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Edited Transcript of ENV.N earnings conference call or presentation 5-Nov-20 10:00pm GMT

·48 min read

Q3 2020 Envestnet Inc Earnings Call CHICAGO Nov 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Envestnet Inc earnings conference call or presentation Thursday, November 5, 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 * William C. Crager Envestnet, Inc. - Co-Founder, CEO & Director ================================================================================ Conference Call Participants ================================================================================ * Alexander Kramm UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Exchanges, Ebrokers * 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 * Devin Patrick Ryan JMP Securities LLC, Research Division - MD and Equity 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 JPMorgan Chase & Co, Research Division - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, everybody, and welcome to Envestnet Third Quarter 2020 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. -------------------------------------------------------------------------------- Christopher Curtis, Envestnet, Inc. - Division CFO & Head of IR [2] -------------------------------------------------------------------------------- Thank you, and good afternoon. I'm joined today by our CEO, Bill Crager; and CFO, Pete D'Arrigo. Our earnings press release, supplemental information and associated Form 8-K can be found at envestnet.com under the Investor Relations section. During the call, we will be discussing certain forward-looking information. Such comments are not guarantees of future performance, and therefore, you should not put undue reliance on them. We also will be discussing certain non-GAAP information. Please refer to our press release and SEC filings for more information on forward-looking statements, risk factors associated with our business and required disclosures related to non-GAAP financial information. With that, I will turn the call over to Bill. -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Christopher, and thank you, everybody, for joining us today. I hope that you and your families have remained safe and healthy during these last months and also that maybe you had the chance to catch up on your sleep after that sleepless election night earlier this week. In such a dramatic and disrupted time period, it is noble to begin with the progress we're making. Such mission is to make financial wellness a reality for everyone. That is our purpose. We have a clear strategy to achieve that mission, which we've spoken about in prior calls. Here, we bring together our data solutions with our market-leading technology and network to the broadest set of solutions available. In doing so, we are creating the ecosystem that connects all the capabilities and components of financial wellness that drive value for our customers. And our customers, while they are financial services firms and the advisers who work for them, they're also fintech companies. And there are also new opportunities in new markets where they're embedding financial services into offerings, all of which makes us accessible to tens of millions of consumers. Envestnet is uniquely positioned to achieve the mission. And we have spent these extraordinary months executing on our strategy and our progress has been meaningful. The business continues to perform very well in the current environment, with our third quarter financial results exceeding our expectations. As we head towards the end of the year, I'm incredibly pleased with the progress we are making. We've focused. We've invested in key parts of our business and we are attacking areas of opportunity. Envestnet has the scale, the footprint, the capabilities in the organization to continue to drive the future of financial advice. We are the market leader. We are winning share, and we also are expanding the solutions that we offer to the marketplace. Today, our Wealth Solutions business supports $4.1 trillion in assets in nearly 13 million investor accounts. And our data and analytics infrastructure is unmatched with more than 17,000 data sources, 450 million linked consumer accounts and more than 33 million users in the most recent quarter. Our planning and wealth platform is used by more financial advisers in the United States than any other provider. In fact, 17 of the 20 largest banks in the U.S. work with Envestnet. 47 of the 50 largest wealth management and brokerage firms work with us. 3,000 RIA firms, including many of the nation's largest and more than 500 fintech companies rely on Envestnet to help them meet the growing demand and expectations from their customers. Whether you are in Rhode Island and you're accessing us, you're on your phone with your bank's offering of our MyBlocks that's integrated with our Yodlee data to help manage your credit card, your credit card debt or you're sitting with your adviser in Arizona to plan your estate in the transition of generational wealth, Envestnet's offerings are reaching further, touching more users and creating more deeply integrated financial experiences. What's emerging is a powerful network effect. When we are powering it, we're generating it. As manufacturers put more products on our shelves, our services, they become more valuable. And they can address more customer needs. This attracts more sellers to the ecosystem. And more sellers drive more users connected to more consumers. More consumers means more financially well people who seek more services and products to meet their needs into the future. Our focus has been on execution and executing on behalf of our customers, are identifying what drives our customers' success and then making it easy for them to deploy our offerings, on providing the most modern and integratable platform, on prioritizing investing in the most critical success stories for our customers and organizing our talent and resources to the right metrics as we drive value through this ecosystem. We have aligned our investments during this year to help us meet our clients' needs and the opportunities that they see, things like modernization of the platform and our move to the cloud, our value-added fiduciary solutions, our exchanges, enhancing user experiences and building pleasant consumer-facing technologies and engaging the marketplace with a much more cohesive go-to-market organization. The opportunity for us to invest is greater now than perhaps it ever has been before. We see areas where we have the ability to lean in and drive long-term value, and we will continue to invest in these areas. Why is it greater now? Why? Because we are seeing how the marketplace and our clients are responding to these integrated offerings, how they're using data to power and differentiate our solutions to drive long-term value. It is long-term value for them, our clients, for their customers, but it's also long-term value for Envestnet. We are seeing meaningful progress in advisers adopting our higher-value fiduciary solutions. On last quarter's earnings call, we highlighted success with our tax and impact overlay solutions, our impact in ESG investment portfolios, in our direct indexing products. Advisers continued adopting these solutions in the third quarter. We continue to see accelerated use of our overlay solutions and a 35% year-to-date increase in use of our direct index portfolios. The growth and adoption of these solutions is impressive, highlighting