AssetMark Financial Holdings, Inc.

Good afternoon, everyone, and welcome to AssetMark's first quarter 2022 earnings conference call. At this time, all participants are in listen-only mode. Later, we will be conducting a question and answer session, and instructions will be given at that time. Today's call will be recorded. Now, I'd like to turn the call over to Taylor Hamilton, head of investor relations. Please go ahead, Mr. Hamilton.

Thank you. Good afternoon, everyone, and welcome to AssetMark's first quarter 2022 earnings conference call. Joining me are AssetMark's chief executive officer, Natalie Wolfson, and chief financial officer, Gary Zyla. Today, they'll discuss the results for the first quarter and provide an update to AssetMark's business outlook for 2022. Following our introductory remarks, we'll open up the call for questions. We also have an earnings presentation that Natalie and Gary will reference during their prepared remarks. It can be accessed on our website at ir.assetmark.com. Before we get started, I'd like to note that certain statements made during this conference call are forward-looking statements. These forward-looking statements represent our outlook only as the date of this call, and actual results could differ materially. Additionally, during today's conference call, we'll be discussing net revenue, adjusted EBITDA, adjusted EBITDA margin, and adjusted net income, all of which are non-GAAP financial metrics. Please refer to our earnings 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'll turn the call over to my colleagues. Natalie, take it away.

Thank you, Taylor, and hello and welcome to our first quarter earnings call. I hope everyone is doing well. Since the last time we spoke, our team members have returned to the office in a hybrid schedule, and we've held our largest advisor event, Gold Forum, in person. which was attended by close to 500 advisors representing about a third of our platform assets. Our entire company is energized by seeing colleagues, advisors, and partners in person. Additionally, I'm excited about our strong first quarter results highlighted by record quarterly revenue of $148 million and an adjusted EBITDA of $44.5 million, the second highest quarter in our company's history. We ended the first quarter with an adjusted EBITDA margin of 30%, up 140 basis points year over year. Gary will provide more color on our financial and operating results for the first quarter, as well as provide an update on our 2022 outlook later in the call. Today, I'll start with the findings of our latest impact of outsourcing study, and then get into the five key components of our growth strategy. Starting on slide three of the earnings presentation, A recently released impacted outsourcing study furthers initial research conducted in 2019 to uncover how the role of outsourcing has changed and what direction trends are heading in for financial advisors. Advisors are outsourced by a range of advantages, greater access to investment solutions, better relationships with clients, notable improvements in their businesses, and personal benefits. In fact, according to our most recent study, About 83% of advisors surveyed agreed that investment management outsourcing has better enabled them to strengthen client relationships, up from 68% in 2019, while 82% of advisors cited increased client retention, up from 65% in 2019. Advisors also state that delegating investment management results in a tangible financial value. In fact, 91% of advisors in the study which, by the way, was a mix of advisors who work with AssetMark, don't work with AssetMark, outsource, and don't outsource, reported growth in total assets as a result of outsourcing, while 84% reported higher business valuation and 83% reported higher personal outcome. The bottom line for us is that outsourcing works, and AssetMark is built for advisors to make the decision to outsource. It's no surprise that 93% of advisors who use AssetMark as their primary outsourcing provider are highly likely to recommend outsourcing to other advisors. This is compared to 81% of advisors who outsource with another provider. We're focused on continuing to enhance our outsource offering as well as expand the channels we impact. With that said, let's turn our attention to the five key components of our growth strategy. The first component of our growth strategy, highlighted on slide four, is to meet advisors where they are, catering to a variety of affiliations and new growth-oriented or mature advisors. As more and more advisors embrace the RAA model, asset market institutional, or AMI, is well-positioned to support their growth, efficiency, and scale. I will split my update on AMI this quarter between a sales update and a features update. Let's start with sales. We continue to see strong growth within our RAA segment with the fee-only RAA leading the way. First quarter AMI production list was 19%. In the first quarter, we also signed agreements with 18 new RAA firms. And in the second quarter, we will host our second annual RAA summit. And we're really excited