Enfusion - Q3 2022

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to Enfusion's Third Quarter 2022 Earnings Conference Call. At this time, all lines have been placed on mute to prevent any background noise. Following the speaker's remarks, we will open the lines for your questions. As a reminder, this conference call is being recorded. I would now like to turn the call over to Ignatius Njoku, Head of Investor Relations, to begin.

Ignatius Njoku (Head of Investor Relations)

Thank you. Before we begin, I'd like to remind you that today's call may contain forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including those set forth in our filings with the SEC, and are available in the Investor Relations section on our website. Actual results may differ materially from any forward-looking statements we make today. These forward-looking statements speak only as of today, and the company does not assume any obligation or intent to update them following today's call, except as required by law. In addition, today's call may include non-GAAP measures. These measures should be considered as a supplement to, and not as a substitute for, GAAP financial measures. Reconciliation to the nearest GAAP measure can be found in today's earnings press release, which is available on the company's website.

Hosting today's call are Oleg Movchan, Enfusion's Interim Chief Executive Officer, and Steve Dorton, Enfusion's Chief Financial Officer. With that, I'd like to turn the call over to Oleg to begin.

Oleg Movchan (Interim CEO)

Good afternoon, and thank you all for joining us today to discuss our third quarter 2022 results. I'm delighted to be here speaking with you in my role as the company's Interim CEO, and I'm honored to have received the confidence of the board to lead Enfusion. First, let me introduce myself. I'm a founding investor in Enfusion and have been on Enfusion's board for over 10 years. I've also worked with the company in multiple capacities for more than 13 years. Since my appointment as Interim CEO, I've been focused on engaging with our clients and employees through town halls, virtual, and in-person meetings. The more time I spend on the day-to-day operations of the business, the more I appreciate the talent and experience of our team.

It's the strength and depth of Enfusion's talent pool that gives me the utmost confidence that we'll continue to deliver innovation in the rapidly changing investment management industry. Stepping back for a moment, since the first time I was introduced to Enfusion over a decade ago, the company's vision and determination to achieve this vision have been unwavering. The vision has always been to transform the investment management industry with our cloud-native technology and product-driven service. The ultimate outcome of this transformation for our clients would be reduction of operational inefficiencies, cost-effectiveness, and ability to focus on enhancing the investment process and generating alpha. Currently, we're focused on building our top-notch client experience across onboarding, implementation, support, and Managed Services.

Excellent customer service is foundational to the way our clients experience Enfusion technology and serves as a critical component of our overall strategy to expand our footprint in the institutional asset management segment. Our focus on quality services and support continues to differentiate Enfusion from our competitors. As you know, I'm currently serving as Enfusion's CEO on an interim basis. The board's top priority is to recruit the next permanent CEO. The board has retained an executive search firm and is currently reviewing a number of high-caliber candidates with terrific backgrounds and strong leadership capabilities. As the search continues, the board is looking for a CEO with strong leadership skills and deep experience in scaling high-growth SaaS businesses, with focus on product excellence as a foundation of delivering superior client services.

We're convinced that the strength of our brand, execution record, and the tremendous growth opportunity in front of us will attract high-caliber executive talent that will lead the company towards its next stage of evolution. I'm extremely excited by what the future holds. We're executing against our strategy of moving upmarket, unlocking new adjacencies, and expanding our global footprint. We have the momentum to continue generating strong top-line growth while maintaining healthy profitability. As you have seen, our results this quarter demonstrate that investment managers continue to embrace the cloud-based digital transformation. As a result, we continue to extend our leadership position as the industry replaces outdated and disjointed legacy systems with our superior software and the service offering. Now let's turn to third quarter results. We're pleased to report another strong quarter as our execution efforts maintain momentum.

Revenue grew 35% to $39.2 million, reflecting continued demand for our product and services. Adjusted EBITDA was $5.4 million, including CEO transition costs of $670,000, which represents a margin of 13.9%. During the third quarter, we generated ARR of $158.7 million, which represents 33% growth year-over-year. This growth was driven by strong sales execution and client adoption across all our product capabilities and managed services. The ongoing durability of our business is reflected in healthy net dollar retention of 116.6%. Including involuntary churn, the NDR was 112.7%. Our healthy net dollar retention and strong ARR growth underscore the durable and resilient structure of Enfusion's financial profile.

In addition, we signed 43 new clients this quarter, ending the quarter with a total of 810 clients. We made material progress with larger investment managers as we signed another seven-figure deal in the quarter. We further penetrated the large institutional fund manager market by signing eight new institutional asset managers, half of which were conversions. Despite the market volatility, and perhaps because of it, we see ongoing strength in conversions, which accounted for 60% of new client wins in the quarter. Now let me discuss several new latest client wins that demonstrate our continued sales momentum. In the Americas, revenue again grew 33% year-over-year, driven by broad adoption across all our products. I'm excited to announce that we signed another 7-figure deal with a well-known multi-billion-dollar New York-based family office.

