lenders are providing a fee or supplying a fee to us to be part of our exchange and then the firms are utilizing a platform fee to access these solutions. It's early days. I think the feedback has been very promising. And when you see the totality of the capability that's here and the integration of the capability here, we believe it will be a significant contributor as we ramp up in the quarters ahead.

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Operator [12]

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And we'll go next to Will Cuddy from JPMorgan.

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William V. Cuddy, JP Morgan Chase & Co, Research Division - Analyst [13]

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Before my questions, I just want to say I have a tremendous amount of respect and appreciation for Jud's contribution to the industry and to Envestnet. I mean it was a loss for the industry last month.

Turning to questions kind of staying focused on the data analytics team. Stuart, could you elaborate maybe on some of the faster-growing products in data and analytics? And you had mentioned some new solutions and insights. Could you elaborate on areas of the market that you find most attractive? I think it sounds like based on that market research potential, it's about finding new distribution channels to sell current product. But I'd be very interested to know more about what you're thinking there.

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Stuart DePina, Envestnet, Inc. - Chief Executive of Envestnet Data & Analytics [14]

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Yes, and I will. I'm going to segment these products, if you will. I will characterize them as solutions. In the area of investment management solutions in the -- we call them data insights, we do believe that there are -- that there is a broad market for our solutions and our insights in the specific segment of consumer research. We do believe that there is a -- and again, I'm basing the belief off of the fact that there is -- alternative data is a relatively new value proposition from -- beyond traditional data solutions and available data. So we're seeing, if you will, that there's a market opportunity there. And we believe that the applications that we have or the solutions that we provide from the data that we have are a bit unique in the marketplace, and we've seen some of that with the investment managers that we work with, and so we're hoping that, that will be true and believe that, that will be true in consumer research.

I would say that -- I'm going to revert back a little bit to what is our core business. And our core business is really providing data aggregation solutions to large financial institutions, mostly retail banks. And we are seeing a meaningful amount of adoption and interest of our -- from our core clients for solutions that we're bringing in the marketplace where we're adding value to the data that we're gathering. And examples of that, we call it, TDE, it's transaction detail enrichment. A lot of the banks that we work with, whether the credit card processors who just in their core systems, lack the capability to really refine some of the information that flows through their system, so that they can use it in a more meaningful way. So we -- through our data science capabilities and resources, we've actually delivered now to several banks a solution that enables those banks to frankly extract the data out of their platforms, we leverage our analytics against it, and we actually provide the information back to our -- those same clients, those banks, and it's much more intelligible and it's meaningful for them and they can actually take action on it.

So there's a fair amount of -- there's a fair market there for us. And again, that market is one that we can tap in to because we already have relationships with a lot of the large financial institutions to begin with. So the relationships exist, we have access to the data already. We're just trying to -- we're trying to leverage up, if you will, the foundation that we currently have. We're also seeing a very strong interest from those same financial institutions as well as some FinTech providers. And this is something that's also crossing over into our wealth clients. We're starting to see a very strong interest in our ability through again the data science capabilities that we have and the analytics capabilities that we have to provide insights down at the consumer level, and Bill mentioned it in his comments; when data is flowing just on an ad hoc basis, if you will, when data is flowing through financial institutions from your general spend, a lot of consumers aren't really tracking what that spend is. And so we're able to categorize some of those spends, provide insights through information and reports back to the consumer, so they can not only know what they're spending, but in addition to that, because we have a vast majority of consumers that we work with, we're up to over 20 million consumers that we work with, we have their data, we actually can benchmark information from the consumers just to give them some insights into -- and I'm going to make up a use case as an example.

A millennial living in a certain geographic market at a certain income level, what is their spend on subscription services relative to their peer group? And you can define what your peer group is. There's a lot of flexibility there. So I give you that overview as an example to see that there's a lot of interest. And I don't want to go too far to say that we generated a lot of revenue here yet because we haven't. We're actually just starting to see a fair amount of interest, and we do believe that there is an upside for us to continue to deploy and deliver those types of solutions that are going to generate some meaningful subscription revenue from our existing client base in that regard. So we see those things.

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William C. Crager, Envestnet, Inc. - Co-founder & Interim CEO [15]

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And then, Will, I would just -- this is Bill. I would just add that I think we're all super excited about how the yielding data is powering these fin apps that are part of the MoneyGuide blocks. And these are pieces that advisers are going to extend to their clients. So keeping track of through their daily interactions with their money, keeping track of those steps or those little data points, they kind of roll up and really begin to depict spending habits and anticipate spending habit and how that connects to somebody's financial plan. These blocks are pieces, they're building blocks, that altogether lead up to a financial plan. So as you're using these apps, you're beginning to plant seeds that helps an individual in shorter steps kind of fulfill the questions that we need to be answered to create a financial plan. We think this consumer piece powered, delivered by advisers is an incredible bridge, and we think it's a breakthrough. And really, it is a powerful example of the combination of data and software with our platform.

