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spk03: One of ours, a broker-dealer independent financial group, which has $40 billion of assets and hundreds of advisors, has contracted to use the entirety of our platform and ecosystem of InvestNet solutions. This includes all of our platforms and services, our data and analytics, our complete suite of financial planning technology, our investment solutions and related technologies, and our broader network of exchanges. This is a great example of the value created by putting the pieces of InvestNet together into an integrated environment. And it expands our revenue opportunity with clients that go all in with us by about 25% before factoring the uptake of additional asset management and fiduciary solutions. We're getting more of these types of engagements in our renewal pipeline. Sure, not every client will use every InvestNet solution, but more and more are engaging deeply with our capabilities, providing continued and accelerated revenue opportunities for us. The headline for InvestNet is that we are leveraging the investments we've made, we're growing market share, while benefiting from a stronger Q2 market. But the market benefit was neutralized by overall challenging industry net flow environment. And our DNA research business has faced significant headwinds, but we are on the path to stabilization and restoration in this business. Tonight, we'll focus our prepared remarks to talk about the industry and market context and what it means in terms of revenue growth and why we are optimistic for the trajectory of our business. We'll spend time on the DNA business to explain the dynamics, the challenges we're facing, and the progress the business is making to restore growth over the coming months. And importantly, we'll spend time on expenses. We're very focused on managing our bottom line, driving margin expansion and cash flow, and we'll discuss how we will exit 2023 as investments flow through to productivity and scale, resulting in greater profitability. Our wealth business is building share in an environment of stubbornly low net industry asset flows, a headwind that's carried over from 2022. We continue to execute, and we're doing what we said we would do, putting us in a powerful position just as the wealth market accelerates to the more integrated environment that we had predicted. There's real pressure on other participants in this space today as we move ahead into areas of significant impact like data intelligence, while others are trying to solve problems that are scaled areas of advantage for us. InvestNet drives and we benefit from strong secular tailwinds that are powering the industry in the quarters and years ahead. Increasing demand for financial advice, growth of independent advisor channels, fee-based and managed accounts, and UMAs, these are the growth engines for the industry. In all industry segments, which also includes technology-enabled offerings and more and more industry utilization of data and insights, the market is moving in our direction. We are capitalizing by gaining share. In the second quarter, our net flows from AOM&A were $10 billion, representing an organic asset growth rate of 5%. These flows are very healthy, especially in the context of the broader industry. For example, Long-term mutual fund and ETF flows across the industry were essentially flat once again in Q2, and multiple wealth firms reported seeing low investor buying activity given the debt ceiling overhang and other factors, a trend that seemed most pronounced among high net worth investors. Looking at our annualized organic growth rates for public companies that have reported so far, the average growth was between 1% and 5%, compared to our 5% organic growth. I think it's very useful to look at longer-term trends regarding flows for some added perspective. Looking at our AUM net flows compared to those of the managed account industry overall, we've gained 70 basis points of share in the last few years. Compared to our publicly traded TAMP peers, our AUM&A flows in dollars have been about seven times larger than their combined flows. over the last three years. These types of flows get reflected in more activity by more advisors utilizing more of our services. In the second quarter, the number of accounts on our platform grew 5% year over year to 18.7 million, and AUM&A accounts grew 7% year over year per advisor. The outperformance of the industry in flows and the growth activity on the platform are leading indicators of our business. Over the last couple of years, assets, accounts, and advisors are all up in our higher margin tax, direct indexing, and high net worth solutions. Active advisors selling these solutions have grown 61% over the last 18 months. In tandem, the gross profit is projected to grow by 26% from 22 to 23, and over the next few years, we expect a 40% CAGR for these solutions. As industry asset flows normalize, there's an important dynamic at play for us. The share gains, account advisor growth will translate to accelerated revenue growth. The revenue story for InvestNet is grounded in these higher margin solutions and data and technology-enabled adoption and cross-sell. Over time, we see fee rates expanding as we cross-sell more solutions. Let me share a few examples of this in practice. The promise of data in the wealth business is paying off. It is a leading capability for us, a differentiator, and it drives longer-term flows to higher-margin solutions. Our enterprise-wide reporting solution, which aggregates both managed and held-away accounts and generates them into opportunities, has meaningfully increased its pipeline into double-digit millions while launching two firms this quarter with over $35 billion of assets collectively. The InvestNet Wealth data offering provides tremendous value by creating more visibility across more assets that ultimately will use our platform to be managed assets. The industry has taken notice. Our insight engine was named the best AI-based solution for financial services at the AI Breakthrough Award. An important use case is one of our leading clients who plans to share an additional financial $150 billion in off-platform assets through the data platform by the end of the year. This allows InvestNet to consolidate more assets and drive more cross-sell opportunities. From a financial standpoint, every 10% of these assets we convert represents a roughly $9 million gross