Enfusion, Inc. (NYSE:ENFN) Q4 2023 Earnings Call Transcript
Enfusion, Inc. (NYSE:ENFN) Q4 2023 Earnings Call Transcript March 12, 2024
Enfusion, Inc. misses on earnings expectations. Reported EPS is $0.04 EPS, expectations were $0.06. Enfusion, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Enfusion's Fourth and Full Year 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I'd now like to turn the call over to Bill Wright, Head of Investor Relations, to begin.
Bill Wright: Good morning, and thank you, operator. We welcome you to Enfusion's Fourth Quarter and Full Year 2023 Earnings Conference Call. Hosting today's call are Oleg Movchan, Enfusion's Chief Executive Officer; Brad Herring, Enfusion's Chief Financial Officer and Neal Pawar, Enfusion’s newly appointed Chief Operating Officer. Please note, our quarterly shareholder letter, which includes our quarterly financial results have all been posted through our Investor Relations website. I would like to remind you that today's call may contain forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including those set forth in our filings with the SEC which are available in the Investor Relations section on our website.
Actual results may differ materially from any forward-looking statements we make today. These forward-looking statements speak only as of today, and the company does not assume any obligation or intent to update them following today's call except as required by law. In addition, today's call may include non-GAAP measures. These measures should be considered as a supplement to and not a substitute for GAAP financial measures. Reconciliation to the nearest GAAP measure can be found in today's quarterly Shareholder Letter, which is available on the company's website. With that, I'd like to turn the call over to Oleg to begin.
Oleg Movchan: Good morning and thank you for joining us today to discuss our results in the fourth quarter of 2023. I’m honored to be completing my first four year as Enfusion’s CEO and thrilled to welcome Neal Pawar our new Chief Operating Officer to the Enfusion team. Neal joined us in November and brings a tremendous amount of operating experience along with breadth and depth of technology experience across the financial services industry. In just the past three months, Neal's presence and enormous enthusiasm has been felt across our entire organization. We're sure Neal will be instrumental in helping us scale up the business and expand our market footprint with global enterprise clients. As for the fourth quarter, I'm pleased to announce that Enfusion's business achieved several milestones and we saw the economic profile of our business continue to strengthen and become more predictable.
While not immune to macro headwinds we have discussed in previous quarters, we have focused on controlling what we can under our roof. To that end, we continue to enhance our world-class end-to-end platform that empowers all workflows. Enfusion is built with unparalleled technology, continued innovation and relentless dedication to our clients. In doing so, we have and will continue to widen our economic moat. Our strong financial results this quarter reflect discipline strategy execution and cost control. Several of our wins this quarter validated Enfusion's strategy as we continue to move up market. We saw a combination of new client wins as well as conversions from our biggest competitors across several time segments and geographies. Now, let me walk you through some of our key financial metrics in the fourth quarter.
Our economic trajectory inflected upward in Q4 2023 as we reported $46.5 million in revenue delivering 15% revenue growth year-over-year. Fourth quarter adjusted EBITDA totaled $9.8 million translating into an adjusted EBITDA margin of 21% representing a 436 basis points expansion compared to the same period a year ago. This outcome is attributable to a combination of discipline expense control and improving scale. From a full year perspective in 2023, we reported $174.5 million in revenue delivering 16% growth year-over-year and $31.7 million in adjusted EBITDA also expanding our adjusted EBITDA margins from 13% to 18% an improvement of approximately 500 basis points compared to the previous year. Despite the challenging and turbulent industry backdrop throughout 2023, we saw growing momentum in Q4 that led to 45 new client additions.
Our biggest quarterly client win since the second quarter of 2022. This brings our total client count to 865, a new firm record. Our ACV increased to $219,000 another firm record representing a 1% quarter-over-quarter and 6% year-over-year growth. Our progress up market continues to broaden our client base and has contributed to our continued ACV increase. Let me provide you with more details on our client wins this quarter. In the Americas, revenue grew 15% year-over-year reflecting the combination of market share gains and wins for large and complex clients in competitive situations. This dynamic provides a more stable set of business economics going forward. One notable win this quarter, which I'm excited to share with you is Utah Retirement Systems or URS, a prominent pension plan that will move approximately $10 billion of internally managed AUM to the Enfusion platform.