the contribution to our consistent revenue outperformance that we've experienced this year. We are exploring how we can move, deeply integrate these solutions into a seamless execution environment and making these solutions available to a broader base of investors. In our data and analytics business, the work we've done to modernize our developer portal to drive growth in the fintech channel continues to bear fruit. Year-to-date, we've seen more than a tripling in the number of fintech deals. Our paid user count has increased 28% versus last year driven by new logos and user growth in both our financial institutions and our fintech channels. And we continue to strengthen our relationship with leading financial institutions by signing additional data-sharing agreements. This is progress. And while it does not translate to meaningful revenue growth next year, it does position us to lead the industry's open finance movement and represent broader distribution opportunities for our financial wellness solutions. We are developing and deploying new solutions for our installed base of customers. An important example of new solutions is our exchange offering, something I've talked about on past calls. I'm going to spend a minute here to explain to you kind of how the Insurance Exchange works and why it's so important. We started the Insurance Exchange with a team of industry experts, folks who sensed the scope of opportunity inside our ecosystem and utilized their expertise to leverage and accelerate disruptive adviser-focused technology. We enrolled manufacturers in the vision and they invested time and money to help identify the marketplace needs and accelerate our go-to-market implementation. Today, 10 insurance carriers, among the largest providers representing more than half of the variable annuity market in the U.S., well, they're participating in the exchange. We are now creating shelf space for the offering by contracting with broker-dealers, contracting with RIAs to provide their advisers with access. And we're engaging with those advisers and training those advisers on the capabilities and the processes, and advisers now are starting to utilize these very powerful tools. That usage begets production. That production drives engagement from the carriers and also from our clients and ultimately drives revenue for Envestnet. From here, we have a base, we have a foundation. From here, what comes is additional insurance products that can be sold and managed through the very same pipes, with the same firms, the same advisers into the same consumers who have an additional need. D.A. Davidson will be leveraging Envestnet's Insurance Exchange to the fullest extent. They will be converting their entire annuity business to the platform, and they will be processing all of their fee-based and commission-based annuities via the Envestnet Insurance Exchange. And we expanded our relationship with Dynasty Financial Partners last quarter as the firm recently made the Envestnet Credit Exchange available to their partner firms, allowing them to have broad access to prequalified lending solutions. These are just 2 examples of notable wins in our effort to drive meaningful long-term results from our exchange solutions with more to come in insurance, in credit, in adviser services and other exchanges that we have planned for the future. We have spent most of the year -- much of the year aligning the organization to drive our strategy forward. Functions are now organized across all business lines to facilitate internal and external communication and to bring to bear the full capabilities of our company. Over the years, we've developed and acquired the leading expertise in our industry. As we brought Envestnet's talent together, we've continued this culture of innovation. We are complementing the incredible talent inside the organization with valuable perspective and experienced leadership to further scale our business and help us achieve our mission. Recently, we have named new senior leaders into the company and these include Dana D'Auria as our Co-Chief Investment Officer. Dana joins us from Symmetry Partners. Donna Peeples is our Chief Relationship Officer. Donna was most recently the Chief Client Officer at FIS and previously served as Chief Customer Officer for AIG. She also has experience at an emerging conversational AI company named Pypestream. Bob Coppola has been named as our new Chief Technology Officer. He began on Monday. And he joins us from Cision, a software-enabled-as-a-service provider, where he served as their Chief Information Officer. He also held technology leadership roles at Bloomberg, Thomson Financial and McGraw-Hill. Dana, Donna and Bob are great additions to the Envestnet team, and I'm very much looking forward to the progress they will help us make. Envestnet's people have always engaged the big challenges to create significant opportunity. Starting a business during a recession with a card table and dial-up modem, building a technology platform that supports 1 out of every 3 financial advisers in the United States, building a network of data connectivity that powers individual's understanding of their money, scaling and infrastructure to support extreme market volatility in trading volumes during the pandemic while working remotely. I'm confident as we navigate the uncertainty caused by this pandemic, we will continue to engage the challenges, and we will continue to create significant opportunity. We are making the investments to ensure we use our market position to continue to press the opportunities that we see. We're enhancing existing capabilities. We're integrating new solutions. We're driving further adoption of our ecosystem, and we're supporting and growing our customers as they power financial wellness to millions and millions of consumers. I'll be back with some closing comments in a moment, but first, let me turn it over to Pete. -------------------------------------------------------------------------------- Peter H. D'Arrigo, Envestnet, Inc. - CFO [4] -------------------------------------------------------------------------------- Thank you, Bill, and good afternoon. Today, I'm going to review our results for the third quarter, update our outlook for the fourth quarter and provide context for our thinking about 2021. Consistent with what we've been experiencing since the pandemic began in March, our third quarter results were quite strong, meaningfully exceeding expectations. Adjusted revenue for the quarter was $253 million, well above the guidance we provided, as we saw outperformance in asset-based and subscription-based revenue as well as professional services. Asset-based revenue benefited from favorable net flows, continued adoption of higher-value fiduciary solutions like our tax and impact overlay and direct indexing solutions as well as a favorable market on accounts that bill monthly and on the average daily balance during the quarter. Subscription-based revenue performed well, driven by higher usage in the data and analytics segment with our financial institution and fintech customers. Operating expenses overall came in around $5 million lower than our expectations for the quarter. While we had already assumed lower operating expenses due to COVID-related restrictions on things like travel, we saw even more favorability than anticipated in the quarter as we saw lower-than-projected expenses associated with slower hiring, medical, marketing and travel. As a result, our adjusted EBITDA of $67.6 million was up 24% compared to