Envestnet CEO says the gap between his firm and the competition is growing

August 4, 2023 2:43 PM

Bill Crager at MarketCounsel 1219.jpg — Envestnet CEO Bill Crager, right, speaks to MarketCounsel CEO Brian Hamburger at MarketCounsel Summit 2019.

As Envestnet reflects on a second quarter that met industry expectations but didn't blow analysts out of the water, CEO Bill Crager is once again looking at his firm's latest financials through the lens of a plan put in motion 18 months ago.

The leader of the Berwyn, Pennsylvania-based tech firm and turnkey program said that back in February 2021, the company took a deliberate stance by detailing plans to invest in the potential of a connected wealthtech ecosystem.

It was a decision to take a short-term hit to secure a long-term win, and Crager believes the playbook he and his team drafted then is still putting points on the board.

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"Our wealth business is building share in an environment of stubbornly low net industry asset flows, a headwind carried over from 2022," Crager said in an Aug. 3 earnings call. "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 in a more integrated environment than we had predicted.

"There's real pressure on other participants in the 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."

To see the key takeaways from the company's first quarter financial results, scroll down our slideshow. For previous coverage of Envestnet's earnings, click here.

By the numbers

Envestnet posted total revenue of $312.4 million in the second quarter of 2023, down 2% year over year from $318.9 million, and 0.85% lower than Zacks Equity Research consensus estimates.

On a per-share basis, earnings were 46 cents per share, in line with Zacks estimates. Over the last four quarters, the company has surpassed consensus earnings per share estimates three times.

Asset-based recurring revenues decreased 3% during the second quarter and represented 59% of total revenues compared to 60% of total revenues for the same period in 2022.

Subscription-based recurring revenues dropped by 3% while professional services and other non-recurring revenues increased by 34%.

Platform assets and advisor performance

Envestnet currently has a total of $5.4 trillion in total platform assets and provides services to more than 107,000 advisors.

Crager said in Q2, Envestnet's net flows from AUM/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," Crager said. "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."

Meanwhile, Crager said the number of accounts on Envestnet's platform grew 5% year over year to 18.7 million, and AUM/A accounts per advisor 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," he said. "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."

Expenses and losses

Total operating expenses for the fourth quarter dropped 7% to $327.7 million from $350.6 million one year ago. Direct expenses decreased to $123.5 million for the second quarter from $126.5 million for the prior year. Employee compensation fell 7% to $117.1 million for the second quarter of 2023 from $125.8 million for the prior year period.

Employee compensation was 37% of total revenue, while general and administrative expenses increased 19% to $53.3 million for the second quarter. General and administrative expenses were 17% of total revenue for the second quarter of 2023, compared to 21% for the prior year period.

Loss from operations was $15.3 million for the second quarter of 2023 compared to a loss of $31.7 million for Q2 2022. Net loss per diluted share attributable to Envestnet was $21.4 million, or 39 cents per diluted share.

Adjusted revenue

Adjusted revenue for the second quarter of 2023 dropped 2% to $312.5 million compared to $318.9 million one year ago, and adjusted EBITDA increased year over year to $57.8 million, up from $57.1 million.

Adjusted net income decreased 5% to $30.4 million from $32 million, and adjusted net income per diluted share decreased to 46 cents from 49 cents.

Remarks:

"Envestnet continues to create value for its clients and differentiate ourselves from the competition by delivering the most integrated ecosystem of data, technology and solutions," Crager said in a statement released alongside the Q2 financials. "We are outpacing the industry in flows, gaining share and helping drive the growth and productivity of our clients, all while executing our strategy of long-term revenue growth and margin expansion."