profit opportunity for InvestNet, assuming a six basis point net fee. We're also working closely with our asset manager and client partners to drive mutually beneficial outcomes. The Insights Engine identifies engagement strategies for over $1 trillion of brokerage to manage and advisor as portfolio manager opportunities on our platform. We're working with partners and their distribution teams to maximize this opportunity. For every $100 billion of brokerage to managed flows, that equates to roughly $60 million of gross profit to investment assuming a six basis point net fee. We continue to innovate and connect all the pieces of InvestNet together to drive greater productivity and growth for the firms and advisors who use our platform. Our modernized proposal tool is connected to the entire ecosystem of solutions, including PMC portfolios and services. It's connected to our exchanges, tax and FSP overlay, and analytics. This has opened more and more opportunities and we see that client firms have turned on 25% more of these solutions this year versus the prior year. We continue to make progress on unique custody options through our partnership with FNZ. We talked a lot about this, and the benefit it will provide our clients with an option for a more digital environment, and capturing the economics of cash through this partnership fills a gap we have had and creates a long-term benefit for InvestNet and our shareholders. As we've integrated the ecosystem, it is accelerating our pipeline, driving value for our clients, and creating bundling and pricing opportunities for InvestNet. Our strategy, and more importantly, our execution, is working in the marketplace. We've created the most seamless operating system, networked to the broadest set of solutions with digital and data-driven engagement tools. is increasing client engagement, helping them be more productive, which drives more cross-sell and assets on the InvestNet platform. Now, let's spend a few moments on the data and analytics business. As I spoke about just a few moments ago, what we have created in the wealth market is competitively unique, is being well-received and adopted, and is foundational to the long-term advantage as we serve the industry. While other participants in the space work to figure out and build feature sets and configurability, things that we have long delivered at scale to our customers, we're able to move to AI-driven insights that drive greater adoption for a vast set of solutions. That said, in the non-wealth parts of the data business, we continue to see challenges, particularly in our data research business. This has been a resilient headwind for us, an increasingly competitive market coupled with the decline in the quality of users in our data set has pressured revenue in the business for several quarters. We indicated we would experience weakness in the first half of 2023 with stabilization coming in the second half of the year. We've been focused and purposeful on restoring our data sets. We've made significant progress and we'll be back in a position of strength with the best quality, the best quantity of data that we've ever seen. Those data sets are in production and we're testing with clients and will be live by the end of this year. This is why we feel good that the business is stabilizing and leading to stronger interest and higher renewals and pricing. The remainder of the year should have promising bookings for this business that will point to restoration of the revenue in 2024 and beyond. Next, I'd like to provide some thoughts around expenses and reiterate our conviction in achieving a 25% adjusted EBITDA margin in 2025. In 2022, our adjusted EBITDA margin was 17.8%. In the first half of 2023, we expanded the margin by 90 basis points compared to the first half of 2022, despite macro headwinds. This performance has been driven by a combination of expense discipline and investments we have made to modernize our platform. In the back half of 2023, we expect to drive even stronger margin expansion. helped by incremental efficiency initiatives. For the full year of 2023, we're now expecting to generate margin expansion of 270 basis points, which is at the midpoint of our guidance range, putting us at around 20.5% for the year. On the expense side, the key takeaway is that we've exited the investment cycle and are focused on managing all expenses, which include personnel, vendors, G&A costs. while not wavering from our key strategic initiatives, client support, and product delivery commitments. As our investments take root, here are the specific expense actions we've taken and will continue to enact. Our onshore headcount is lower year-to-date by 5%. As we noted last quarter, we've taken action by restructuring, combining teams, now joined by the unified technology work that we've done. We've been very judicious about selected hires. We've reduced the first half real estate occupancy spend by 27% and marketing by 33% as we use data and analytics to more efficiently target our efforts. Both areas are targeted for additional efficiency in the second half of the year. In total, adjusted expenses are down 3% in the first half of 2023 with 7% year over year reductions targeted in the second half of the year. All of this equates to full year adjusted expenses excluding costs of revenue being down 5% year over year. The entire organization is focused on managing our expenses while making sure our priorities are fully aligned with the needs of our clients and drivers of financial results for the company. Looking beyond 2023, there is additional room to expand margins. We are confident in revenue growth acceleration via our solutions and more normalized industry flows. Despite challenges in the market and in the non-wealth DNA segments, we continue to make considerable progress on our plan and remain committed to our 25% adjusted EBITDA margins in 2025. We have modernized our platform, expanded our solutions, connected the pieces of InvestNet to drive greater adoption and engagement from our clients. As we operate in this stage of our cycle, we continue to focus on our core strategy while we review areas that are non-core to the business. We are disciplined in our expense and capital allocation to accelerate our earnings and free cash flow in the coming quarters. I'd now like to turn the call over to Pete, who will provide details on this quarter's performance and our outlook for the rest of the year.