The family office invests in a wide variety of strategies and asset classes, including public and private equity, fixed income, credit, currencies, and commodities. The fund manager was seeking to replace its front, middle, and back-office capabilities that consisted of a combination of complex in-house systems and disparate legacy vendor solutions, which resulted in manual and cumbersome processes. Attesting yet again to our core value proposition, by selecting Enfusion, the client significantly streamlined workflows, reduced operational risks, and increased efficiencies. As a result, the family office is better able to meaningfully reduce overhead costs as well as lessen the burden on their internal resources. We're extremely pleased with this partnership. Not only does it demonstrate our ability to win larger and more complex clients, but also validates the strength of our product offering. In EMEA, revenue grew 41% year-over-year this quarter.

We had a record bookings level in the quarter and for the region with strong double-digit growth. I'm pleased to announce that Enfusion won a London-based multi-billion dollar family office. This client employs multiple strategies, including private equity, credit, and public equities. In this competitive takeaway, our fully integrated end-to-end solution, including portfolio management system, order and execution management system, and data analytics, are replacing the client's front, middle, and back office technology, which was pieced together from disparate vendor solutions in an obsolete homegrown system. They selected Enfusion because of our cloud-based technology and its ability to streamline workflows. As a result, the investment manager drastically reduced the total cost of ownership while creating an opportunity to reallocate resources towards the investment process. Now turning to APAC. We grew revenue by 35% year-over-year as we continue to see healthy demand in the region.

I'm excited to announce that we entered into an agreement with a Hong Kong-based alternative investment manager. The investment manager was seeking to replace its ten-year-old provider with a robust cloud-based technology platform that supports compliance requirements in new features like mobile delivery. By partnering with Enfusion, the manager adds more functionality, materially reduces the technology footprint, and significantly improves productivity at a considerably lower cost. Finally, I'm thrilled that Apex Group selected Enfusion to deliver middle-office services to its global fund administration client base. This win represents another example of Enfusion's continued global expansion beyond our core market segments and exemplifies our revenue diversification strategy. Apex Group will utilize Enfusion for cash and position reconciliation, corporate actions processing, trade affirmation, shadowing and recalculations, and reporting. We're excited to align with Apex to serve their global clients and look forward to our shared growth. Turning to product and technology.

We rolled out more than 480 features and enhancements for our portfolio management system and OEMS. Our ongoing focus on expanding our API-driven technology stack and opening data and analytics architecture allows us to drive efficiencies and scale. This framework gives our clients the flexibility to leverage Enfusion platform and develop their own proprietary customization and integration capabilities. Notable enhancements this quarter include the improvements of our API technology to support corporate actions reporting, enhancements to OMS compliance, and support for listed and OTC securities transactions. We also launched a new column feature for OMS, which helps in debugging order tickets. Innovation remains a key pillar of our success and sets us apart from our competition. The breadth and depth of our platform, as well as fast pace of product development and system upgrades, allows us to maintain our competitive edge and expand our moat.

We continue to win in competitive situations where differentiated technology capabilities matter to our prospects. Enfusion will remain focused on sustaining such competitive edge going forward. Now let me briefly comment on the market dynamics. The simultaneous and precipitous decline in both equity and fixed income markets, rising inflation and macroeconomic and geopolitical uncertainty are causing the industry yet again to reexamine its investment processes and business models. Although we see a decrease in hedge fund launches, the number of hedge fund closures remains moderate by historical standards. While we expect this uncertain environment to persist, we believe our business is resilient as we continue to see strength in conversions as a result of industry focus on digital transformation and shift away from outdated legacy systems to cloud-native integrated solutions. In fact, we have seen this environment play out several times during Enfusion's history.

As AMs come down and performance delivery becomes more challenging, investment managers tend to question the cost-effectiveness of their status quo technology infrastructure. Such setups historically presented a broad opportunity set for Enfusion as a go-to partner, displacing expensive and unstable technology stacks. Additionally, in such uncertain market environments, asset allocators tend to emphasize alternative investment strategies over passive exposures, which falls squarely within our core and adjacent addressable market segments. Our healthy conversion pipeline supports growth opportunities similar to what we saw in the past. As we prove our value proposition and win larger and more complex clients, we expect our revenue mix to continue to shift towards conversions. Finally, I'm happy Enfusion is increasingly recognized as the leading software provider within the financial technology industry. As one testament to our industry standing, Enfusion was once again included in IDC's FinTech Rankings Top 100.

In conclusion, we delivered solid third quarter results driven by ongoing sales momentum, strong bottom line, and broad adoption across all products and managed services. Our ability to deliver high revenue growth with an attractive profitability profile speaks to the strength and durability of our business and consistency of strategy execution. To that end, I'd like to thank all of our employees for their hard work, dedication, and passion for our brand. Our team demonstrated once again that Enfusion is laser-focused on executing and delivering outcomes for our clients at the highest level. By the same token, I'd like to thank our clients for their trust with their most sensitive and mission-critical operational capabilities. I will now turn the call over to Steve to discuss our financials.

