Envestnet, Inc

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.

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.

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.