last year. This translated to similarly strong performance in adjusted earnings per share of $0.72, 20% above last year. We are raising our fourth quarter revenue outlook from our prior expectations as we expect our asset-based revenue to benefit from stronger-than-expected net flows and a favorable market in the third quarter, both of which contributed to higher billable values at September 30. We also expect our adjusted EBITDA and earnings per share to improve in the fourth quarter relative to our August guidance, despite a meaningful sequential increase in operating expenses compared to the third quarter. As a result of our outperformance in the third quarter and this improved outlook for the fourth quarter, we are raising our top and bottom line guidance for the full year of 2020. We now expect adjusted revenue for the year to be between approximately $991 million and $993 million, up 9% year-over-year; adjusted EBITDA to be between $238 million and $239 million, up 23% to 24%; and we are raising adjusted earnings per share to be between $2.51 and $2.53. To add some context to the full year, our EBITDA, EBITDA margin and earnings per share this year are meaningfully higher than we expected at the beginning of the year. With revenue growth expected at 9% and EBITDA growth expected at 23% to 24%, that level of margin expansion is beyond expectations. Expense management and pandemic-related circumstances have lowered expenses significantly and unsustainably for the long-term. This expense favorability gives us an opportunity to assess many elements of our business, like our office footprint, given our successful work-from-home transition, and the need for travel at the levels we did in 2019 and before, allocating some of that spending into the product, technology, engineering and organizational initiatives Bill mentioned. We are looking at how we better drive our strategy to position us for long-term value creation. Over the next several years, we target returning to double-digit growth in revenue while driving our adjusted EBITDA margin into the mid- to upper 20s. In any given year, we may make more or less progress toward those targets. Next year is a prime example of the variability we may experience from period to period. While we are not yet providing specific guidance for 2021, we expect that adjusted revenue will grow in the mid- to high single digits. Embedded in that expectation is high single-digit growth in wealth revenue and low to mid-single-digit growth in the data and analytics segment. As our expenses return to a more normal level over the course of 2021 and as we continue to invest in our long-term growth, its likely operating expenses will grow at a faster rate than revenue next year. However, when combining the performance we expect in 2020 with an early look at 2021, the average growth rate in adjusted EBITDA exceeds our revenue growth rate over that 2-year period from 2019, on track with our long-term margin targets. Turning to the balance sheet. We ended September with $363 million in cash and debt of $863 million, including the convertible notes we issued in August. Our net leverage ratio at the end of September was 2.1x EBITDA, down from the 2.3x at the end of June. And the proceeds from our recent convertible note issuance enabled us to pay off the amount that was outstanding on our revolver. So now the revolver is entirely undrawn. With $500 million available on the revolver, meaningful cash on the balance sheet and positive cash flow generation, we are comfortable that we have the liquidity and flexibility as we balance managing the business in the current environment with continuing to invest in growth opportunities, both organically and through strategic activities. Thank you again for your support of Envestnet. At this point, I will turn it back to Bill for his closing remarks. -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [5] -------------------------------------------------------------------------------- Thanks so much, Pete. The future of consumer financial services is an integrated experience that connects the person's daily financial lives to their long-term financial goals. People will access financial information and make decisions in new ways. Yes, absolutely more digital engagement. That's for sure, but also relying more and more on accessible expert advice to guide them. We are seeing this play out during this COVID-disrupted period of time. Envestnet is best positioned, and we are investing in capabilities and talent to make sure we take advantage of this opportunity. We have work to do, but the progress we are making is meaningful. We're on our way to establishing the ecosystem that can make financial wellness a reality for everyone. And this is a cloud-based model, where advisers and their clients can access capabilities to tackle the financial questions, both big and small, make a decision and then seamlessly execute on it. We are very encouraged by our progress, and we are very excited about what we see ahead of us. Thank you again for your time this afternoon. Thank you for your support of Envestnet. With that, Pete and I are happy to take your questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question is from Devin Ryan with JMP Securities. -------------------------------------------------------------------------------- Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Equity Research Analyst [2] -------------------------------------------------------------------------------- Thanks for all the detail. First question, just around financial wellness capabilities for the workforce, essentially used as an employee benefit. It feels like that's accelerating thematically, and many of the large wealth firms and fintech are increasingly going after corporate clients for access to their employees. And many of these employees have really not historically had access to much financial product. And obviously, through technology, that's now possible. Envestnet is playing a part in that, you're already in that market. But it still feels like we're in the very early days there, maybe first or second inning. And also would seem there could be some chunky growth at that scale. So I'd just like to maybe dive a little bit more into that as an opportunity for the firm, and as you guys are expanding the capabilities, focusing on, really, firms that have exposure in the workplace just given that you're kind of tapping, in some ways, brand-new customers. -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [3] -------------------------------------------------------------------------------- Yes. Devin, it's a great question, a great observation. And if you look at the composite of tools that we have, whether it's the data aggregation tools that are networked with our financial-planning capabilities, which we've really consumerized in many ways. The MyBlocks is on the phones and on the desktop and very quick kind of exercises to find answers to financial questions that individuals have. And I know we rolled out MyBlocks internally at Envestnet and have found tremendous usage of the tool, and we're creating this sense of financial wellness within our employee base. We've also extended that for free to advisers' firms for them to use with their staff and their teams. And again, the feedback we've had there has been exceptional as we found a lot of utility and usage there. Now how do you take the next step and get into the corporate market? Either with a partner or using our network of financial advisers who serve