Steve Dorton (CFO)

Thanks, Oleg, and thank you everyone for joining us today. We are happy with our performance in the third quarter. We continue to see broad adoption across product lines and across customer segments. This reinforces the revenue growth opportunity we continue to see in our business. In the third quarter, we generated total revenue of $39.2 million, an increase of 35% year-over-year. We made good progress across all product lines and delivered a solid financial performance. Recurring revenue was up 33% year-over-year to $38.5 million. Third quarter ARR, our annual recurring revenue, was up 33% year-over-year from the year ago period to $158.7 million.

Net dollar retention, excluding involuntary churn, was 116.6% compared to 125.9% in the year ago period. Net dollar retention including involuntary churn was 112.7% compared to 122% in the year ago period. The sequential decline in net dollar retention was driven by challenging prior year comparables. We signed 43 new logos in the third quarter, ending the quarter with 810 total clients. Third quarter gross profit increased by 30% year-over-year to $27.2 million, which includes $406,000 in stock-based compensation compared to gross profit of $21 million in the year ago period.

Third quarter gross margin was 69.4%, including stock-based compensation, compared to 72.1% in the year ago period. Income from operations was $2.9 million for the third quarter compared to $4.9 million in the year ago period. Third quarter income from operations includes stock-based compensation of $833,000 and $670,000 in CEO transition costs in the quarter. Adjusted EBITDA was $5.4 million in the third quarter compared to $6.3 million in the year ago period. This represents adjusted EBITDA margin of 13.9%. Third quarter adjusted EBITDA was above our expectations, driven by expense management and cost efficiencies. We remain committed to prudent management of our cost structure as we continue to grow our business.

GAAP net income for the third quarter was $2.6 million, which includes $833,000 of stock-based compensation as compared to $3.3 million in the year ago quarter. We ended the quarter with $63.5 million in cash and cash equivalents. As discussed in previous filings, in October, we issued approximately 1.4 million shares to former holders of award units and a non-executive employee. Including these shares, a total of approximately 18.6 million shares will be distributed prior to October 20th, 2023 in one or more additional tranches. Finally, let's turn to outlook for the fourth quarter. Let me briefly comment on our updated Q4 guidance.

Given that we are operating in an environment of greater market volatility driven by macroeconomic and geopolitical uncertainty, we are seeing some reductions in hedge fund launches and a more measured approach in client purchasing behavior. As such, we are taking a more prudent approach to our fourth quarter expectations. Based on current business trends, we are narrowing the range of our full-year 2022 revenue and adjusted EBITDA outlook. For the fourth quarter, we expect revenue to be in the range of $39.5 million-$40.5 million, which represents 26% growth at the midpoint. We anticipate adjusted EBITDA to be in the range of $5.5 million-$6 million, representing an adjusted EBITDA margin of 14.4% at the midpoint.

For the full-year 2022, we expect revenue to be in the range of $149.3 million-$150.3 million, which represents 34% growth at the midpoint. We expect adjusted EBITDA to be in the range of $18.1 million-$18.6 million, representing an adjusted EBITDA margin of 12.2% at the midpoint. For modeling purposes, we expect CEO transition expense of $300,000 for the fourth quarter. We also expect stock-based compensation of $4.7 million for the fourth quarter. Despite the challenging environment, the increased market volatility encourages investment managers to reexamine cost effectiveness of their legacy technology infrastructure. This creates a broad opportunity for Enfusion conversions similar to what we have seen in the past.

We continue to carefully monitor the current and long-term economic conditions to understand possible impact of our business model and future projections. To summarize, we are very pleased with our business performance in the third quarter. The fundamentals of our business remain strong and our business model is durable despite market volatility. We have built a leading cloud-based end-to-end investment manager platform, and we have the momentum to continue generating high growth and profitability. With that, we'd like to open up the call to questions. Operator, please go ahead.

Operator (participant)

Of course. Thank you. We'll now begin the Q&A session. If you would like to submit for a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, that's star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We'll pause here briefly as questions are registered. Our first question comes from Kevin McVeigh with Credit Suisse. Kevin, your line is now open.

Kevin McVeigh (Managing Director and Senior Equity Analyst)

Great. Thank you so much, and congratulations on the results. Hey, Oleg, I wanna start. You gave some really good context around, you know, seeing different cycles, things like that. I wanted to try to get a sense of, you know, the environment we're in. Is there any way to think about what the most parallel kinda time period would be in the past? I just kinda wanted to start on that, if we could.