Instead of upgrading its legacy OMS, URS will utilize Enfusion's full front to back capabilities. Additionally, URS will take advantage of our portfolio workbench tool for quarterly rebalancing functionality. This is an exemplary strategic win for our business, particularly as we continue to grow in service pension advisors. We remain keenly focused on taking market share. I'm also thrilled to announce that Enfusion signed Mariner Investment Group, a prominent alternative investment manager with $7 billion AUM. Mariner will have 70 plus users utilizing our platform across trading, portfolio management, operations and technology. Our team was able to design a well-suited solution that will consolidate and replace multiple pre-existing systems for Mariner and provide one centralized view with increased automation for all trading teams involved.
This is an exciting competitive win. And another proof point, validating our ability to support complex fund structures and multiple asset classes and strategies as we continue to grow our presence in the multi-strategy space. In Europe, Middle East and Africa, revenue grew 24% year-over-year, reflecting our continued expansion in Europe. We signed our first asset manager in Belgium and a large multi-family office in Sweden. Both of these wins are additional confirmation that Enfusion is executing our global strategy to reach traditional managers and grow beyond the concentrated money centers in Europe, where we already have a dominant position. In the Asia Pacific region, revenue grew 7% year-over-year, which is an outstanding result given the regional capital outflows and the challenging geopolitical and economic backdrop.
Our growth in APAC was driven in part by client conversion from an asset management arm of a large corporation headquartered in South Korea. We were able to take this business away from one of our biggest competitors. This client win is a testament to our focused product strategy, which has enabled us to displace established competitors up market. Edging out the incumbents reflect our ability to listen to our clients' needs as they re-evaluate their tech stack and pick a single product with one data set or single source of truth. This allowed the client to eliminate multiple modules as they look to lower their total cost of ownership. At this time, I would like to introduce Neal Pawar, our new Chief Operating Officer, to provide updates on our platform capabilities and client services.
Neal Pawar: Thank you, Oleg and everyone at Enfusion for providing such a warm welcome to the firm. Before we discuss service, a few investors have asked what led me to join Enfusion. After a career as CIO of some very large successful buy-side firms, I observed firsthand the trend of SaaS eating into the on-premise enterprise software space. When you look at the total cost of ownership of an enterprise platform, a client spends at least as much as the license fee on operating and supporting the platform in their data center. Enfusion was designed as a multi-tenanted SaaS platform from day one, and since then has onboarded over 860 diverse buy-side clients. After a few decades of seeing our industry rely on legacy on-premise systems, I'm excited to have joined the leadership team that is steering Enfusion's modern SaaS platform.
Looking beyond our recent success in client wins, our service team has been laser-focused on providing our clients with a smooth implementation, hitting critical time deadlines. While smaller clients have continued to be onboarded in record time, as we move up market and sign larger and more complex clients, the onboarding process has had to become more tailored. Through our integration toolkit and APIs, we establish a software and data partnership with our clients. This creates an electronic and also sticky relationship, which facilitates the ability once landed to further expand our relationship. On this note, during the fourth quarter, we successfully completed the second phase of implementation for a hybrid asset manager with over 30 billion in AUM, allowing the client to go live and do so on time.
This is a great example of the kind of customer we want. Since it illustrates our ability to serve a complex cross-section of our industry. This particular client, Kane Anderson, invests in a variety of assets, ranging from equities to more complex instruments like bank debt. And obviously our ability to support all the asset classes they invest in was critical to winning their business. In this case, we had initially onboarded our order management system or OMS, and then after OMS was complete, we then expanded to accounting. This is a good example of our ability to land and expand, made possible thanks to Enfusion's shared investment book of records or IBOR. As with many of our clients, we've helped them lower costs as well as operational risk by replacing multiple vendors with a single platform and eliminated manual work, like having to reconcile those different systems, which helps deliver on the lower total cost of ownership I described earlier.
The beauty of multi-tenanted SaaS models is that clients never again have to handle system upgrades. Clients of on-premise vendor software are often 18 to 24 months behind versions. Enfusion releases its software weekly. Those weekly releases ensure every single one of our clients benefits from features we are adding to the platform. For example, in this last quarter, we rolled out 247 new features across our portfolio management and order management systems. Shifting to product, our recent rollout of Portfolio Workbench, which we announced in the third quarter of 2023, has already driven new business. To recap, Portfolio Workbench's functionality enables investment managers to seamlessly rebalance their portfolios across multiple strategies and investment vehicles.