many small and midsized businesses in which, as a benefit, will evolve this more of a lifestyle, more integrated benefit package from health, to thinking about financial service, also into social service for mental and other support that employers are being looked to provide. And we think we can be -- we think we can really play well and be very successful in that concept of embedded finance. You look forward into the marketplace and what we see is these financial journeys that people head off on. And they start being very concerned, do I have enough money to pay the rent. But they wind up thinking about generations and their legacy. And in that journey, they're going to touch and engage with all sorts of environments. Some of them will be self-serve, some of them they will find with their employer. But at some point, they're also going to reach out for expert advice, for that human advice to help them solve the more complicated challenges. We think we can be part of networking those pieces together, from that direct, to employer, to a network of advisers who are there to serve individuals as they graduate out of those self-serve environments. And again, I think Envestnet is uniquely positioned given the properties we have: Data, the planning technology, network to solutions that we can deploy in more friction-free types of ways to a broader audience, not just financial institutions and their advisers, but also into this embedded finance category. -------------------------------------------------------------------------------- Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Equity Research Analyst [4] -------------------------------------------------------------------------------- Okay. That's great color, Bill. And then just a follow-up here on the growth of the exchanges and adoption. So clearly, some very good momentum. You kind of walked through the Insurance Exchange, really stood out to me, 7,000 advisers to 27,000 this quarter. Can you give a little more perspective around the potential? How big could insurance be relative to the adviser base? Because obviously, not all advisers may need this solution. And maybe if you could touch on credit as well. I'm just trying to think about for maybe a couple of exchanges that are a little bit more developed kind of framing out kind of where they could end up here. -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [5] -------------------------------------------------------------------------------- Yes. I mean the -- thank you for recognizing the progress that was made there during the third quarter. And we really started to get the shelf space for the exchanges at the beginning of the year. And if you -- sorry, been speaking a lot today. But if you look at the progress we've been able to make during a COVID period to have this many advisers begin to light up on the platform, it reveals the demand. It reveals a kind of a need in the market to bring the pieces of financial advice together. And our broker-dealer clients and our RIA clients are recognizing it. So you're seeing that in the number of firms that are working with us and a number of advisers that attached to it. Also, I think the D.A. Davidson data point is a very important one because they're a great client of ours. They work with us with our core wealth platform, they utilize our UMA, they utilize our separate accounts, they're utilizing our trading tools, their advisers have those on the desktop. Now they're extending that out into insurance. And not only that, Devin. They are transitioning their entire insurance book of business, commission and fee-based onto the platform. Why? So that it begins to centralize. It begins to integrate together wealth and insurance. So when you're building a financial plan, you're creating a strategy for a client, you can include the 2. You can also do an assessment and analysis on the past insurance products that have been delivered to the client versus opportunities that may be better, more value, be better for the client going forward into the future and will drive more and more adoption of the Insurance Exchange. So I think those are really important data points to pay attention to. The 2 is the number of users, advisers, and also D.A. Davidson being an example of a client that is moving their book of business onto the platform. Now we have structured the insurance platform in which we are working with the carriers. The carriers are supporting the platform through an annual license fee. But then as they hit scale and generate accounts on the platform, we'll begin to revenue-share on those -- on the production that advisers are delivering back to the carrier. So it's early days. But we are bullish about it. We are -- where I know we're right and where I know that we've made so much progress is this concept of integrated advice, bringing these pieces together under a very robust planning engine. And then the adviser being able to deliver that much more seamlessly than using one system, another system, a third system. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Our next question is from Surinder Thind with Jefferies. -------------------------------------------------------------------------------- Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [7] -------------------------------------------------------------------------------- Bill, I'd like to start with a question around the data and analytics business. Can you maybe break down the fundamentals of kind of what's going on in that business on the fintech and the, I'll call it, the financial institution side versus maybe the wealth management at this point? It sounded like, unless I missed it, that you guys are expecting low to mid-single-digit growth in that business come next year? -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [8] -------------------------------------------------------------------------------- Yes. Surinder, thank you. So we're very encouraged with the progress we're making at Yodlee. And I'll just -- Stuart and I kind of live this every day, but you all don't. So I'm just going to go back a few quarters and just update everybody on kind of the steps that we've taken to kind of fortify and renew our focus in the data and analytics business. So what we've done is last year, we spent most of the year building out a developer's portal so that we can engage in the fintech market much more seamlessly. And as you know, Plaid was very successful in the fintech market because they approached it with a developer's mindset, easy-to-access code, access the API and the fintech was able to get in business. Yodlee was a little more onerous to engage, and we've solved that problem. I think if you look at the developer environment today, we are at par, if not better, and the results are beginning to show. So if you look at our year-to-date results on fintech deals, we signed 3x as many in 2020 than we did in 2019. So we're competing very well there. We're renewing our financial institution contracts. And not only that, we're signing data rights deals with some of the largest financial institutions in the world because we have the infrastructure, we have the scale, we have the privacy and also security that surrounds our process at scale. So when I look -- when I -- in addition to that, Surinder, we've been threading our data product into our wealth applications. Just this quarter, we launched a product, a financial planning product, the MyBlocks, fully integrated with Yodlee. And we've got several dozen RIAs, RIAs, individual advisory