Oleg Movchan (Interim CEO)

Sure. I would probably compare it to a couple of periods that Enfusion sort of existed, right? Post GFC, global financial crisis, so 2008, 2009, 2010, then 2011 through 2014, and then I'd say, you know, the situation around COVID, which basically came to a screeching halt, which by the way, you know, when COVID broke out, we essentially froze our entire hiring process for like a month or a quarter to quickly realize that it was a mistake, and we kind of restarted all again. What typically happens is, of course, people start tapping the brakes, you know, hedge fund launches either stall because investors that committed capital, they kind of don't follow through on their commitment.

It was especially acute, as you probably remember, in 2008, 2009. Of course, similar stuff happens in private equity world, where LPs simply withdraw the commitments as well. What typically happens in the past with us, and I have no reason to expect anything different going forward, is, you know, despite slower launches, the larger, more complex clients, both hedge funds, sort of enterprise clients that run, you know, billion-plus type AUM, they typically look to, you know, not just stay alive, but in general optimize their costs. They immediately, the first thing they do is to look around and see where they can cut costs and kind of streamline the operations, and this is where we come in.

In a way, our business has been relatively convex to the downside when things like this occurred, and we were able to sort of demonstrate our total value proposition, replace all the disjointed systems, streamline the workflows, and really allow people to reposition their workforce as well, right? To the extent that the fund, you know, until recently even could not pass through the expenses to the investor, you know, for the investment management company, that was a big burden. We're seeing the same thing again, except I guess what's different for us now is that the overall proportion of our revenue is much more heavily tilted toward conversions, right? To a larger, more complex client that typically take a bit longer to assess, to lend, to align with, to identify functional gaps.

Once this is done, we, you know, we're kind of all good to go. That shift away from, you know, in a way finding startups, which what hedge fund launches are, to partnering with more mature organizations, you know, we think will provide additional downside protection for this business, if you will.

Kevin McVeigh (Managing Director and Senior Equity Analyst)

It's super helpful. Then just one quick follow-up, if I could. It looks like the OEM bookings were 32% of total in the quarter versus 44% in Q2. I guess just trying to understand what drove that delta?

Steve Dorton (CFO)

That is typically from quarter to quarter as we have the bookings. It's more in line with the clients and the types of clients that are actually signing in that quarter. Overall, all of our clients, approximately 2/3 of our clients are utilizing our OEMS, you know, platform attribute. That we don't really look at on a quarter-over-quarter basis. It just occurs as those new clients are joining.

Oleg Movchan (Interim CEO)

Yeah, I would echo that, Kevin. It's, you know, the ultimate proof is in the pudding. Our ability to both sign and implement OMS in a time-efficient manner is our focus. You know, we do see sort of prevalent utilization of OEMS and EMS capabilities by institutional investors. That's kind of a must in a way, and we consider it as such.

It'll maybe be up, down, but the overall trend is definitely up in terms of OEMS subscriptions. We do, you know, as you know, we don't typically position the platform in a piecemeal fashion. We don't just sell OEMS or we don't just sell Portfolio Management System, although sometimes clients are in the market for that kind of functionality, and that which is okay. Once we sort of land and we, you know, sell or we partner on one side of our value chain, like Portfolio Management System, and clients, you know, at the time, you know, use some other third-party OMS solutions, which we integrate with almost all of them. Over time, it's almost inevitable when they have to ask themselves the question, "Why do we need all of that?" Then they kind of revert back to our OMS.

Yes, it's important for us to look at the dynamics of OMS bookings and conversions, more importantly than bookings in my mind, but that's just how the business sort of operates nowadays, if that makes sense.

Kevin McVeigh (Managing Director and Senior Equity Analyst)

Totally. Thank you so much. Very helpful.

Oleg Movchan (Interim CEO)

Sure.

Operator (participant)

Thank you. Our next question comes from Gabriela Borges with Goldman Sachs. Gabriela, your line is now open.

Callie Valenti (Analyst)

Hi, this is Callie Valenti on for Gabriela. Congrats on the quarter, and thanks for taking my question. So far, we've been pretty impressed with the durability of the hedge fund market. You talked about the lower hedge fund launches, but are there any other noticeable pockets of weakness or strength, either by size of fund or type of fund?

Oleg Movchan (Interim CEO)

I would say yes. What we've seen in the last three-six months is that investors tend to allocate capital to much more stable, you know, what people tend to call multi-manager platform. Some of them are, you know, our top, you know, clients. They're, you know, they are favorite clients of ours, which kind of plays to our strength when, you know, the investment management platform has multiple, you know, what I would call risk-taking units, portfolio managers, or portfolio management teams on the platform. They need to have a holistic view on, you know, the entire risk and entire P&L, as well as the risk and P&L of each unit. That's what I see the business and the model evolving toward.