to have one-on-one interactions with RAAs we serve and those we prospect. On the feature side, we continue to enhance our offering. We are actively upgrading the advisor-managed platform focused on bettering the advisor experience. In addition, later this year, we will begin to offer the start of a model marketplace. With this, advisors have more flexibility in terms of the models they choose to implement. Turning to slide five, the second component of our growth strategy is to deliver a holistic, differentiated experience to advisors and their clients providing an end-to-end, easy-to-use platform designed to create meaningful conversations between advisors and their clients, while also saving advisors a significant amount of time. The global market for planning and wellness has grown significantly, and Voyant's strategy focuses on expansion by geographic opportunity. In the UK, where Voyant derives more than 50% of their revenue and is the market leader in the enterprise and independent space, The team is focusing on Client Go, that part of the Voient platform, to accelerate new business. Financial wellness is a group endeavor in the UK between the advisor and the client, and Client Go allows end clients the ability to customize their plans on their own time before, after, and in between meetings with advisors. In Canada, financial wellness and planning is the focal point of client engagement in all lines of business. Buoyant is continuing to grow their enterprise banking market share and further enhance relationships with credit unions and independents. Lastly, in the US and Australia, both new markets for Buoyant, the focus is to grow by individual advisors, key intermediaries, and investment solutions providers. Feedback from our advisors using Buoyant continues to be positive, and Buoyant is showing strong end user growth, having added nearly 10,000 enterprise consumer licenses since we acquired them in July of 2021. We're excited about Voyant's future growth opportunities across multiple geographies. The third component of our growth strategy is to enable advisors to serve more investors across the wealth spectrum, varying life stages and generation. For more, let's turn to slide six. This month, we launched our values-driven investing program, which includes four new ESG strategies, In addition to the four strategies, advisors will also have access to a suite of tools to help them facilitate values-driven investing conversations with their clients. The new resources include an investor questionnaire, client discovery tools, due diligence resources, ESG and impact reporting, and educational materials. This new program is in response to rapidly increasing demand for ESG solutions from both advisors and their investors. We look forward to continuing to provide our advisors and their investors with a wide range of personalized investment options that allow them to reflect their preferences and values in their portfolios. More on this in quarters to come. In addition to launching our values-driven investing program, AssetMark also launched our inaugural ESG report this month, another sign of our commitment to values-driven investing and diversity and inclusion. The fourth component of our growth strategy, as seen on slide seven, is to help advisors grow and scale their businesses by offering turnkey advisor solutions and programs. In the first quarter, we launched Wealth Builder Prospecting, a new tool designed to streamline prospecting for financial advisors and help them with insights to drive lead conversion. Broadridge's third annual financial advisor marketing study found that there was a huge disconnect between advisor prospecting and what investors want. Historically, prospecting takes a large investment of an advisor's time and money in a very inefficient process. Investors want a process that is easy and flexible, and they want to avoid setting up usernames, passwords, and sharing personal and sensitive data. With wealth builder prospecting, it allows advisors to invite leads into the planning process and effectively kickstart a warm client engagement in a time-efficient way that increases the chance of earning new business. While WealthCenter prospecting launched in late January, early feedback from our advisors has been extremely positive. In the two months post-launch, advisors have already generated hundreds of leads. Turning to slide eight, the final component of our growth strategy is to pursue strategic transactions by adding capabilities and assets that improve advisors' ability to serve investors and expand their businesses. As I have mentioned on previous calls, we are more deliberately focused on M&A than we have ever been before. will remain a very disciplined buyer looking only to buy capabilities that we feel could be a strong fit for our platform i will now turn the call over to gary who will take us through a deeper dive of our first quarter 2022 results and provide an updated outlook for 2022. thank you natalie and good afternoon all those on the call it's so great to be talking to so many of you