firms, who contract, that are already licensing that technology in the quarter. So we see opportunity with the Yodlee business, given the way that we've modernized it, given the way we've created a new developer's environment to kind of light up these different opportunities that we see. I think that with the financial institutions and fintech and our penetration and success in those markets, it also opens up the opportunity now for us to sell other wealth-type applications, financial planning or MyBlocks, integrated with the exchanges into the fintech market. So we have a broader aperture and a broader marketplace to sell to. The challenge that we have and continue to have in the data business, and this will be a resilient one, this is one that we're facing and working hard to kind of address is in the analytics business. In the analytics business, that was a very fast-growing business for several years, new entrants came into the market. Pricing power is degraded. So we're renewing our contracts there, but they're being renewed at lower contract rates, lower price rates. And the revenue for that once -- a couple of quarters ago, fast-growing business, has really stalled. So that pulls the overall results of the data and analytics business down. We're working to address it. We're assessing that business. But there's real competitive pressure there. So as you look at the balance of what's happening in the data and analytics business, I'm very encouraged from a product standpoint, the way we've developed, we've become more accessible, the success we're having with clients, the way we're integrating our data solutions across our broad set of offerings, across Envestnet but also underlying the challenge we continue to have in the analytics business. -------------------------------------------------------------------------------- Surinder Singh Thind, Jefferies LLC, Research Division - Equity Analyst [9] -------------------------------------------------------------------------------- That's very helpful. And then as a quick follow-up, a question on just kind of the expense or the structural components of expense. Obviously, the margins are coming in doing well. Is there an opportunity to keep some of the temporary savings permanent? Or is the idea that eventually you expect to kind of get back to where margins normally were and kind of the extra cash that you're saving in the meantime, you're just -- you're going to invest? How should we think about that trade-off in the longer-term outlook on margins? -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [10] -------------------------------------------------------------------------------- Yes, Surinder, I mean 2020 has opened cost-savings opportunities for us, without a doubt. And those are because of COVID, in the amount of travel, entertainment, some other expenses, real estate expenses, et cetera, we've been able to mitigate and really manage. And I think we've done an excellent -- a really good job of managing costs through this period of time. That said, we see a tremendous opportunity ahead of us. As you bring the composite, the pieces of investment together, they are competitively distinct, differentiated, absolutely have opportunity in the adviser space, in the financial institution space, in the fintech space and the embedded finance space. And so in order to get there, in order to create that same developers' environment that we've done in Yodlee, we had to do that across our platform and continue to invest in that. So we've been investing in modernization, we've been investing in moving all our infrastructure into the cloud. We're very focused on user experience. We've been very focused on consumer-facing technologies where the consumer is able, through our partners, their consumers are able to engage in their wealth at a much different level. All of that is investment that is focused, but it's creating more and more opportunity for Envestnet. So I would not take the expense savings that we've been able to generate in 2020 as a rule of thumb. I think as we return into a, I'm air quoting, "a more normal environment," what you'll see is us to continue to invest in things that we believe will drive future higher growth for the company and ultimately drive higher margin for us. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- Our next question is from Alex Kramm with UBS. -------------------------------------------------------------------------------- Alexander Kramm, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Exchanges, Ebrokers [12] -------------------------------------------------------------------------------- Maybe starting with the 2021 early outlook you gave. A couple of clarifications. Sorry if this is multipart. But first of all, I assume on the wealth side, this does not include any sort of market performance. So this is just organic, right, ebb and flows. -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [13] -------------------------------------------------------------------------------- That's correct. -------------------------------------------------------------------------------- Alexander Kramm, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Exchanges, Ebrokers [14] -------------------------------------------------------------------------------- Yes. And then -- but more importantly, on the cost side, I think -- and if I heard you correctly, you just said that the cost will be growing faster than the revenues. Can you be a little bit more specific? And if you cannot, maybe just help us with what are the savings that you had this year in terms of dollars? How much are you -- do you think those are going to come back? And then what's the normal kind of growth on top of that as the business grows? And is that growth predicated on reopening? Or are you going to be spending that money no matter what? -------------------------------------------------------------------------------- Peter H. D'Arrigo, Envestnet, Inc. - CFO [15] -------------------------------------------------------------------------------- Well, thanks, Alex. Yes, really, I think I'm just going to kind of talk about the math, really, that kind of supports the statement that I laid out there. Really, the idea is that there is spending that we've saved on, and there is a lot of uncertainty in the next year. So again, not giving explicit guidance for next year, it's likely that as we take on these initiatives that we've talked about and allocate some of that savings from this year into 2021, we'll be spending more in 2021 relative to revenue growth than in 2020. But if you look at it on a longer-term margin expansion, then from '19 to '21, we'll still be growing EBITDA faster than revenue. So I think directionally, it's just a question of what we're seeing now, assuming that there is going to be some of that savings allocated back. And I think if you go back to the beginning of the year and look at our original guidance to see what our margin expectation was and convert that relatively into what our margin expectations are now, the overwhelming majority of that difference can be associated with lower expenses relative to COVID and the environment. -------------------------------------------------------------------------------- Alexander Kramm, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Exchanges, Ebrokers [16] -------------------------------------------------------------------------------- Okay. I work with -- go