I think large capital, you know all these players, they typically have become successful over time, you know, Millennium and all the way down. This is where we find most of our opportunities where the system fits really well because it's sort of like Lego business, if you will. We can service each unit on a standalone basis, but we can then service the entire enterprise and scale as both up and down. If some teams leave, and then other teams, you know, expand, and entire business expand, we typically have capability to grow with the client that way.

I would say from launches perspective, that's another interesting source of launches where, you know, larger platforms like, you know, you know the list, Elliott and some others, a portfolio manager becomes, you know, successful for one reason or another. You know, he decides to go on their own, and that's another source of capital that is at the ready, another source of launch.

Callie Valenti (Analyst)

Great. Thank you. That was super helpful. Just as one more follow-up, how has the initial traction been with the Enfusion Express product? How does sales efficiency at this lower end of the market compare to the rest of the business? Just kind of in that same vein, how is the momentum of the product relative to your initial expectations?

Oleg Movchan (Interim CEO)

Great. Thank you for the question. You know, we're still evaluating Express. I feel it's too early to draw any kind of conclusions. You know, I think that one reaction when I did a deep dive into the product is that you know, the ability, the desire, and ability to respond to that sort of, quote-unquote, "lower market" that is looking for stripped-down functionality. What we shouldn't be doing, I think, is we shouldn't be selling our system short and providing just, you know, so little functionality that it doesn't really capture the full benefits of what the system can do for the customer, right?

The balance then becomes how do we work with our distribution partners on one hand, and what kind of commitments related to support both the distribution partners and Enfusion can make so that becomes economically feasible for the target market. It makes sense for us commercially as well. You know, I cannot, you know, sit here and straight face and tell you this is all figured out. It's still a work in progress, and we'll update you hopefully next quarter once we dial things in and make it all airtight.

Callie Valenti (Analyst)

Great. Thank you for the detail, and congrats again.

Oleg Movchan (Interim CEO)

Sure.

Operator (participant)

Thank you. Our next question comes from James Faucette with Morgan Stanley. James, your line is now open.

James Faucette (Managing Director and Senior Equity Research Analyst)

Thank you very much. Just a few questions on bookings and directional trajectory right now. I guess maybe first, well, let me ask the question this way. Can you give any color on sequential deceleration we saw in conversion as a percentage of bookings in the quarters? Is this just kind of the pause that you're alluding to? How should we think about conversions as a percentage of bookings kinda going forward? What do you think that sales cycle is gonna look like?

Steve Dorton (CFO)

We continue to see a majority of our new bookings or conversions, and that really has started in 2021 and in 2022, and we continue to see that going forward. One is, you know, we've moved to a resilient client. We are still working and continuing to add on launches and new clients. But we are seeing opportunity with conversions, and we're seeing as conversions come on, the attributes that they're taking on more and more of the platform itself. It continues to be a vast majority of our new clients that we're adding on quarter-over-quarter.

James Faucette (Managing Director and Senior Equity Research Analyst)

Got it. Then separately, it looks like, at least on our calculations, that ARPU growth helped to offset a you know, kind of a slower rate of new logo additions. How should we think about the forward mix of logo growth versus ARPU growth? Kinda what in particular is driving that ARPU change?

Oleg Movchan (Interim CEO)

You know, I think it's probably focus. We try to make sure right now, like in terms of bookings themselves, right? From tactical perspective, not necessarily from strategic perspective, right? I would prefer, you know, everything else being equal, I would prefer a lower number of bookings if that lower number of bookings are actually high-quality bookings. You know, I can spend hours to define what that means. You know, in general, it means much better product-client fit from Enfusion's perspective, functionality fit, and our ability to deliver value to the clients while, you know, sort of keeping the layer of the value added to ourselves and generate return on equity, right? In fact, the paradigm that I'm trying to establish at the company really has to do with upfront understanding, right?

Of how each potential client, given their needs, how we can respond to their needs, both in terms of product capabilities and in terms of services they provide, which, by the way, this is what we're increasingly seeing. The larger and more complex clients, especially institutional clients that have both sort of long-only passive traditional investment management capabilities and, you know, what people typically call liquid alts or multi-strategy, flexible, you know, absolute return time type businesses. They increasingly want not just software, but they want, you know, call it white glove, continuous dedicated support teams that really know them, you know, soup to nuts. They know the client really well, they're expert in our product, and they can provide that ongoing support twenty-four/seven in a timely, thoughtful, and, you know, pertinent level, right?

This is ultimately what, you know, what conversions are all about, and that's why we sort of take time to make sure we perfect that combination and we perfect the combination of client services with the product that is targeted to those conversions. That's in a way, that's kind of a term that we're trying to use at Enfusion, which is we're being sort of labeled as a SaaS company, which is software as a service. What we really are selling and how those large institutional clients are experiencing us is software as a service, right? That understanding, that paradigm is what's helping us to actually win those conversions.

James Faucette (Managing Director and Senior Equity Research Analyst)

Appreciate that, Oleg. Thanks.