spk01: Thank you, Bill. Our second quarter results provide evidence of how the business is progressing through this phase of our investments. As expected, we are seeing margins expand compared to 2022 while we are effectively managing our expenses. While the macroeconomy performed well in the quarter, the wealth industry continued to experience dampened flows while advisors and firms remained cautious during this recovery. Our expectations for 2023 were that the year was to be one of execution and delivery with the anticipated result of margin expansion, which we are demonstrating. As Bill described, we are continuing to see positive signs for future revenue growth in both segments. For the second quarter, revenue came in at the low end of our guidance range. Adjusted EBITDA was above the high end of the range. Adjusted revenue was approximately $312.5 million. Adjusted EBITDA was $57.8 million, while adjusted EPS was 46 cents. Our guidance for Q3 and for the full year is laid out in the earnings release and in the supplemental presentation. Overall, the environment in Q2 continued to present challenges for clients and prospective clients, impacting both segments of our business as well as both asset-based and subscription revenue. While industry-wide flows remain under pressure, our wealth segment continued to experience positive net flows in our asset-based products, although the mix of flows has not been as favorable for our average fee rate. Our guidance for the rest of the year reduces our outlook for net flows and mix from what we had previously expected. At this point, these updated assumptions for the rest of the year are offsetting higher revenue from Q2 capital markets increases. We expect subscription revenue in the wealth segment to grow at mid to upper single digits organically for 2023. The data analytics segment had challenges in research as well as delays with bank and tech clients. The emerging wealth channel is showing positive signs but is still a relatively smaller part of that segment. While we have lowered our DNA forecast for the rest of 2023, there are positive signs in the segments bookings and client pipeline. For the third quarter, we expect adjusted revenue to be between $316 and $319 million, adjusted EBITDA to be between $64 and $66 million, and adjusted EPS to be between $0.52 and $0.54. For the full year, we are modifying our adjusted revenue guidance to be between $1,252,000,000 and $1,259,000,000. Adjusted EBITDA to a range of $255 and $260,000,000 and adjusted EPS of $2.09 and $2.15. Our guidance as always does not assume any changes in the capital markets from prior quarter end and is based on market levels as of June 30th. Turning to the balance sheet, we ended March with $59,000,000 in cash and debt of $913,000,000 making our net leverage ratio just below 3.9 times adjusted EBITDA. In June, we paid down the remaining $45 million outstanding on our 2023 convertible notes using our revolving credit facility. As of June 30th, only $20 million remained drawn on the revolver, and that $20 million has been paid down in July. We expect our high point for the leverage ratio to be March 31st of this year, dropping below 3.5 times EBITDA by the end of the year. We expect to continue to reduce our leverage ratio and improve our balance sheet with growing EBITDA going forward. One last point to note, we expect to see an increase in cash taxes paid in 2023 related to the legislative change eliminating the immediate deductibility of research and development expenses effective for tax year 2022. We'll have an estimated payment in Q3 of approximately $13 million. which is higher than our quarterly expectation going forward in the near future. We paid cash taxes of around $2 to $3 million quarterly over recent years, and we expect that to go up to $4 to $6 million quarterly for the near term. Again, all related to this legislative change from 2022. Thank you again for your support of InvestNet. And before we open it up for Q&A, I'll turn it back to Bill for his final remarks.