ahead, please. -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [17] -------------------------------------------------------------------------------- Yes. Alex, this is Bill. Just -- and then your assumption around the market is absolutely true. We do not include any market in our -- in the way we think about things, okay? Just want to make sure that's clear. -------------------------------------------------------------------------------- Alexander Kramm, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Exchanges, Ebrokers [18] -------------------------------------------------------------------------------- And then just -- No, loud and clear. And then just another quick topic, and this is a quick one. Just coming back to the third quarter. You made comments about strong flows, et cetera. When I look at my model or the stuff that you reported, a couple of line item or items stand out. One, I think the accounts per adviser, I think that was the biggest jump quarter-over-quarter. But then on the other hand, I think the AUM growth or AUM flows was one of the lowest that I've seen in a long time. So can you just maybe clarify where that came from? Because it seems like 1 -- a few very, very good metrics and then the AUM was pretty disappointing. So... -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [19] -------------------------------------------------------------------------------- Yes, we had a -- Alex, this is Bill. We had a conversion that took place during the third quarter. Most of that was on reporting or data conversion that we brought on to the platform. So we took a pretty big set of performance information and we've created a reporting function for a large client. And then on the AUM, Pete will provide some color on that. -------------------------------------------------------------------------------- Peter H. D'Arrigo, Envestnet, Inc. - CFO [20] -------------------------------------------------------------------------------- Yes. So we had a bit of a shift from 1 client from AUM to AUA. And we also had -- I think when we -- the statement about relatively stronger performance and flows was to what our expectation was in August. So when we're coming out of what looked like a Q2 that was rather slow, it was better than that. It's not going back to the years where we really had significant growth in some of those. And I think we were almost back to Q1, but not even as strong as Q1 of this year. So I think it was relative to kind of a lowered expectation that the -- we're making a statement about the stronger flows performing. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- Our next question is from Will Cuddy with JPMorgan. -------------------------------------------------------------------------------- William V. Cuddy, JPMorgan Chase & Co, Research Division - Analyst [22] -------------------------------------------------------------------------------- So I think about the number of capabilities for financial wellness, and I match it up against investment capabilities. I think that there are a number of opportunities. And I'd like to kind of drill into one. Yodlee was running a payments business called Money Movement, which I think has been at least closed or deemphasized the past couple of years. If it was closed, why was it closed? And if the business is still open, how do you think about Money Movement's playing into the embedded finance ecosystem concept? -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [23] -------------------------------------------------------------------------------- Thanks, Will. We -- that payments business is something that we're not investing in any further. I think the technology was something that we piloted out in the marketplace, did not see the traction to continue to sustain the investment. And so when we look at payments today, obviously firms like Plaid and even Finicity have created a lot of value around their capabilities. We have focused mostly on wealth and then open finance and open banking in the financial institution channel. So when we look at payments as we go forward, we'll likely take a page out of the playbook that we did around credit with our partnership with Equifax and seek a partner to bring us to the market and really supply the raw material to that partner for them to build out a payment solution to the market. -------------------------------------------------------------------------------- William V. Cuddy, JPMorgan Chase & Co, Research Division - Analyst [24] -------------------------------------------------------------------------------- Got it. That makes sense. And then actually, I'll just -- I'll go off of that, Bill. Could you update us on where the Equifax relationship stands today? I think like we're nearing the time line for launch. Any update there would be helpful. -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [25] -------------------------------------------------------------------------------- Certainly. So I think I mentioned 2 calls ago that COVID delayed the project a little bit, but happy to report that we'll be -- with Equifax, be in the market early in '21, early next year. And the solution, again, I'll just remind everybody what we're doing there or what they're doing there, which we're very excited about, is they're helping [fin file] or customers who have -- don't have their credit history or have some challenges to create a new capability to establish creditworthiness so that the idea that credit can reach a far broader population, both in the U.S. and internationally. So we're very optimistic about what the tool will do, what the offering will do. We do have a very good contract and partnership with Equifax. As we look at the early part of '21, we'll probably still be in the kind of the minimum contract with Equifax, but expect that throughout the year, we'll see user growth and that will generate further revenue for Envestnet. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- Our next question is from Peter Heckmann with Davidson. -------------------------------------------------------------------------------- Peter James Heckmann, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [27] -------------------------------------------------------------------------------- Bill, I just wanted to see what are your thoughts in terms of consolidation among advisers? It continues, but is it something where the scale is affecting clients' demands for pricing? Or would you say that the impacts are pretty modest at this point? -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [28] -------------------------------------------------------------------------------- Yes. I would expect that you'll continue to see consolidation in the broker-dealer space as well as in the RIA space. And we've seen it. Deals are harder to do during this period, but there are firms that are attracting advisers into their network or acquiring firms and pushing forward in this more integrated, consolidated environment. The benefits of those are, hey, you can sit with 1 set of technology, deploy that across multiple firms, have the compliance oversight across those firms, create pricing paradigms, product paradigms, investment fiduciary paradigms across a broader network of clients, serve them more holistically and do that in multi kind of regional way. And we see that and that absolutely will continue to be a theme. I think this year, the headlines aren't there, honestly, because of COVID. I just feel like the deals are harder to do. These are personality. These are people. These are -- in the RIA space, these are small businesses that are getting