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William V. Cuddy, JP Morgan Chase & Co, Research Division - Analyst [16]

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Great. And then just on the quarter, the subscription revenue came in a little bit higher than the guide. What drove that?

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Peter H. D'Arrigo, Envestnet, Inc. - CFO [17]

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There was some transition from some clients that move from asset-based pricing to subscription-based pricing that was a little bit of what happened, and then it's just client conversion and the timing, otherwise. So pretty small outperformance. But as I said at the beginning, slightly ahead of our expectation.

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Operator [18]

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And next, we'll go to Chris Shutler from William Blair.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [19]

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My condolences as well. Wanted to dig into the Equifax announcement this afternoon a little bit more. If you can just walk us through at a high level how that solution is going to work? I'm sorry, I haven't had a chance to go through the press release in detail. And it sounds like you're going to be leveraging Equifax for distribution. So maybe just -- is that right? And how should we think of this? Is this some kind of revenue share agreement?

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Stuart DePina, Envestnet, Inc. - Chief Executive of Envestnet Data & Analytics [20]

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Yes and yes. We are definitely going to leverage their -- obviously, our clients will want to use the solution as well. But we will leverage their distribution channel, clearly, to get the product broadly distributed. They actually have installed base where they're offering a lot of elements from a credit decision perspective already. So we see a relatively quick and easy -- and easier adoption by leveraging that channel, and it is a revenue-share agreement that we have with them.

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

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And can you talk about the decision for this to be an exclusive deal among the credit bureaus?

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Stuart DePina, Envestnet, Inc. - Chief Executive of Envestnet Data & Analytics [22]

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Yes. Honestly, it was their preference. And the reality is we've had conversations with the different credit bureaus, and there's 3 of them that are meaningful. We feel that the economics are better for us. If we could -- in order to be in a position where we can leverage the distribution channel, in order to be in a position where we can frankly they've got a very unique offering from a consumer perspective and who they touch. And we -- there's just more value, if you will, in getting deeper and richer relationship by having an exclusive relationship. It works for us on the upside and it works for them on an upside because we can really go to market together. I think most of you on the phone realize that Yodlee has operations outside of United States and given the fact that Equifax is well entrenched outside of the U.S. as well, it gives us a heads up there or it gives us a lead there as well.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [23]

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All right. And then any update on the, I guess, the leadership and organizational structure of the firm? I mean at what point do you expect to be able to communicate that to investors?

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William C. Crager, Envestnet, Inc. - Co-founder & Interim CEO [24]

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Thanks, Chris. This is Bill. So of course, the phone call we received on October 3 was devastating, and the way that our organization responded to that, I think, was incredible. We immediately assembled the leadership team. We engaged the Board of Directors. The Board of Directors met, they implemented the emergency succession plan. At this moment, Ross Chapin is the Interim Chairman of the company, and I serve as the Interim CEO of the company. Over these last 4 weeks, management leadership, myself has spent a lot of time with the directors, and we're pursuing a process, and it's a process that I think is important and one that I believe will continue to have us focused on the long-term vision and goals of the company. We've been working, Chris, with our heads down focused on making sure we didn't skip a beat and not taking our foot off the gas. We've been very focused on continuing the momentum and actually trying to make sure that the marketplace understands and doesn't doubt our degree of conviction. I would expect that over the next couple of weeks, months, there'll be some clarification about the leadership of the firm. But in the meantime, I don't think anyone should mistake how focused we are on what we're doing.

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Operator [25]

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And our next caller is Chris Donat from Sandler O'Neill.

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Christopher Roy Donat, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [26]

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I will also add my condolences here. I wanted to ask 1 question about some changes in the marketplace in the last couple of months that I'm not sure have direct impact on you, but I want to get your thoughts on. And Bill, with the online brokers going to 0 commissions for their brokerage businesses, as it happens, a lot of those same online brokers are also custodians for RIAs. So I'm wondering if you expect any changes that will affect advisers. And are there any potential knock-on impacts to Envestnet?

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William C. Crager, Envestnet, Inc. - Co-founder & Interim CEO [27]

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Yes. The commoditization to the 0 is an interesting dynamic, and one that you could see the trend and where they're headed. And so the statement has been made. But what I really believe very deeply and what we're working really hard behind is that we have to make sure that the value of advice is elevated. And that the value of advice to the consumer, to the American family is crystal clear. So in order to do that, we have the elements to execute. You have data that feeds the planning module, the planning module takes the answers, the answers are executed across a broad set of solutions, integrated from investments to insurance to credit as data is loaded back up, and we're presenting a holistic performance report so the client understands they're well better than ever before. That is much different than a 0 fee trade. And so we believe that there's a vast difference between a commission for no cost and the value of advice that helps a person achieve financial plan. That hasn't changed. If anything, that has probably focused advisers on making sure that they're providing differentiated advice. And in that case, we clearly are advantaged.