spk03: Thank you, Pete. Investnet is executing on our strategic plan. We're on the path we set forth for driving sustained revenue growth and margin expansion while creating greater demand and engagement from our clients and a significant competitive advantage in the marketplace. We continue to gain share with industry leading flows and are addressing the challenges in the data research business. We will continue to be laser focused on our expenses and have confidence in the revenue upside through our network of solutions data, and technology. As always, I'd like to thank every member of the InvestNet team. Hard work, dedication to our clients, industry-leading innovation, these are the hallmarks of a great organization, and I'm appreciative every day for your excellence. And to our clients, thank you for the trust you put in us and the partnership to drive greater growth for your business and better outcomes for your clients. It is extraordinary what we are doing together. Now I'll hand it back to the operator for questions.
spk00: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. And our first question comes from the line of Michael Cho with JP Morgan. Please proceed with your question.
spk02: Hi, Bill and Pete. Good evening, and thanks for taking my question here. My first question, I just wanted to touch on kind of the industry flow trend that you highlighted, Bill. You know, you talked about kind of that sentiment bleeding into investment as well. I'd like to And really carrying on from 2022, I guess, in your mind and from your seat, I mean, what do you think is prolonging that friction in the space and for investment as well in terms of kind of industry advisor and AUM flows? And really, what causes it to normalize from here? And what does normalized mean in your mind?
spk03: Yeah, thank you, Michael. Hope you're doing well. It has been a stubborn, I think, in my prepared remarks, I use the word stubborn, and it's been a very stubborn dynamic. And yeah, the first half of the year has been a healthy first half for the capital markets. But as you know, it's been pretty narrow, right? So the The leaders of the market are concentrated in a couple of, you know, stocks and so that the broader market really hasn't participated along with that narrow group. And, you know, what's been interesting, because whenever we've had a healthier market, it correlates to, you know, increased flows, increased account openings, and that has not been the case this time. And, you know, I think it goes back and it really tells you very clearly that, you know, there's an alternative out there. And that alternative are yield assets, whether that's cash, fixed income, you know, the yields are higher with a higher interest rate. We spend a lot of time focused on, you know, the industry data. And the industry data, you know, Q2, ICI, mutual fund, ETF data, you're negative. in 2Q, which is surprising given the health of the overall market or the returns of the over, the headline return of the overall market. Then we dig in, we look at a lot of survey data and surveys particularly around the high net worth category or even more deeply negative. And then you dig in and you look at some of the public comps that we study, whether that's a wealth management firm or whether that's an asset management firm, and those growth rates have been really kind of suppressed. So this is not an investment issue. It's an industry issue. I speak to a lot of leaders in the business, whether leading asset management firms, wealth management firms, and there's some head rubbing out there on, okay, what is that catalyst? How does it begin to turn? I think it turns Michael, as you broaden out the participation in the overall market, and the rate overhangs there, the government's debt issue was there in the quarter. You've got this recessionary overhang that certain banks continue to talk about. And so there's a risk off. You've got an alternative in cash. and you need to broaden out the participation in the market for the flows to respond. All of that said, I look at how InvestNet has performed, and I'm looking at our overall organic growth rate, which is at the upper tier of any firm that we really take a close look at. And then I look particularly in some of these higher value services, and yes, They're not meeting our expectation as to what we thought when the market began to turn that would be a quicker restoration towards flows. But we're doing really well there. We've enrolled or have active advisors over the last 18 months of 61 percent growth in number of advisors using these solutions. And, you know, if I dig in and I look at each of these types of capabilities, the direct index capability, for instance, you know, 41% growth in assets, 26% in accounts, 47% in advisors, year-to-date or year-over-year growth rates. That's impressive. And so we're chipping away. We're doing what we're doing. I think we're at the upper tier of the growth in the flows in the industry. And returning back to the conversations I have with the asset manager partners who distribute with us, a lot of feedback is that we continue to lead. When they look at the flow rates that are coming in, into different environments across the wealth industry, InvestNet has performed probably at the top tier of those types of opportunities or distribution points for the asset manager community. You know, it's on a comparative basis that we're doing well. It's not on the actual basis compared to what we were hopeful as the market began to restore, you'd see a restoration of flows.
spk02: Great. No, thank you for that, Bill. And I guess just for my follow-up, just kind of switch gears on the other side of the business, on your DNA business, I appreciate all the commentary there and some of the near-term puts and takes you walk through. So I'm just kind of curious what you're hearing from clients as well. I mean, is it kind of clients kind of delaying purchasing decisions or is it really just a matter of product pipeline and Just kind of curious, again, from your seat in terms of what you're hearing from clients and sentiment there for investments products.