together and the people matter the most in those types of deals, and COVID being separated, it created a challenge. But I will note there are firms of ours, networks of ours that are making tremendous progress. They continue to announce advisers joining their network and are continuing to forge this consolidated, integrated environment for advisers. I think the list is getting bigger, too. I think as we look at the partnership that we announced with Dynasty Financial Partners around their adviser services, you begin to bring together whether it's finance or your data solutions or access to capital, marketing support, that all can be scaled at a new level for advisory firms. Utilizing like an Envestnet technology across these platforms brings it together, provides that compliance overlay. The idea of the network, the thesis behind it is really getting stronger. I think you have to wait for the storm to pass here, and you'll see a real acceleration of deals. -------------------------------------------------------------------------------- Peter James Heckmann, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [29] -------------------------------------------------------------------------------- Got it. Got it. That's helpful. And then just in terms of your relationships with the big -- the wirehouses and clearing firms. Do you anticipate -- I guess, how do you think about those relationships as they renew? And are you -- and just trying to figure out if there's -- it seems like there's a number of competitive offerings, clearly, Envestnet's the leader, but trying to figure out the pricing pressure there and demands for additional feature functionality? -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [30] -------------------------------------------------------------------------------- Yes. I think we -- the thing that stands out -- we have -- we've been very successful at delivering kind of the product-level solutions to the largest firms, whether those are trading solutions, data, our financial planning. We've been very successful at a product level. And where we're moving is how you bring those pieces more and more closely together to integrate them to create more and more value, get more usership and have those advisers and those advisory firms begin to kind of grow in production and their productivity and their desire to have -- continue to have a connected environment the way that we can offer it. So that's unique. When you think about, again, the components that Envestnet offers, as you bring them together, that is a unique capability that we have. We also have scale. And the scale and infrastructure that was able to -- has been able to perform during a difficult period of time, I want to go bring us all the way back to March. But during all that volatility, then we had the stock split for Tesla and others and that created a havoc in a lot of trading systems, hey, Envestnet was able to service our clients at scale to enable them to deliver, uninterrupted, to deliver advice to their clients. And I think that's really important, whether it's the scale we have in our data infrastructure, 17,500 data connectivities, [435 million] accounts that we're serving and/or our wealth platform, $4.1 trillion, 13 million accounts, there's real scale and infrastructure here that addresses the needs of the biggest firms. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- Our next question is from Chris Shutler with William Blair. -------------------------------------------------------------------------------- Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [32] -------------------------------------------------------------------------------- Bill, in your investor deck from the summer/fall period, there's a slide that shows the total addressable market in both your current areas of business and adjacencies. On the adjacencies, the biggest TAM is categorized as the kind of optimization engine. Would you mind diving into that in a little more detail and what -- kind of what are your plans to go after that opportunity? -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [33] -------------------------------------------------------------------------------- Yes. And Chris, thanks. We're beginning to really productize that and deliver out into the market capabilities that are -- what that means is we're offering suggestions. We are using our data set to identify opportunities and then encouraging advisers to click through and take action. That's one element of it. And if you track the progress we're making on the Advisor Services Exchange, you'll see how our adviser data analytic has the homepage, it says, what should I do? Well, those are suggested based on the data that we see within that book of business. Those are the opportunities that, that adviser should be paying attention to and the risks that sit inside their book of business and they should take the next action. That's one element of it. The other one is to use our data to understand portfolios and how to optimize portfolios. So we have -- we've been talking these last couple of quarters about these value-added fiduciary solutions. One of those areas is overlay. We have a very powerful overlay tool that surrounds the portfolio. It can provide a tax overlay. It can provide a social and impact overlay as well. And that begins to optimize the portfolio to the exact needs of the client. The exact needs of the client can be a personal index, Chris Shutler index, that is surrounded by our tax overlay because you have tax concerns, and you want to optimize for taxes. We can identify those opportunities among our $4.1 trillion. We can use that data to optimize the portfolio, and then we can manage that portfolio on an ongoing basis. And we can recommend to the adviser during that course and that progress that they should also introduce to you a credit offering or an insurance offering because according to your financial plan and your path towards achieving it, that would best optimize your opportunity or ability to reach that goal. So Chris, we do that and we do that for an overlay fee, a fee that surrounds the portfolio and the assets in which we're providing that active advice. -------------------------------------------------------------------------------- Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [34] -------------------------------------------------------------------------------- Got it. Okay. Bill, and then the sort of a segue into this question. So regarding the overlay impact in direct indexing, I think you mentioned in your prepared comments, exploring how to make those solutions available to a broader base of investors. Maybe just talk about what you're thinking, how you plan to do that, what capabilities you need. And also as you maybe go further into direct index, some of the custodians are -- obviously have talked about rolling out their own solution. So just how does an adviser and investor kind of choose one solution versus another? -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [35] -------------------------------------------------------------------------------- Yes. And there are lots of great kind of illustrations that have come up in the -- even the last couple of quarters that kind of heightened where we're headed here, whether it's Schwab that purchased Motif and they've come out with Slices, and it's an important strategy. Morgan Stanley acquired Parametric. Again, they're the kind of the formidable player here in the direct tax-managed direct index business. Envestnet has