Envestnet CEO says 'choppy markets' can't stop company's organic growth

May 8, 2023 5:44 PM

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

Envestnet CEO Bill Crager — fresh off the company's annual Elevate Summit in Denver, Colorado — said he heard the same thing over and over from advisors he connected with at the Tom Brady-headlined conference last month.

The leader of the Berwyn, Pennsylvania-based tech firm and turnkey program said that having the right tools to deliver a quality experience to clients gives advisors the time needed to offer more holistic advice. It also drives deeper client engagement amid a difficult macro environment and rising financial uncertainty.

"We've been investing to modernize the platform to deliver for our clients and better integrate their workflows, increasing our operating leverage through automation and processes and monetizing higher-margin solutions," Crager said in a May 4 earnings call, according to a transcript from Seeking Alpha. "On the revenue side, yes, we'll be challenged by choppy markets, but we are gaining share, and that will drive faster organic growth rate in more normalized conditions. We're going deeper with more clients, cross-selling more solutions in our renewals and winning new logos and new conversions, as well our pipelines and bookings are up significantly since last year."

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 $298.7 million in the first quarter of 2023, down 7% year over year and 0.5% lower than Zacks Equity Research consensus estimates. On a per-share basis, earnings adjusted for one-time gains and costs came to 46 cents per share, better than Zacks estimates by 4.6%, but down from 2% cents per share the year before.

Asset-based recurring revenues decreased 13% during the first quarter and represented 59% of total revenues compared to 63% of total revenues for the same period in 2022. Subscription-based recurring revenues rose by 2% while professional services and other non-recurring revenues increased by 20%.

Platform assets and advisor performance

Cager said Envestnet posted $20 billion of AUM net flows or 11% organic growth, stating "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 in the first quarter."

He added that looking at annualized organic asset growth for public companies that have reported so far this quarter, the average growth was between 2% and 6% compared to Envestnet's 11%.

"That is considerable outperformance, which we've been delivering quarter-after-quarter. This is reflected in more activity, utilizing more services by more advisors," Crager said. "In the first quarter, the number of accounts on our platform grew 4% year-over-year to 18.5 million, and AUM/A accounts per advisor grew 6% year-over-year. Our personalized investment solutions like direct indexing and overlay services continue to grow new advisors and new accounts."

Envestnet currently has a total of $5.3 trillion in total platform assets and provides services to about 106,000 advisors.

Transitioning to high net worth solutions, Crager said last year the company had $4.5 billion in gross flows from a total of approximately 12,000 advisors who had access to Envestnet's high net worth program. In the first quarter of this year, the company drove $1.3 billion of flows and projects $6 billion in flows in 2023 with a pool of approximately 30,000 advisors.

"We're increasing firm and advisor access and increasing the penetration of existing high net worth advisors by upselling tax overlay and direct indexing," Crager said. "We expect flows to continue to grow and these solutions carry an average fee rate of 20 basis points to 30 basis points."

Crager said that in the RIA channel, Envestnet has more than 2,000 firms using their software. "We are leveraging our integrated platform to expand the adoption of investment management solutions." Crager said.

Expenses and losses

Total operating expenses for the fourth quarter dropped 6% to $309.8 million from $328.1 million one year ago. Direct expenses decreased to $109 million for the first quarter from $125.3 million for the prior year. Employee compensation fell 10% to $114.2 million for the first quarter of 2023 from $126.8 million for the prior year period.

Employee compensation was 38% of total revenue, while general and administrative expenses increased 21% to $53.6 million for the first quarter, up from $44.3 million last year. General and administrative expenses were 18% of total revenue for the first quarter of 2023, compared to 14% for the prior year period.

Loss from operations was $11.1 million for the first quarter of 2022 compared to a loss of $6.7 million for Q1 2022. Net loss per diluted share attributable to Envestnet was $41.2 million, or 76 cents per diluted share.

Adjusted revenue

Adjusted revenue for the first quarter of 2023 dropped 7% to $298.8 million compared to $321.4 million one year ago, and adjusted EBITDA dropped year over year to $55.4 million, down from $55.7 million.

Adjusted net income decreased 3% to $30.1 million from $31 million, and adjusted net income per diluted share decreased to 46 cents from 47 cents.

Remarks

"Envestnet is paving the way for the future of advice. Providing more services and solutions through integrated technology, data and digital tools. This is the growth strategy for Envestnet and the industry," Cragerr said in a statement released alongside the Q1 financials. "We are thriving in the unparalleled change and embracing innovation all while modernizing our breadth of offering.

"At a time when markets face headwinds, our first quarter results prove the strength of our business and our engaged clients are playing back to us the benefits of what we do."