spk03: Great. Thank you, Michael. I'll spend a minute on the DNA business, and I'll kind of walk through kind of what we're seeing. In the wealth market, with our wealth data product, there's high demand. There's a deep pipeline. There are really good bookings. There's good adoption. And firms that are adopting – particularly in this brokerage to manage where we're looking at kind of the firm's broadest set of data and we're moving assets into, beginning to move assets into more managed account environments. Those firms are top tier growers for us. It's having an effect. And that effect is great data to return back to the marketplace and say, hey, firms that are using this are growing at a faster rate. Here are some numbers. And so we're very bullish there. And, again, I'd reiterate that the pipeline is strong and the bookings are strong. The usage as it goes up is driving a faster result for our clients. So we're very enthusiastic about the wealth data offerings. The bank market, as you know, has had a tough, very difficult first half of the year. There's some delays on a particular client deployment, and that's impacted our outlook for the rest of the year. And then in the fintech market, particularly the larger fintech-type companies which utilize our verification business, there's lower volume, and that's also had an impact and impacts our outlook for the rest of the year. The real challenge, though, I'll put a circle around the research business. And in that research business, what we do is we de-identify data. We look at underlying consumer activity separated into kind of generic data sets. We share that with a universe of asset managers who utilize that to help understand momentum or activity for a particular company. It's been a very useful capability and something that we, you know, really innovated in that space and were a leader in that space. But over the years, there's been competition. And the competition began to match our data set. And, in fact, our data set was degrading over the last couple of years, given, you know, the data makeup and the characteristic makeup that we were able to utilize and share with our research clients. That said, so that's been a focus of ours. A focus of ours has been to restore that data set, to improve it, and to create a characteristic set that was once again unique and preferenced or kind of more competitive than what was in the marketplace. That can happen overnight. It happens over quarters. And I would tell you that as we get to this year versus the beginning of the year to when we end the year, contracted in the door, being processed, and beginning to be shared with our research data clients is a data set that has profoundly been enhanced in the many, many, many millions of users and many, many, many millions of characteristics that have real value because of geographic reasons, because of demographic reasons, and it is now, I believe, The high watermark for the quality of data that we're able to provide to our research clients and the high watermark for the quantity of data that we'll be able to share with our research clients. So that doesn't solve the short-term revenue headwind that we faced in the first half of the year. I believe, you know, over the last couple of earnings calls, I've called out that the first half is going to be weak and that we'd begin to see stabilization and restoration as we got to the back half of the year. I'm reiterating that outlook, that the first half of the year was, you know, was a challenge in that research business. But now, as we've, you know, acquired, processed, beginning to share that level of data with our research clients, we believe that that business will be stabilized. and that towards the end of the year, we'll start to see a restoration in the revenue for that research business. I hope that's helpful.
spk05: Thanks, Bill. Appreciate it.
spk00: Thank you. And our next question is from Devin Ryan with JMP Securities. Please proceed with your question.
spk03: Hey, Devin. How are you?
spk07: Hey, good, Bill. How are you? Hey, Pete. I guess first question just, you know, kind of hitting on expenses and, you know, if I look at the guidance for the third quarter, I think it implies for the fourth quarter, something like 64 cents to 70 cents for fourth quarter EPS. And so it implied pretty nice step up in EPS from the third quarter. And so it sounds like that's expense driven primarily. And so I just trying to think about some of the moving parts there. So there's kind of two things going on. There's, these efficiencies are driving. But then I think there's also a little bit of timing or seasonal dynamics. So just trying to think about the kind of pieces to getting to a better expense level at the end of the year, based on some of the things you said. And then maybe it's a little bit earlier, but just thinking about a jumping off point for 2024, just given that expenses are obviously in focus.
spk01: Yeah, so this is Pete. Thanks, Devin. You've caught kind of the highlights on the expense side. It's not entirely expense driven. There is some revenue growth assumptions that kind of meet sort of our ongoing growth trajectory, although we've obviously pulled things down a little bit from what our prior expectations were. But yeah, on the expense side, it's a couple of things. It's the activities that Bill mentioned that is going to kind of lower our run rate, and then there is that seasonality aspect where we typically see the fourth quarter come in a little bit lower, and then probably in Q1 comes in a little bit higher. But still, a general run rate is going to be significantly lower compared to where we have been in 2022. So I'll let Bill get into the higher levels. Yeah, strategy of that.