As Natalie mentioned, it is great to be back in the office with all of our team members and also great to see our advisors in person. Just last week, I attended one of our 20 premier advisor meetings held this month, and the atmosphere, the advisor engagement process, the reopening or our reopening after two years of COVID is just great for our business and for our community. As usual, I will start with a discussion of our platform assets, then talk about our revenue, expenses, and then our earnings. and we're clearly going to update on our outcome for 2022. On slide nine, first quarter platform assets from $90.8 billion, up 15% year-over-year. This growth reflects first quarter net flows of $2.1 billion, which are up more than 10% year-over-year. Offsetting our strong quarterly net flows was $4.8 billion in market loss net of fees. Analyzed net flow, As a percentage of our beginning period assets, 9.1% is slightly below our target, 10% for 2022. Momentum is continuing to the second quarter, and as we are near the end of April, I can say that we are expecting monthly flows of about $350 million, which reflects normal seasonality or the normal seasonal impact of the tax season, as well as some outflows due to market volatility. As a reminder, last year's taxes were due in May, which was our second lowest month of flows for that. Let's now turn our attention to our advisor metrics. Please turn to slide 10. In the first quarter, we added 195 new business advisors for MPAs. As we always point out, growing the number of engaged advisors on our platform is a key focus for managing, as it is crucial to drive further growth for our business and its financials. We define engaged. has loads of over $5 million in assets in our platform. Our total engaged advisors at the end of first quarter was 2,815. This reflects 61 net new engaged advisors, but offset by 104 advisors dropping below $5 million due to market depreciation. Our engaged advisors make up 92% of our platform assets. Now let's turn to slide 11 to discuss this quarter's revenue, which was a record $148 million. As you know, we focus on our revenue net and related variable expenses. In the first quarter of 2022, our net revenue of $106 million was up 29% year over year. This is due to my asset-based net revenue, which is up 25% to $100 million, and the addition of subscription-based revenue from points, which was $3.3 million. Spread-based revenue for the first quarter was $1.6 million. We expect spread-based revenue to begin to tick upward this year with the Fed raising rates a quarter percentage point during their March meeting and signaling to lift rates nearly 2% by the end of this year. I will provide additional details on how we expect these rate increases will impact our financials when I discuss our 2022 outlook. Slide 12 details our year-over-year net revenue loss. As the waterfall shows, net revenue was up year-over-year driven by the impact of our asset growth, which generated $20 million in additional net revenue. Also adding to our increase in net revenue is a $3.6 million reduction in our asset-based expenses. As a reminder, this is ongoing savings that is primarily driven by restructured agreements with providers we first revised in the second quarter of last year. Year-over-year fee compression was approximately one basis in line with expectations. Prescription revenue from Boyd added $3.3 million in additional revenue, and Boyd's consulting revenue rolled the increase in our other revenue line as well. Lastly, spread base revenue decreased about $400,000 year-over-year due to the decline in our average yield from 31 basis points to 22 basis points. Now let's discuss expenses, as shown in slide 13. total adjustment expenses increased 23% year-over-year to $111 million. Quarterly operating expenses were up 28% year-over-year to $61.7 million, driven by a $5.5 million increase in compensation expense and an $8.2 million increase in S&A. And to quickly run through our adjustment supporter, we added back a total of $8.1 million pre-tax, which is comprised of three items. First, $3.1 million in non-cash share-based compensation. This is $30 million lower than the first quarter of 2021. It represents the first quarter without the equity charges that resulted from our IPO. Second adjustment to it says this is $1.7 million of amortization expense related to prior acquisition. We set this number to be our quarterly run rate in 2022. Lastly, there's $3.3 million related primarily to reorganization and integration costs, and one-time costs related to the pandemic. Now let's turn to slide 14 to discuss our earnings. First quarter 2022 adjusted EBITDA was $44.5 million of 30% year-over-year, and our second highest quarterly adjusted EBITDA in our company's history. We are extremely pleased with our adjusted EBITDA quarter, especially given that it includes a rather sizable set related to our annual in-person Gold Forum event. The cost of this event last year was much less as it was held virtually. Adjusted EBITDA margin for the quarter was 30% of $148.20 a year. Our reported net income for the quarter was $22.2 million, compared to $25.7 million for the full year of 2021, while adjusted net income for the first quarter was $28.8 million, with 39 cents per share. This is based on the first quarter of the early share count of 73.7 million. Our adjusted and effective cap rate for the full year is unchanged at 23.5%. In further color, we see the adjusted net income loss in slide 19. During the slide 15, I want to spend some time this quarter highlighting our cash balance and cash generation, both of which I believe are key positives. At the end of the first quarter, we had just under $100 million of cash in the balance sheet, and had $375 million of available credit via our credit facility, providing us plenty of dry powder for future M&A opportunities. Cash generation also remains strong. We continue to generate more cash each year, and we expect to generate between $85 and $100 million of cash this year. With a strong cash balance, in addition to our ability to generate cash, we feel that we are a great position for M&A and investing further in the business. Let's turn to slide 16 to provide an update on our 2022 expectation. We have flexibility in our business model, given that we bill in advance and have a strong track record of expense management. By using market volatility, I am pleased to announce that we are reaffirming our earnings outlook, as well as our EBITDA margin expansion targets for the year. Let me share with you what gives us this confidence. First, let's start with our revenue map. As a result of our billing advance, we have already collected revenue for about half the year based on any platform action total on December 31st, 2021, and now on March 31st, 2022. Our 2022 revenue output was impacted, about $17 million, or had been impacted, about $17 million due to the market quality, and another $5 million related to timing issues with Boeing as a result of global macroeconomic pandemic issues. Auctioning offsetting this is a forecast increase in spread income. With the 25 basis point increase in March and signals from the Fed that we look to raise rates to about 2% by year end, we have spent an additional $9 million in spread revenue in our outlook. Reminder, our last outlook did not forecast any rate increase in 2022. As a result of the March volatility and the rising rain environment, we were reviving our revenue growth expectations from and range of 18% to 22% down to 16% to 20%. Turning to our expense outlook, our model has flexibility in our expenses, and we remain disciplined so as to not outpace revenue growth. With our revenue expectations coming down slightly due to the market volatility and the time we're going to contract, we are also revising our expense growth outlook from a range of 16% to 20%, 14% to 18%. By doing so, we look to take about $9 million in expenses FROM OUR FORECAST IN 2022. THESE REDUCTIONS ARE SURGICAL, RELATED TO TRAVEL AND EVENT COSTS, TIMING OF NEW HIRES, AND DELAYS IN NON-GROWTH AND NON-EFFICIENT PROJECTS. WE REMAIN INCREDIBLY EXCITED ABOUT 2022 AND ASK MARK'S ABILITY TO CONTINUE TO DRIVE AND GROW. WE ARE REAFFIRMING OUR OUTLOOKS OF 20% PLUS ADJUSTED EVENING GROWTH FOR THE YEAR AND EVENING MARGIN EXPANSION ON 100 BASIS. With that, I'll hand it over to Natalie for concluding remarks.

Thanks, Gary, and thank you everyone on the call today. We look forward to seeing you in person sometime soon. This concludes our prepared remarks, and I will turn the call back to the operator to begin question and answers.

Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad. If for any reason you'd like to remove that question, please press star followed by two. Again, to ask a question, press star one. And as a reminder, if using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. There are no questions waiting at this time, so I'll pass the call back over to the management team for closing remarks.

All right. Thank you, everyone. We appreciate you joining us on the call today and look forward to meeting with you soon.