Oleg Movchan (Interim CEO)

Of course.

Operator (participant)

Thank you. Our next question comes from Parker Lane with Stifel. Parker, your line is now open.

Matthew Kikkert (Managing Director and Senior Equity Analyst)

Hi, this is Matthew Kikkert on for Parker. Thanks a lot for taking my questions, and welcome, Oleg, to the team. First, what are some of the changes that your team has made since you joined as CEO? Do you think any of those might lead to an increase in the efficiency of go-to-market motion over time?

Oleg Movchan (Interim CEO)

Yeah, I would hope so. You know, the biggest change I made, which was my, you know, top priority after I had the chance to, you know, stop being a, you know, what I would call goalie during a warm-up in a hockey rink, kind of really had a chance to breathe and understand what's going on. You know, I kind of quickly realized that the top priority tactically, not strategically, but tactically, is to really step up and improve our client services experience. To that extent, what we've done is we really redesigned the entire workflow, okay? We did it, by the way, not just in isolation, right? We had a very deep dive globally. We had a town hall with input from all our key stakeholders from EMEA, from APAC, and from U.S..

We aggregated that input, we synthesized it, and it resulted in what we believe state-of-the-art client services architecture that really addresses deficiencies that Enfusion, we believe, that I strongly believe Enfusion had previously, which really revolved around, you know, traditional processes when, you know, sales and solution engineers, you know, design a solution, you know, they close a sale, and they just hand it over to onboarding and implementation and product. Then from there, new people show up that don't necessarily have a nuanced and deep understanding of what client's requirements are. Then from there, once implementation is over, you know, the client is then handed over to technical account management. During this process, you know, a lot of client-specific knowledge is lost.

What we've done is we created a structure where onboarding and product are involved very early in the solution engineering process and in the sales process in a way where, you know, there's really no handover process. The client upfront knows exactly the team that is going to implement them, that's going to onboard them, and technical account management team is involved precisely at the same time. By the time the client is live, the same technical account team that played a key role in onboarding is going to continue to support that client going forward. Essentially, we eliminated these gaps that exist in handoffs from one stage, like client's journey, to the very last stage when client is live, and of course, things happen in real time.

We have a very talented technical account management team that is now getting their feet under them and really responding in a timely and effective manner. Like I said, thoughtful and timely manner to, you know, back to the clients. That, in my mind, was top priority tactically. From strategic perspective, you know, it's all about the product, okay? Enfusion since inception was product-centric, product-driven. We have best-in-class technology platform. As we grow, you know, the top priority is for us to make sure that the technology is viewed internally and externally as a centerpiece of the heart and the brain of Enfusion's organization, right? To that end, we

Whatever investments we are going to make over the next 12 months, we will accentuate the product as much as we possibly can, and then we'll accentuate client services because this is, from my perspective, the highest return on equity we can possibly generate for the shareholders. From technology perspective, I'm not just talking about, you know, filling functional gaps that we currently see with our current clients. It's also innovating and anticipating certain things that we know today that institutional investor, investment managers need. Like for example, some nuanced compliance logic during the process of, you know, order management and execution management, order allocation. You know, there's a slew of examples there.

You know, at the end of the day, those are kind of tactical and strategic product capabilities, but also we need to prepare the system to become more scalable and more robust, more resilient, so that we can start processing 1 million trades a day, so that we can start supporting clients that have, you know, hundreds of thousands of accounts and manage, you know, hundreds of funds with model portfolios, with flexible allocation schemes, with very sophisticated compliance rules. Those are the things that will really cement our position and move upmarket.

Matthew Kikkert (Managing Director and Senior Equity Analyst)

Got it, that's very good. Secondly, I'm curious if you've seen any uptick in clients wanting to adopt Managed Services, maybe as they're potentially trying to run leaner in wake of tighter macroeconomic conditions. What does the traction look like for Managed Services, and where does that fit into your strategy going forward? Thank you.

Oleg Movchan (Interim CEO)

We did. You know, unfortunately, I don't have the number in front of me right now. Maybe Steve can help. I think we have about 15% now of overall revenue. It was like single-digits just two, three quarters ago. Steve can confirm the numbers, but it's about 15%. You know, I'm obviously being cognizant of, you know, the profit margins on each, which is again, you know, I'm going back to this whole concept of us being very thoughtful of you know, clients that we are onboarding, not just in terms of the revenue we're bringing in the door, but which is the numerator, right? What is the denominator? How much it will cost us to support the client, right? What is the return on capital? What is the return on our time?

Is it adequate to actually give the client the best possible value that they're asking for, right? Managed Services is a big part of it. Now, after this restructuring that I described, Managed Services is squarely sitting within overall client services. But in some very direct way, it's more or less like a standalone self-sufficient business unit. You can look at it this way. In fact, we have an interesting potential client in the pipeline who came to us specifically. It's not an upsell or anything like this. This client, the multi-billion-dollar player, they just came to us specifically for Managed Services. That was their explicit ask. We are going through proof of concept.