spk03: Right. So, Devin, so a couple of things that will happen between now and the end of the year is, you know, we've kind of, you know, we're factoring in the overall flow rates. And it's just not the flow rate, it's kind of the fee dynamic to that flow rate, where the assets are coming from and kind of what solutions they're coming into. And that really modified our guidance for the rest of the year. But there are real kind of interesting and notable revenue opportunities that will begin to come to fruition as we get to the to the fourth quarter of the year. Included in that are how we're partnering with asset managers and pulling them in a little bit more closely to the engagement strategy that we have across the span of our business that will generate, begin to generate additional revenue high margin revenue as we get to 4Q. The other dynamic as we get to 4Q on the revenue side will be our partnership with Empower for the retirement business begins towards the end of the year. So those are dynamics that that are kind of the pluses where some of the headwinds that we're factoring in on our guide are very much industry flow assumption that we've experienced in the first half of the year. And we don't want to be ahead of whenever that trend begins to transition. We're going to be observers and say, hey, this is the overall health of the marketplace. And then we'll modify to to make sure that we're in line with when the restoration of flows begins to happen. But I do want to highlight or call out some of these other revenue opportunities that we see coming before the end of the year and then will be ongoing as we roll into 24. On the expense side, look, This is a very focused organization. We're focused on a couple of things. One is that the wealth market, we believe that we are deeply establishing a competitive advantage given the integration work we've done and how we've injected the data into that environment to help power the growth and efficiency of our clients. So that's a big deal. And so the focus on the wealth market, we think, creates material and long-term competitive advantage for Investnet to continue to win share and continue to grow. We'll power our growth. And connected to that is the focus on the execution of strategy. A couple of years ago, we said this is where the industry is headed, and it is exactly where the industry is headed. It is a more integrated, holistic wealth environment and utilizing data technology and a connection to a broader set of solutions, and that's exactly what we're delivering to our clients. Clients are reflecting that back to us, and they're utilizing us more in a holistic way. But really very important, important, important is our focus on margin and expenses. where we're focused. Our priority list is pretty sharp. It's pretty tight. We're delivering on it. And then when we look around the firm, we're managing expenses in every corner to make sure that we are going to deliver on that 25% adjusted EBITDA by 2025. That's a high watermark that we believe that we can sustain from a profitability standpoint. And we're making progress. We're going to make progress this year, despite some of the headwinds. But we're going to make important progress as well in 2024. We'll roll into 24 in a strong position to make that progress.
spk07: Okay, terrific. Thank you. And then just a follow-up on some of the cross-sell opportunities. Obviously, you guys have been talking a lot about Insights Engine, and it does seem like a differentiated offering and a win-win for both you and advisors, and ultimately clients as well. So I'm just trying to think about the ability to really get more traction there to kind of accelerate the cross-sell opportunity, you know, is it just more an education aspect of just getting in front of folks and making sure they understand the capability? Because again, it seems like it would sell itself, but at the same time, how do you accelerate that growth and how do you get it to, you know, another step function higher, if you will?
spk03: Yeah, that's awesome, Devin. And, you know, so there is, you know, I said it there when I was talking about the data business, high degree of interest in it, the pipeline's strong, the bookings are strong, and usage is beginning to, you know, usage is picking up. And as the usage picks up, you get some really great return data, meaning, you know, firms that are utilizing the Insight Engine are just growing faster than other firms. There's a great marketing story there, and it's an important one. It's fact-based and data-based. And so we're excited about that. One of the things that we are also, and this is connected to another important focus of ours, which is pricing. And as we move forward on renewals for our clients and contracts, you will see the data inside engine bundled in with an increased fee from a licensing standpoint on the licensing contracts in those renewals. And so what we're doing is we're bundling that data into our base products, whether it's trading, rebalancing, reporting, et cetera. And the value add for us is incremental higher subs rate But the real kind of objective there is to drive more and more usage of the data platform, which will drive more and more kind of adoption of these higher value fiduciary solutions that we provide. So it is embedded in the strategy. It's embedded in the platform. It's embedded in our go-to-market. It's going to be embedded in our pricing.
spk05: Okay. Thanks. Appreciate the color. All right. Thank you, Devin.
spk00: Thank you. And our next question is from Pete Heckman with DA Davidson. Please proceed with your question. Hi, Pete. How are you?
spk06: Good, good. Thanks for taking my question. Listen, I just wanted to follow up a little bit on the custody opportunity. We're getting closer to that. I just wanted to see the feedback you're getting from clients, where you're getting the most interest, and if possible, if you can help us start to handicap or size the opportunity and how that might roll on and kind of what it looks like in terms of maybe the amount of revenue and kind of the incremental margins involved.