It also provides our clients with the ability to leverage in-grid portfolio editing and works in concert with our order management functionality. Through this new functionality, portfolio managers can test pre-trade compliance rules and model upcoming subscriptions and redemptions across multiple investment vehicles, all within one user interface, without concerns about data integrity. Portfolio Workbench was a key product innovation that has allowed us to win the Utah Retirement Systems Accounts in the fourth quarter. The continual focus on innovation is a core value of Enfusion, and it empowers us to compete on a global basis and strengthens our competitive edge. And now I will turn it back to Oleg to discuss market dynamics.
Oleg Movchan: Thank you, Neal. I now want to share with you some market dynamics we observed over the last few months. Despite a very modest pickup in hedge fund launches the past several months, we delivered 45 new client additions, our largest client win in six quarters. This quarter demonstrates our diminishing dependence on hedge fund launch dynamics as we diversify across market segments and regions. Although larger and more complex investment managers have longer onboarding cycles, our SaaS native architecture offers collaboration with our clients and provides a framework driving more predictable and timely onboarding processes. As investment firms experience additional cost pressures, we saw tailwinds for our business this quarter.
We see the industry players seeking our best-in-class software platforms to lower their total cost of ownership and increase operational efficiency. This is our sweet spot. We have proven that our SaaS native architecture is a sustainable competitive advantage, providing a natural platform in which workflows are powered by the same data set in software versus our competitors on-prem or SaaS Lite models. Accordingly, we anticipate that our overall composition of client wins will continue to shift more towards convergence this year. Looking ahead to 2024, our key focus will be product innovation for our clients, strengthening our bond with our partners, continuing to be a destination for world-class talent and creating superior value for our shareholders.
We see the company positioned to take market share and expand geographically. Reporting strong growth in 2023 with expanding operating margins has given us flexibility to invest in our business, talent, and partnerships. Our key focus areas for 2024 will be executing our product roadmap by expanding our platform functionality and deliver new capabilities and workflows for our clients with specific focus on traditional asset managers, provide existing clients with the highest customer service, exceeding their expectations, achieve another 100% success rate for new client implementations, invest in technology capabilities, supporting our account management and managed service teams so we continue to create value for our clients, scale our business, and improve our efficiency.
Keep a sharp focus on non-critical expenses so we can continue expanding our adjusted EBITDA margins while deploying capital into our platform and product to support business growth. In conclusion, we're excited by our results in the fourth quarter and the full year. We see the economic profile of the company continuing to strengthen as revenues grow and margins expand while we simultaneously reinvest in the business. As you may be aware from our press release, the company will be hosting an investor day in Fort Lauderdale, Florida next Tuesday, March 19th. The event will feature presentations from our executive team and provide an overview of Enfusion's fully integrated investment technology platform, current and future market positioning and growth outlook over the medium term.
The formal presentations will be followed by a question and answer sessions hosted by members of our management team. Advanced registration is required and in-person attendance is by invitation only. Individuals who have not received an invitation but would like to attend can request an invitation on the investor relations section of our website. Discussion materials will be made available on our website. We hope to see you all at our investor day on March 19th. I will now turn the call over to Brad to discuss our financials.
Brad Herring: Thanks, Oleg, and thank you everyone for joining us today. On behalf of the entire management team here at Enfusion, we're excited to announce yet another quarter of market-leading growth combined with significant margin expansion. For the fourth quarter, we generated revenue of $46.5 million, an increase of 15% over the same quarter last year. Of particular note is the fact that our revenue growth has reversed the trend of the past several quarters with our Q4 growth rate exceeding our Q3 growth rate by 140 basis points. This change is due to accelerated client activations from a strong front book and the improving trends in the back book that I've discussed previously. Just to clarify, we defined the front book as our ability to book and onboard new logos while the back book represents our ability to organically grow our existing client base.
We'll be discussing that delineation deeper at our investor day discussion next week. It's worth commenting that Q4 bookings were the highest we've seen in four quarters with 65% of those bookings coming from conversions. Fourth quarter ARR was $185.1 million, up 12% year-over-year and 4% higher than what we reported in the third quarter. Starting this quarter, we're simplifying our discussions around NDR. While historically we've discussed a fully impacted NDR and an NDR excluding involuntary churn, we've made the decision to report only our fully impacted NDR going forward. The thought process behind this change is that churn, regardless of whether it's voluntary or involuntary, affects our revenue streams the same way. That said, our NDR for the quarter, including all churn was 102%.
