Envestnet, Inc

Greetings, and welcome to the InvestNet fourth quarter and full year 2022 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Brian Shipman, Head of Investor Relations. Thank you, Mr. Shipman. You may begin.

Good afternoon, everyone. Thank you for joining us on today's fourth quarter and full year 2022 earnings call. Before we begin, I'd like to point out that our earnings press release, supplemental presentation, and associated form 10-K can be found under the investor relations section of our website and investnet.com. This call is being webcast live and a replay will be available for one month on our website. During the call, we will be discussing certain forward-looking information. This information is based on our current expectations and is not a guarantee of future performance. I encourage you to review the cautionary statement on slides two and three for the potential risks, uncertainties, and other factors that could cause actual results to differ from those expressed by the forward-looking statements. Further information can be found in our regular SEC filings. During the call, we will be referring to certain non-GAAP financial measures. Please refer to the appendix in our presentation for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. The presentation is also posted to the InvestNet Investor Relations website. Joining me on today's call are Bill Krager, our Chief Executive Officer, and Pete DiRigo, our Chief Financial Officer. Bill and Pete will provide a company update as well as an overview of the company's fourth quarter and full year 2022 results. After our prepared remarks, we will open the call to your questions. During the Q&A, please limit yourself to one question plus one follow-up. You may get back into the queue if you have additional questions. With that, I will turn the call over to Bill.

Thank you, Brian, and thank you, everyone, for joining this evening. In 2021, Investnet took a very deliberate stance and announced our strategy to invest in the economic opportunity inherent in our unparalleled client footprint and our breadth of services. We knew that unlocking the revenue potential of a connected ecosystem would pay tremendous long-term dividends for our shareholders. We also knew that by doing so, we would experience a setback in the short-term results and But that would enable us to deliver the real value creation that is the goal of every sound investment in every resilient business. We're here to tell you that through an exceedingly painful year in our industry, marked by stunning inflation, double-digit losses in both equity and fixed income markets, and a dramatic shift away from an era of low capital costs, the soundness of InvestNet's vision is paying off. In our industry-leading account growth, deeper advisor penetration, in the rapid expansion of higher margin services, in the realization of our vision around connected data-powered advice, we are demonstrating that by delivering enhanced value to our clients, we will truly capitalize on our market share. And in doing so, we are turning the corner on both margin and revenue growth and affirming the path to our long-term goals. we have been clear and have delivered on our stated intentions. Those are to maximize the investment plan we outlined in February of 2021, creating acceleration of our organic revenue and modernizing our platform for greater operating leverage, driving greater engagement and usage of the platform by our clients, taking advantage of new processes and technologies to enable greater expense discipline, and reestablishing our margin expansion in 2023 and reaffirming our commitment to 25% adjusted EBITDA margins in 2025. Over the last year, we were there for our clients as they navigated through a period of deep market uncertainty and volatility. We delivered, managing increased volumes, enabling foundational account growth, offering them more choices to solve the challenges of a historically difficult market. Also, we have heard over and over and over again how the evolution of investments offering is answering the strategic roadmaps that our clients have planned for their futures. We're delivering the leadership our clients want from us. With foresight in 2021 and from a position of strength, we knew we would create greater value by leveraging that market leadership and making our business resilient in all market cycles. We invested intentionally to modernize the platform into the cloud to better integrate with our clients. We're delivering in the marketplace with our new client portal, our data platform, a connected proposal generation tool, and enhanced integrations. Also, to increase our operating leverage, becoming more efficient as we streamline and automate more of our processes, from daily reconciliations and service requests to compliance reporting and client conversions. as well to accelerate high-margin businesses in our fiduciary solutions, integrating and enhancing technology with data into a broader set of client-demanded offerings like direct indexing, tax overlay, RIA managed accounts, digital insurance platform, and retirement services. Investing into this moment produces an unparalleled offering coupled with extraordinary industry reach, creating what we believe is an outsized long-term opportunity for shareholders. We are more essential and more embedded into the workflows of our clients. We have delivered for them. We are aligned with and addressing how they win