spk03: Great. Thank you, Peter. Yeah, no, it's been, you know, so we're continuing to be leaned in. And, you know, I talked about focused on priorities. One of those focuses is clearly the integration work and work that we have going on with FNZ, which I've spoken about in the past. Just for those of you who are not completely up to speed, FNZ is a new U.S. entrant, a global firm. have done a really great work at creating a more digital environment for the custody business, and we're partnering with them. Today we trade, Peter, as you know, to the industry, right? So every sort of custodian or trust system that's out there, we're connected to, and our clients are able to utilize those. FNZ is another option, but it's an interesting option because In that option, it is fully digital, real-time account opening, real-time exchange of data versus a batch process, which is how much of the industry works today. In the relationship with FNZ, we'll be able to garner economics that we have not been able to participate in the past. Those are from a custody standpoint, but they're also from cash management and other feature sets that come along with a custody offering. If you look at, I've said this in the past, kind of in the past is, hey, look, I feel very, very good about the InvestNet position. I feel very good about the InvestNet business model, but our Achilles heel has been that we have not been able to serve cash and that this is going to resolve that for us. And that'll become a revenue generator versus assets or dollars that are moved away to be served outside of our ecosystem. So this is a good opportunity for us. I would also say, and I think I've said it maybe on prior earnings calls, is I believe that the digital nature of what FNZ is doing in the marketplace will bring other firms along. And that has been the case. So as we lean in with FNZ, we have very strong and very deep partnerships with the other custodians and working with the other custodians to figure out how to digitally connect to the investment to streamline account opening administration, et cetera, I think is all, you know, very interesting and work that we're excited to engage with those partners. We, you know, I think the way to think about the economics really is that, you know, if you look at a gross sale number, gross assets, the flow between the Tamarack platform and the Investnet platform, during the course of a year, you know, it's been running at about a trillion dollars between the Tamarack platform and the InvestNet core platform. $200 billion of that would be on the kind of the InvestNet platform. If we're able to convert 10% of that, those dollars on the $200 billion, then you're talking about a $10 to $20 million run rate of revenue that we'd be able to generate, you know, there. So it's meaningful. It's also very high margin. you know, as we're successful there. In the market, I would say there's been a lot of interest. And it's one of the service challenges our industry has in a multi-custody world is, hey, I've got to operate these different ways of opening accounts and servicing, administrating. This is more turnkey. It's purely digital. It's real-time. And, you know, that's a promise or a perspective. that has not been presented really to the advice industry before. And so there's a lot of interest. We'll have early successes in 2024. So there's definitely a 24 story, not a 23 story. And we'll get going, you know, beginning to build business there in 2024.
spk06: Great, great. That's helpful. And then, you know, I assume custody is one of these buckets, but can you just remind us of some of the larger buckets of how you're thinking about returning to 25% EBITDA margins by 2025? I think that's something like 400, 500 basis points. And I guess, how do you think about expense controls, expense reductions versus high incremental revenue in terms of hitting that goal?
spk03: Yeah. So, you know, we we we're gaining share. We're driving more into these high value solutions. Those carry a higher gross net for us. And as we get a normalization or restoration of some degree of flows into the wealth markets, it'll be there. There's a lot of cash on the sidelines. There's a lot of money that is waiting to be put to work. That will be, from a percentage and market share standpoint, more likely to be in the investment environment than kind of competing platforms. So we feel very good about the position that we've put ourselves in, Peter. Because the work that we've done has advantaged the platform, made it easier to open accounts and to drive towards these higher value solutions. And we're using the data insights to really kind of motivate them. There'll be more and more adoption of those over the next couple of years. So our growth will be ahead of market. And we believe long term with a restoration, we're not going to back away from this idea that we'll be a strong teens grower, you know, in a normalized market. In the meantime, will grow ahead of the market and that growth will drop more meaningfully over time to the bottom line. Why? Because we're created, in the investment cycle and in the modernization cycle, we've created a tremendous amount of efficiency in our operations. I'll give you an example. Last quarter we had one of our largest trading quarters in our history, top five or so. And and we did that with exactly flat headcount didn't add any headcount as the volumes are very significant and We had 25 percent fewer traders. So we're doing what we're doing the scale is growing and we're doing it on normalized to lower headcount across the business and We're doing it more effectively and And that, you can see it in our trading, you can see it across the administrative parts of our business. We'll be able to do more because of the AI and the cloud work that we've done with fewer personnel costs to serve the business, which will drive higher margin. And then the last thing I'd say is that, I said it just before, is focus, focus, focus on prioritization and focus on where we're spending money. And, you know, again, the modernization of the platform has connected our operating environments. We don't need three trading teams. We don't need three performance reporting teams. You can start to consolidate those groups into best in the industry talent and get the real scale and quality that, you know, that investment is known for. So there is, you know, As we normalize markets, we're going to grow the EBITDA and profitability of the company. That'll be delivered. And I will reiterate that the 25% adjusted EBITDA will come no matter what the top line does. we will deliver on that commitment to investors, and so there is the flexibility and room to do it. We don't want to disrupt the work that we're doing, so we're very focused on executing on it, but we're also very committed to the 25% adjusted EBITDA.