This is flat to what we reported last quarter, but it's worth noting that our Q4 NDR was negatively impacted by nearly one full percentage point from the consolidation of UBS and Credit Suisse as customers dropped duplicative broker connections. The impact of this consolidation will be a headwind for NDR through Q3 of this year. For other items inside of NDR, upsells remain above the lows we saw in the second quarter while churn rates continue to decline. With respect to targets for NDR, I've mentioned previously that our target for NDR excluding involuntary churn was 110%. With our revised view of providing NDR with any source of churn included, we are setting a 12-month target for NDR to 106% to 107%, applying an additional 400 to 500 basis points of upside as these measures return to normal levels.
Our reported adjusted gross profit increased by 13% year-over-year to $31 million. This represents an adjusted gross margin in the quarter of 67%. Q4 was negatively impacted by some non-recurring incentive payments made to our support and onboarding teams related to the accelerated revenues from new client onboardings that I mentioned earlier. The impact of these payments was just under one percentage point of gross margin in the quarter. Adjusted EBITDA for the quarter was $9.8 million, up 45% compared to Q4 of last year. This represents an adjusted EBITDA margin of 21%, which is up over 430 basis points from the same period a year ago. The improvement was due to improved scale across our SG&A functions, as well as some targeted cost reductions that were implemented throughout 2023.
For the quarter, we generated adjusted free cashflow of $4.3 million compared to $5.8 million in the same period a year ago. This brings our total adjusted free cashflow for the year to nearly $16 million, representing a 50% conversion rate against adjusted EBITDA. That compares to $6.2 million of adjusted free cashflow in 2022, an adjusted free cashflow conversion of 32% for the same year. GAAP net income for the quarter was $900,000 compared to $800,000 in the same period last year. Against our fully diluted share count of 127.8 million shares, our current quarter net income results in a GAAP EPS of $0.01. On an adjusted net income basis, this equates to $0.04 per share of non-GAAP EPS. We do not have anything significant to report with respect to the quarter-over-quarter changes in our balance sheet or capital structure.
We ended the quarter with approximately $35.6 million in cash and cash equivalents with no outstanding debt. As we discussed last quarter, we've recently secured a revolving line of credit totaling $100 million. But at year end, we had not taken a draw against those funds. Now I'll move on to guidance for this year. For 2024, we anticipate revenues to fall between $200 million and $210 million. At the midpoint, that represents a growth rate of 17.5%, which is 280 basis points higher than where we exited Q4 of 2023. This revenue guide assumes a macro environment consistent with where we exited Q4 of 2023. We anticipate adjusted EBITDA to fall between $40 million and $45 million, representing an adjusted EBITDA margin at the midpoint of 21%, which is approximately 250 basis points higher than what we reported for the full year 2023.
The primary reason for the year-to-year expansion is related to the increasing scale benefits across our SG&A functions, offset by investments in our product and technology capabilities. We anticipate our adjusted EBITDA margins will follow the same seasonal cadence that we experienced in 2023. This factors in the timing of certain expense considerations, such as the implementation of our annual merit increases and the timing of audit and tax fees. To be very prescriptive on this point, a margin guide for Q1 of 2024 would start with our printed margins in Q1 of 2023 of 14%, and add 200 to 300 basis points of annual improvement to get to a Q1 2024 expectation of 16% to 17%. We continue to remain confident in our ability to expand free cash conversion into 2024, guiding to a full year conversion rate of between 50% and 55%.
There are also a few tactical items I want to pass along. First, modelers should expect our stock-based compensation for the year to fall between $19 million and $20 million. The increase over 2023 stock-based compensation of $8 million is largely due to forfeitures in the first half of 2023, as well as implementation of a revised incentive plan for 2024. Second, going forward, we'll be breaking out the capitalized software as a separate line item on our cash flow statement. The objective is to give additional visibility into our product R&D efforts that fall outside of our income statement. With that said, we'd like to open up the call to questions. Operator, please go ahead.
Operator: [Operator Instructions] Our first question comes from the line of James Faucette with Morgan Stanley. Please go ahead.
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