in the next transformation in wealth management. And that is the next super cycle of holistic, connected advice. We've earned the right and are going deeper to be an even more important part of how they grow, how they expand revenue, margin, and enterprise value in their businesses. This is what our investments and our work are accomplishing. Our results prove the strength of our business, not despite, but in recognition of the environment that we're operating in. Macro headwinds were numerous in 2022. A 60-40 portfolio was down 17%, its worst performance since the year 1937, and the NASDAQ was down more than 30%. Importantly, the U.S. retail asset management industry saw over $500 billion of net outflows across the combination of long-term mutual funds and ETFs, an organic growth rate last year of negative 1.7% compared to a growth rate of 3.5% in 2021. That is more than a 5% swing. In the face of the market we experienced in 2022, our operating results signal the progress our business is making. InvestNet posted $132 billion of total platform net flows, including $57 billion from AUM&A. Our 7% organic growth is a very strong result. Consider that for a cohort of large wealth management firms that have reported fourth quarter results thus far, organic fee-based asset growth fell substantially year over year, to 4% on average. In the AUM&A bucket, InvestNet posted $32 billion of AUM net flows, or 9% organic growth, reflecting continued uptake of our fiduciary solutions, which typically carry more attractive fee rates than AUA. These results are significantly higher than the marketplace data that we tracked. Our clients are valuing and using our platform more and more, creating cross-sell and bundled pricing opportunities for us. Over the last year, the number of platform accounts grew to more than 18 million that we serve, an increase of over 5%. AUM&A accounts per advisor grew 9% last year. Last year, over 130 firms on the InvestNet platform adopted a new AUM program. Over 2,000 advisors used an InvestNet proprietary managed portfolio for the very first time. Over 100 new solution amendments were signed across client enterprises, providing thousands and thousands of advisors with access to the cutting-edge features available through InvestNet, ultimately expanding their options to better serve their clients. We have signed several new contracts across the business from our financial planning business to data and analytics to the core investment wealth platform. We are successfully expanding the footprint of distribution and we are importantly going deeper by expanding our services to existing clients. These results are beginning to drop to the bottom line. We have turned the corner on improving profitability. Our guidance in 2023, which is based on markets as of December 31, calls for margin expansion of around 200 basis points, which would bring the margin to approximately 20 percent for the year. Factors underlying this margin expansion in 2023 incorporated the anticipated pressure that we'll see on revenue growth, countered by greater operating efficiency given our investments, as well as taking tangible steps we have to reduce expenses with laser-sharp focus on the most important priorities. In 2022, we streamline the business to drive greater connectivity, client responsiveness, and organizational efficiency. We see the collective benefit of all of our businesses working together and the investments made to strengthen the platform and create seamless, personalized, connected experiences. We're driving delivery of hyper personalization, which is a critical, critical secular trend for the industry. One example is our wealth data platform, which utilizes our data and connects that data to our next generation proposal tool and our financial planning software. And those offerings and technologies then connect to a broadening array of portfolio solutions. The interconnectivity of this environment is what drives accelerated usage and more profitable growth for our clients and for InvestNet. Add on to this interconnectivity the unique capability we have here at InvestNet to provide our clients with extraordinary insights to better serve their clients. We are now serving over 20 million personalized actionable insights a day versus 11 million insights a day last year. We have created the foundation for InvestNet's accelerated revenue growth that we articulated two years ago. The progress we have made puts us in a competitively differentiated place, just as the industry is beginning to transition to a more holistic advice model. This would not have been possible without the investments we have made. The resulting opportunities to drive our organic growth rate from this interconnectivity and data-driven personalization are numerous and they're meaningful. We're using our platform to help our clients move brokerage assets to managed accounts using our insights, scaling, and client engagement tools and streamlining workflows. One particular client has seen an increase in their firm's managed account flows by 35% quarter over quarter. Another client grew their converted assets by more than 100% year over year after enabling this powerfully connected program. These are just two examples of how our strategy is working. If we use an actual BD example, extrapolating the conversion rates that we're seeing in asset pool size, we can model out the opportunity for investment to translate into approximately $5 million of incremental