It's going very well, and I'm excited to see if we can perfect that model and then scale it, you know, not just with this client, but scale it through, and then really deploy the same model globally.

Steve Dorton (CFO)

If I could, a clarification. In September 2021, we had 14% of our clients were actually using Managed Services. Today, it's at 15%, but we are seeing significant growth in our revenue overall, and we're seeing more and more those conversations are happening while we're, you know, while they're in the pipeline and while we're looking at closing those clients and continuing to happen, you know, as more of our existing clients are adopting that as we go forward. Today, it creates a great opportunity for some of our, you know, conversions to really kind of lower their total cost of ownership by using our Managed Services.

Oleg Movchan (Interim CEO)

Right. In my mind, that's a logical extension to what we do. By the way, Apex partnership is similar. You can think of it as the same way. We're sort of providing the engine for them to perform their managed services. Our services are no different. We just don't have this kind of intermediate layer. We just kind of tap into their client base indirectly, if you will. You know, in general, our managed services should be thought as product-centric. Without our product, the way we service our clients in that kind of format, we just wouldn't be able to do that. Again, just going back to the philosophy and positioning, product first, everything else revolving around it. Every single person on the client services team is super technical product expert.

We're doing, you know, a lot of work internally to make sure not only we hire the right talent, but we are putting a lot of effort in making sure this talent is being properly educated, trained, onboarded, spend a lot of time and effort over the last three months creating the knowledge base educational program for our employees globally from, you know, India to London, to Dublin, to Hong Kong and Singapore to make sure everybody speaks the same language. There is a knowledge base online that, you know, really covers basic fundamentals of capital markets infrastructure, capital markets in general, financial instruments, as well as, you know, overall Enfusion's capabilities at the very deep level.

Ultimate idea is to actually have this knowledge base and potentially open it up to our client base so that we actually become partners with our clients and actually teach them how to fish and make sure that whatever tasks are possible to do by them themselves, they can do, and of course, we'll be there to catch whatever is falling through the cracks.

Matthew Kikkert (Managing Director and Senior Equity Analyst)

Terrific. Thank you very much.

Operator (participant)

Thank you. Our next question comes from the line of Koji Ikeda with Bank of America. Koji, your line is now open.

Natalie Howe (Equity Research Associate)

Hi, this is Natalie Howe on for Koji. Congrats on the quarter. You mentioned that EMEA had record growth, which is great to hear. How do you characterize the demand environment within your different geographies, and do you anticipate that strength in EMEA to be sustained?

Oleg Movchan (Interim CEO)

Yeah. You know, EMEA for quite some time has been sort of a, for lack of a better analogy, a stepchild. You know, the APAC has been growing at incredible pace, and I think that growth will slow down, but it still will, you know, will be one of the leading growth engines for us, controlled for whatever geopolitical issues we may see in China, Taiwan, and Hong Kong, which we, by the way, monitoring very carefully.

Our team and corporate development team is actually tasked to make sure we have ear to the ground there, and we're working on sort of contingency planning to make sure if something happens, God forbid, we have redundancies, and we can move the team to a safe location, to Singapore to make sure that, you know, of course, first and foremost, team members are safe, and second, our services to our clients are uninterrupted. It's one of the reasons I think marginally that area will probably slow down. However, to somewhat compensate for it, we do see some opportunities in places like Japan and Australia, which by the way challenges our system capabilities.

Like in Australia, there is, you know, a lot of institutional clients that have interest in our system, but we frankly lack in some of the nuances that are typical to that market. Which by the way, we're very, very good at that. We're very good at sort of zooming in, figuring out what are the specific regional specific or region specific technology and functional requirements. We've done it in Brazil, we've done it in Hong Kong, and we are going to do it in Australia as well. We're going to execute on that. That becomes, you know, however small the nuance is, it typically becomes a tipping point for clients to actually engage with us. APAC has been growing, but I think it.

You know, we need to sort of diversify away from sort of Hong Kong, mainland China, you know, Singapore type region and go a little outside and see what's possible in Japan and Australia.

Steve Dorton (CFO)

EMEA really continues to grow at a really nice pace, both you know year-to-date as well as this quarter as well. EMEA is continuing to grow at a very fast pace as we move forward.

Oleg Movchan (Interim CEO)

Yeah. We are very hopeful that EMEA will reach its full potential and will operate at par with APAC and U.S., and we see really positive performance from the team. I'm going to India in a couple of days, but London and Dublin is my next stop, just to make sure that we're all aligned and you know, we capture the opportunity to set as much as possible.

Natalie Howe (Equity Research Associate)

Great. That's all from us. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Dylan Becker with William Blair. Dylan, your line is now open.