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Christopher Roy Donat, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [28]

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Got it. And then for Pete, just one clarification. In the data and toward the back of the release, it looks like there's $18.8 billion that was reclassified. So does that reclassification, is that part of the reason why the fee rate is going to likely tick up to 10.1 basis points? In other words, you've got whatever the mix of numerator and denominator going there? Or is this something that's factoring into the higher fee rate?

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Peter H. D'Arrigo, Envestnet, Inc. - CFO [29]

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That's a lot of what's going on. There's a little bit of mix in sales too, but that's a bigger driver. It's -- we've talked over the years about how conversions will have an impact on fee rate. And when you bring on a lot of reporting assets, there may be a step down. This is a similar dynamic in the opposite way where we -- the revenue is the same for the most part from asset based to subscription based. But since it's out of the asset based at what is a low effective fee rate, then the average of the whole thing goes up a little bit. So that's exactly what's going on for the most part.

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Operator [30]

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And we'll go next to Surinder Thind from Jefferies.

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Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [31]

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I apologize if I missed this, but did you disaggregate the subscription licensing into its different components of the growth rates within Tamarac and the enterprise business?

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Peter H. D'Arrigo, Envestnet, Inc. - CFO [32]

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No. It's all aggregated in our reporting and in our guidance.

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Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [33]

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I guess, any color on the quarter and how those subsegments trended?

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Peter H. D'Arrigo, Envestnet, Inc. - CFO [34]

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I mean again, not much to talk about the distinction. I would say, to characterize it as in line with what we have expected and what we've experienced is probably the best expectation to take away from it.

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Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [35]

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Fair enough. And then following on from that, it looks like there's a bit of a dip in the professional services revenues. It looks like it's going to be the lowest in a number of quarters at this point. Any color that you can provide there in terms of -- in the past, you guys have talked about that as a leading indicator for possibly subscription revenues and those kinds of things.

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Stuart DePina, Envestnet, Inc. - Chief Executive of Envestnet Data & Analytics [36]

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Right. So there's 2 parts to that, really. One is that, we had mentioned earlier that we're, again, slightly ahead on subs overall compared to the guide from last time. That's another element of over -- I think the quarters starting last year, we talked about an expectation that increasing professional services or PS revenue would be increasing, which would lead to higher subscriptions later as those products are adopted. I think that's part of what we're seeing there. But there's a finer distinction with professional services where, as we are focused more on the wealth market, we are -- it's -- within data and analytics, the professional services revenue is harder to put into contracts. And so as we've, again, looked to further integrate and connect the business units, as we've talked about in this year, our expectation is that professional services would not be growing as fast as in previous years, and actually, it was a pretty big quarter last year for PS. So not surprising that we're seeing this go down for kind of that business rationale as well.

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William C. Crager, Envestnet, Inc. - Co-founder & Interim CEO [37]

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And Surinder, this is Bill. I just wouldn't read into that. That's kind of a slow in the conversion pipeline at all. I think it's just our emphasis on it and how we're onboarding certain clients in the wealth market.

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Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [38]

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Understood. That's helpful. And then turning to the asset-based business. The AUM adviser count was relatively flat quarter-over-quarter. Like, anything that you guys are seeing there? It's a little -- it seems like there's a little bit of counterintuitive in that. We looked at last quarter, and gross sales were -- despite all the volatility, gross sales held up. Redemption was only pretty low...

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

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No. I don't think...

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Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [40]

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Pretty low when we fast forward to this quarter -- I'm sorry, go ahead.

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Stuart DePina, Envestnet, Inc. - Chief Executive of Envestnet Data & Analytics [41]

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I was going to say, it's more to do with the reclass of the asset-based business to subscription, those advisers also move.

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William C. Crager, Envestnet, Inc. - Co-founder & Interim CEO [42]

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Yes. So that was a decent-sized adviser team or a firm that left. And so the number was overcome by new advisers this quarter, but it's really -- it has everything to do with the reclass.

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Operator [43]

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And we'll go next to Hugh Miller from Buckingham Research.

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Hugh Michael Miller, The Buckingham Research Group Incorporated - Director [44]

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Just had 1, following up on kind of the movement to 0 cost trades. We've read a bit about, I guess, in that scenario, the potential for maybe an increase in breakaway advisers from the wirehouse channel. I was wondering if you had a view on that. And then just as we think about a scenario where we continue to see general cost pressures on the industry. I guess, how do you think about maintaining the stickiness of your pricing and your products in that scenario longer term?