organic revenue growth this year, but that will grow substantially over the next years. Other focus points we've highlighted for you in the past, the number of managed accounts on our RIA platform has grown 150% year over year, and the number of advisors utilizing this offering is up 44% since last year. The number of advisors selling overlay offerings is up 26%, while the number of accounts with overlay attached to the account is up 33% over the last year. In our direct index offering, accounts are up 30% year over year, and the number of advisors have grown 48% year over year. This is incredibly impressive growth in the face of the market we experienced last year and demonstrates our ability to execute on our strategy. We do anticipate asset growth in these solutions to be up nearly 50% in the year ahead. We're having similar success through key initiatives that deliver efficiencies and automation internally. We expect to lower recurring adjusted operating expenses, and this is meaningful given the inflationary pressures of the macro environment we're in, and also the increasing volumes that we continue to serve. We reduced our non-people expenses in addition to lowering our headcount in both U.S. and India. On December 1st, we completed the transition of our data and analytics operations to Tata Consultancy Services. As a result, we expect to realize savings this year of between $10 to $13 million, a number that will increase over the coming years as our account base continues to grow. Since the beginning of 2022, we reduced our real estate footprint by 30%. By the end of first quarter 23, we will be down by 45%. The scale we have created, a scale we believe no one can match, will deliver more efficiency as our clients continue to do more on our platform. Here are some extraordinary examples. In 2022, we achieved a new milestone. We processed 220 million trade orders, representing a 31% increase from 2021, all while reducing our expense to serve this critical function. We helped our clients trade historically high volumes as we administered more portfolios than any client platform in the United States. We've created modernized scale that meets the critical needs of our clients. This is the objective of any company's modernization efforts, and yet it is hard to achieve. But this leverage, it's just beginning for us. There is so much more to come. Here's another example. Every day, our system evaluates 233 million account details to identify instances where accounts are out of alignment with their firm's investment policy rules. This is the essence of scale, the essence of service. This is the power of InvestNet helping our clients in truly essential ways. Once again, our volumes are way up year over year, while our cost to serve this function is down. In a regulated industry, these types of unique services have inherent essential value. As our clients rely on our platform more and more, we have created scale, and while we are also driving meaningful cost efficiency in how we serve them. As part of our long-term strategy, we're achieving higher operating efficiency for our business, and we constantly look for new opportunities to strengthen our business model. A missing element of the InvestNet business model has been the ability to complete the service cycle for our clients and generate incremental ways to monetize our services. Last quarter, we announced our partnership with FNZ, which will create a fully end-to-end digital environment that will automate and scale our clients' engagement with our company. The technology integration is underway, and we are on track to be in the marketplace by the second half of this year. This is a significant step forward for our clients, for the industry, and allows us to go deeper and enable us to pursue new revenue opportunities that are associated with custody, which we've never had the opportunity to do before. To begin to size that opportunity, consider that over the last three years, InvestNet has averaged over $200 billion of gross flows onto our platform. In the future, for every 10% of these flows we capture, we believe we could earn an incremental $10 to 20 million of revenue with very attractive margins. During the quarter, we also strengthened our balance sheet by repurchasing the bulk of our 2023 convertible notes and issuing 2027 convertible notes, which we completed this past November. This extends our maturities, placing InvestNet in a strong financial position to continue executing our growth strategy and to prudently pursue attractive acquisitions and partnerships that may arise in the marketplace. In short, in 2021, Investnet, we set our course. In 2022, we executed on it. We accelerated several investments to modernize the platform, to go deeper with our clients, to drive sustained revenue growth for the company and lift the ceiling for margin growth. We have strengthened our position in the marketplace and we are winning new mandates. We've turned the corner towards the margin expansion we are committed to. Despite headwinds from the global capital markets, We will continue to drive towards accelerated growth and are committed to achieving adjusted EBITDA margins of 25% in 2025. We're executing the strategy we set out for investors, and we believe the results will create material value over the next quarters and next years ahead. I'd now like to turn the call over to Pete, who will provide details on this quarter's performance and our outlook for 2023.