spk06: Okay. Okay, Ben. Well, good.
spk05: It's great to hear the confidence, and we'll look forward to seeing that progress.
spk00: Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. And our next question comes from the line of Surrender Thin with Jeffrey. Please proceed with your question.
spk05: Hi, Surrender. Hi, Bill.
spk04: Hi. I guess for the first question, I'm just trying to get a sense of you talked about having exited the investment cycle and you're now focused on the managing expenses. So as you move forward in trying to, you know, sell more of your high value at the fiduciary solutions. Is it just that there's a bit more handholding that's kind of required at this stage with clients? Is it a bit of a macro issue? How should we think about the dynamic of where growth is currently versus where you want it to be?
spk03: Yeah, it's very market related, Surrender. So, you know, exiting 22, you've got as I said, a healthier market from a headline standpoint. You know, the returns are positive. It's green, right? But it's very narrow. And so when advisors look at it, at portfolios in a holistic way, and they're thinking about diversification and not concentrations, And so when you're thinking about the financial advice and how it ties to a financial plan, you automatically have a reasonably conservative posture. On the other hand, you've got alternatives now. You've got cash yielding, you've got other fixed income kind of yields that are pretty steady, that are much higher than they've been for more than a decade. And, you know, they're also safer. And so advisors are waiting for that catalyst. They're waiting for that moment where the market broadens out and they put the money to work. Now, all that said, I'm going to give you a couple of statistics. In our direct index business, which we're one of the leaders in the industry, we're significantly growing assets, year-over-year growth of 41%. Account numbers are up 26% year over year. And advisor usage, new advisors using that platform, advisors are up 47%. So in the market environment, we continue to chip away. We've broadened our footprint and opportunity set by contracting with more firms that have access to the product. Advisors are using it, you know, 47% more advisors year over year. But the account flow isn't all there. And I think that when the catalyst occurs, you're going to see the benefit, an accelerated benefit across our platform, particularly in these high value personalized solutions, which is exactly where the market is headed. And that's how we positioned ourselves.
spk04: That's helpful. And then you also made a comment. I only caught part of it. So apologies if it's just a clarification question here. But I heard you mention something about reviewing non-core areas of the business. Can you elaborate on that, please?
spk03: Sure. Thank you, Surinder. You know, I'd use the word focus in that, you know, we're focused on the wealth market. We're focused on bringing the parts of our business together to really exert the competitive advantage that we've invested in. And that is what we've got the company tuned into and tuned onto. That is what we're delivering and focused on. So as we go through that, and you get to this stage of an investment cycle, you start to really, again, the word focus. What are those areas that contribute to that mission, and what are the areas that might not really participate and not be closely aligned enough from an adjacency to be focused on, to be investing in, to build markets outside of that core focus? And that's exactly where we're at at the moment. is really doing those evaluations and thinking through, okay, what adds to the competitive long-term advantage of what we've built from a wealth standpoint and what is not core? And that's exactly what it is.
spk05: Thank you. That's it for me. Great. Thank you, Surinder.
spk00: Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Bill Crager, CEO, for closing comments.
spk03: Thank you, Camilla. As we wrap up, I just want to again thank all of my colleagues at InvestNet. You do an extraordinary job, and the work that we're doing is making a difference. Thank our partners. Thank our customers and clients for your partnership together. We're changing the way advice is offered to millions and millions of households. I also wanted to thank our shareholders for your commitment to InvestNet, and I'm looking forward to seeing you and talking to you all next quarter. Thank you.
spk00: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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