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William C. Crager, Envestnet, Inc. - Co-founder & Interim CEO [45]

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Yes, thank you. I think the brokerage-based business that is charging, that is going to maintain these commission fees is going to be under pressure. That's whether you're working at a wire perhaps or you're working at a broker-dealer, in which there are -- those fees are not 0 today. So that provides an advantage for the direct-to-consumer, the direct retail business, in some cases, the RIA business. So it will shake out. I do believe, again, that this is an incremental cost that if focused on becomes meaningful, but the answer to that is creating material value in the advice that's being offered. And to me, that is where our industry needs to focus and evolve, so that we're providing, the industry is providing this degree of integrated advice. I used this in the comments earlier, but I think it's really important, that's where we are today. That's where Envestnet is today is by bringing these pieces together where we give the adviser the ability to offer this holistic integrated advice and the industry is headed there. What the fees to 0 are going to do is accelerate it. So yes, I think that in isolation to look at an incremental cost, there may be some transitions. I don't believe there'll be meaningful transitions. I believe what will be meaningful is advisers acceleration around this integrated holistic value-focused advice.

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Operator [46]

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(Operator Instructions) We'll go next to Patrick O'Shaughnessy from Raymond James.

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Patrick Joseph O'Shaughnessy, Raymond James & Associates, Inc., Research Division - Research Analyst [47]

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My condolences as well. Maybe just a follow up on that last question. When you think about the software, the tools, the products that are available to independent advisers now, what's left, if anything, where you would say that the independent adviser is disadvantaged relative to somebody affiliated with a large wirehouse or a large broker dealer?

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William C. Crager, Envestnet, Inc. - Co-founder & Interim CEO [48]

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Patrick, I don't think there's a gap. I think that across the industry, the elements that are becoming essential are data and how you integrate data into software. I'd say the crown jewel, if you will, of the software today would be planning. So planning-based firms and how they're integrating that software is essential. And then how those -- that software is network to solutions. And I think where Envestnet has taken a lead is to build out not only a very comprehensive investment management platform but to very rapidly expand or broaden those solutions to include insurance and include credit and have that as an integrated whole. So I believe that the definition of a platform or the capability that need to be at the fingertips of the adviser are sitting here within Envestnet's product suite. So I don't believe that there's a difference between the independent today and in the wire. Where there are slight differences is that in these in the wires, you have access to capital markets, you have access to institutional services that are often for whether those are trading capabilities or some other investment banking capabilities, those do not exist in the independent market, but they do in the wires.

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Patrick Joseph O'Shaughnessy, Raymond James & Associates, Inc., Research Division - Research Analyst [49]

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Got it that's very helpful. And then, Stuart, maybe that -- since you're on the call today, I want to take advantage of that by asking, how do you look at Yodlee's competitive advantages relative to some of your data and analytics competitors, I think, especially in light of some of the consolidation that's taking place in the aggregation landscape?

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Stuart DePina, Envestnet, Inc. - Chief Executive of Envestnet Data & Analytics [50]

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Yes. So it clearly has been something we're focused on. Obviously, I think most of you on the phone know the firm Plaid, who has been what I'd characterize as the unicorn in the aggregation space over the course of the last couple of years, and I would say that a lot of the work that we're doing and looking at what their approach has been in the marketplace is something that, frankly, we've -- just earlier -- just last week, we announced a new version of our developer experience, which was intended to put us on, what I'd characterize, as solid footing with Plaid. One of the things we -- I believe that we've fallen behind from a modernization standpoint with the platform and we've -- over the course of the last couple of years, and I think that this new release has really put us, frankly, at least on par, if not ahead of them a little bit. And we -- and frankly, that was in reaction to their approach and what they've done. So we're -- we believe that while there are certainly competitors and a lot of the competitors are being brought to the marketplace for how much money is being invested in FinTech generally, broadly, I should say, we're obviously looking at that. I think from an analytics standpoint, we are -- pure analytics standpoint, I'm not aware of -- I would not say that we have -- that we're behind there. I frankly think that we're ahead there. A lot of this has to be the fact that we have such a broader universe of data that we have accessible to us. And we also use and have a legacy now that we built up off a pretty strong and rich data science team, which is why frankly if you look at the offerings the competitors bring to the marketplace, they're not leveraging alternative data the way we are. So I think that we're ahead there.

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Operator [51]

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And now I'd like to turn it back to Bill Crager for closing remarks.

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William C. Crager, Envestnet, Inc. - Co-founder & Interim CEO [52]

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I want to thank everybody for attending today's call, but also after hearing the news of Jud for the outpouring of support, it's really meaningful to us, it truly was helpful and incredibly meaningful. So thank you so much. Thank you all for your questions today, and I am looking forward to our next conversation. Thank you.

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Operator [53]

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And that does conclude our call for today. Thank you for your participation. You may now disconnect.