a great capability. We began it with our quantitative portfolios. They're growing very, very well. We're getting increased adviser adoption. And why are people using those capabilities? Well, you can own the security and then you can establish your own cost basis and you can manage that portfolio around restrictions or additions to that portfolio and then manage it for taxes or social purposes, and you can do that at scale. And we've got really an incredible infrastructure to be able to do that. Where -- what I was really talking about there was, okay, how do you take that product, bring it down-market, meaning smaller account minimums and distribute that for emerging investors through the fintech channel, through our financial institution channel, through the financial adviser channel and be able to really supply from emerging investors to your most sophisticated investors, a capability that's personalized in that way and to connect it from the product to the execution, the way the custodians are, from the product to the execution, bring that together, pull that together from a pricing and value proposition and do that in a friction-free, very-easy-to-open account and deliver to the consumer. So that, I think, is a tremendous opportunity for us, something that we're spending a lot of time exploring, evaluating how we'd achieve it, and I expect a lot of progress there. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- And our next question is from Chris Donat with Piper Sandler. -------------------------------------------------------------------------------- Christopher Roy Donat, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [37] -------------------------------------------------------------------------------- Pete, I wanted to ask one on -- just on the guidance, and maybe I'm doing my math wrong, but I'm calculating that your fee rate in the fourth quarter might be coming down about 4 basis points or so. Are you forecasting some sort of decline? And if so, why? -------------------------------------------------------------------------------- Peter H. D'Arrigo, Envestnet, Inc. - CFO [38] -------------------------------------------------------------------------------- So Chris, you mean 4/10 of a basis point? -------------------------------------------------------------------------------- Christopher Roy Donat, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [39] -------------------------------------------------------------------------------- Oh, sorry, 4 -- yes, yes, yes. 4/10 of a basis point, absolutely. -------------------------------------------------------------------------------- Peter H. D'Arrigo, Envestnet, Inc. - CFO [40] -------------------------------------------------------------------------------- Okay. Four basis points would be a bigger deal. 4/10 is, it's just part of the mix from the quarter, a little heavier toward AUA. And last quarter, benefited a little bit from favorable markets. And so we have growing -- well, not dramatically. We used to be about 15%, now it's probably up to 20% that is not billed in advance. So there's a little more of our assets that's impacted by market and markets were up pretty favorably during Q3. So the revenue we make on those assets isn't in the beginning numbers. So the [9 8] from Q3 is a little bit higher than we would have thought, and that decrease is not quite as dramatic as it looks. -------------------------------------------------------------------------------- Christopher Roy Donat, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [41] -------------------------------------------------------------------------------- Okay. Okay. Got it. And then just a follow-up on one of Chris Shutler's questions there and it's come up a couple of times. On Slide 8 of your deck, which has the growth rates for your asset-based solutions. I'll try asking it, and I'm not sure if you will answer, but any sense on where we are with penetration on either -- on impact portfolios or overlay solutions or direct indexing? I know we're really early. I'm just trying to figure out how much more runway you've got, which I assume is a lot, but just trying to quantify something. -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [42] -------------------------------------------------------------------------------- Yes, Chris, we're in the -- the sprinklers are still -- we still have the sprinklers on the field before the game. I think when you look at it, again, we serve $4.1 trillion in assets. If you look at the progress we're making in the direct index overlay and impact, it's meaningful, and we're up there with the others that are in this space, especially overlay and impact. But there's still -- that's still a very small number of accounts and small number of assets versus what we serve. So the key, I think, from here, like I was saying to Chris, is using our data infrastructure to identify the case, the benefit of the case inside a client's account, the value that can be added, using data and our technology really to do that assessment and analysis and then feed that to the adviser to be able to engage the client. And as we do that, we think we can provide tremendous value to the end consumer. They have access to kind of an index-type solution that can be managed to their personality or beliefs, can be overlaid to optimize a result, provides the adviser with a value-added capability that is advice-driven. It's central to advice. And then for Envestnet, it's something that we can scale, something we have the technology in, something we have the data resources to identify, and also ultimately is very profitable for our business. We also envision that it's just not Envestnet that will offer these solutions through -- or PMC will offer these solutions through our platform. Given the technology, given the capability, we see how we can invite other asset managers into our environment to utilize our tools to offer similar offerings to the marketplace. So you really can see how we would build out a marketplace of these types of solutions for advisers to deliver to their clients. And we're very early on. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- We have reached the end of our question-and-answer session. I would like to turn the call back over to Bill Crager for closing comments. -------------------------------------------------------------------------------- William C. Crager, Envestnet, Inc. - Co-Founder, CEO & Director [44] -------------------------------------------------------------------------------- Yes. Just thank you, everybody, for joining us, for your support in Envestnet. We really appreciate your perspective and that you follow us and provide the assessment and analysis that you do. I do want to point out and thank the entire Envestnet team as we continue to work through really a remarkable period of time this year. And the work that's being done is really extraordinary in the ways that we're able to support and serve our clients and continue to make progress. That's what I want to underline, continue to make progress during this period of time. So thank you very much. I hope everybody is safe. Everybody is healthy. Everybody -- we get resolution in Washington. And that I look forward to speaking to everybody next time. So thank you, and have a very good evening. -------------------------------------------------------------------------------- Operator [45] -------------------------------------------------------------------------------- Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.