Dylan Becker (Senior Equity Research Analyst)

Yeah. Hey Oleg. Hey Steve. Maybe to kind of double click on some of the commentary, maybe on a prior question as well too, how much does the compliance side of things play into their decisioning, right? I'm sure there's an evolving landscape that's kind of handicapped, especially within those larger institutional managers by those legacy tools. How much of that pipeline momentum you guys are seeing is kind of driven by the complexity on the compliance to kind of standardize some of those operations?

Oleg Movchan (Interim CEO)

I'm not sure, you know, that the pipeline momentum is driven by compliance, but I will say that it's definitely important for institutional client managers to remember just, you know, I guess 10 minutes ago, I alluded to some of the EMS capabilities that are like really specific to the way institutional managers handle their orders. As you know, they have typically model portfolios, and then they have relatively sophisticated allocation schemes out of this model portfolio across different portfolios that are client specific and have specific constraints that are specific to the particular client that actually owns those portfolios. Sometimes, it's just one example, there is a slew of them, but oftentimes they tend to want to modify allocation scheme after the order is placed, which is not something we've been seeing in hedge funds.

This is just one example where, you know, this change in order allocation, what it actually does, it trips the subsequent compliance check and compliance rules engine. That sort of breaks the workflow that exists at Enfusion today. We have a live client that we're working on with to address this precise problem, which seems to be sort of universal across, you know, that layer of clients and the list goes on, right? So to speak. Compliance is absolutely important, and we're maniacally focused on it.

Dylan Becker (Senior Equity Research Analyst)

Got it. That's super helpful. Then maybe as you think about kind of some of the partnerships, think you've announced a handful here in the last kind of couple quarters, how should we expect this channel to continue evolving over time, giving you maybe some incremental shots on goals and customer overlap? But what can this unlock from a customer perspective, again, relative to what you guys can kind of currently offer around that mission of unifying the front, middle and back office systems? Thanks.

Oleg Movchan (Interim CEO)

Okay. Great question. You know, just starting from the end, I think the, like, Apex partnership is a sort of exemplary situation where we have, you know, potential to just leverage our core. This is something we do day in and day out. Not much needs to be changed. They're benefiting because, you know, they can rely on our system day in and day out to solve their clients' problems. They just support it's robust, it works. For us, the benefit is indirectly our technology is just sitting, excuse me, in front of their, you know, pretty extensive client base. Then it potentially results in them, you know, buying our software and actually using it not just for middle and back offices, but actually operate their entire, you know, run their entire operating cycle.

Some other partnership will include. You will see hopefully in the next quarter things that actually relate to what our institutional clients as we see now asking for, which is relatively new to Enfusion. New as in, you know, our typical user is, you know, either execution trader that sort of pilots OMS, AMS. Our typical user is middle or back office operating professional that reconciles their trades, you know, runs, you know, different back office processes, runs shadowing NAV calculations, operates in the world between prime brokers and custodians and the actual fund. What we're seeing increasingly, you know, institutional clients want to put this system in front of the decision-makers, PMs, traders, investment managers. What does that mean? Then you need enhanced analytics.

If it's, you know, relatively simple long, short equity or just simple long, short fixed income portfolio that is managed against the benchmark, right? All of a sudden you need something like the standards, you know, you name it, you know, Barra, Axioma, you know, Equity Data Science, Northfield, you know, typical comprehensive multi-factor risk model framework where you can always slice and dice your risk, calculate Value at Risk, do performance attribution using factors, do risk attribution. This is what PMs typically want to see on that front. This is where we will try to partner with, you know, some of those, businesses that actually have a, you know, great reputation. They have great systems.

I myself used almost all of them in my previous career as a risk manager, and I think it behooves us to focus on our product development. That's kind of a last missing piece, if you will, as far as our target persona that we sell our system to, because then PM puts a lot of pressure on all the processes that happen behind just to make sure that the picture he is looking at or she is looking at is airtight and consistent and actionable. Then the idea then after that tool is in front of them, they can then close the loop and from that screen and from that report, start making and executing business decisions, which should take them right back into order management and execution management. The workflow becomes completely closed. Does that make sense?

Dylan Becker (Senior Equity Research Analyst)

Makes perfect sense. Thanks, Oleg. Appreciate it.

Operator (participant)

Thank you. There are currently no further questions in queue. Again, to submit a question, that's star one on your telephone keypad. There are currently no further questions in queue, so I will pass the conference back over to Ignatius for any additional or closing remarks.

Ignatius Njoku (Head of Investor Relations)

Thank you for taking the time to join us today. We appreciate your support and continued interest. We look forward to continuing the dialogue, and have a wonderful evening. Thank you.

Steve Dorton (CFO)

Thank you all.

Oleg Movchan (Interim CEO)

Thank you all for your questions.

Operator (participant)

This concludes today's Enfusion third quarter 2022 earnings call. Thank you for your participation. You may now disconnect your line.