Enfusion - Q3 2023

Transcript

Operator (participant)

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Enfusion's third quarter 2023 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'd now like to turn the call over to Ignatius Njoku, Head of Investor Relations, to begin.

Ignatius Njoku (Head of Investor Relations)

Good morning, and thank you, operator. We welcome you to Enfusion's third quarter 2023 earnings conference call. Hosting today's call are Oleg Movchan, Enfusion's Chief Executive Officer, and Brad Herring, Enfusion's Chief Financial Officer. Please note, our quarterly shareholder letter, which includes our quarterly financial results, have all been posted to our IR website. I would 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 a substitute for GAAP financial measures. Reconciliation to the nearest GAAP measure can be found in today's quarterly shareholder letter, which is available on the company's website. With that, I'd like to turn the call over to Oleg to begin.

Oleg Movchan (CEO)

Good morning, and thank you for joining us today to discuss our results in the third quarter of this year. I'm pleased to announce that Enfusion delivered another solid quarter for both revenue and profitability. Our value creation engine has gained momentum. Our disciplined go-to-market strategy is validated by persistent market capture and expansion across target segments in the face of ongoing macroeconomic uncertainty. We continue to execute against our large market opportunity, take market share, expand our global footprint, and improve our profitability.

Our value proposition remains intact, validated by healthy client additions, improving net dollar retention, increasing average contract value, and expanding margins. I'm very excited about the formal launch of Portfolio Workbench, which empowers portfolio managers to seamlessly integrate portfolio construction processes with operational workloads. Innovation is embedded in our culture and is at the core of our strategy.

This product release not only represents a pivotal moment in our journey to support the largest and most complex institutional clients, but also underscores our commitment to technological development and a best-in-class client experience. I will share more details on this in a moment. Although we're not immune to macro headwinds, I'm more optimistic than ever about our future. We'll continue to grow above market rates and taking business from resource-intensive, fragmented, and expensive solutions.

Enfusion continues to prove that it deserves to be a platform of choice for investment management organizations of any scale and complexity. Ultimately, our results are the evidence that Enfusion's business model is truly global, scalable, and adaptable. Enfusion remains well-positioned to benefit from secular industry tailwinds while increasing its resilience to macro uncertainties.

Regardless of market environment, we will continue to operate from a position of strength and iterate towards recapturing our unique growth and profitability profile. Now, let me walk you through some of our key financial metrics in the third quarter. Revenue grew 13% to $44.4 million as we continue to execute on our go-to-market strategy and product roadmap. Adjusted EBITDA was $8.2 million and represented an 18.5% margin. We continue to improve our margin profile, benefiting from strong expense control and operating leverage.

We added 37 clients this quarter, bringing the total client count to 842, and increased our ACV to $217,000, representing 2.4% quarter-over-quarter and about 8% year-over-year growth. Brad will discuss our financial results in more detail in a few moments.

Now, I would like to share a few notable client additions, validating our execution framework as we expand across geographies and market segments. In the Americas, revenue grew 10% year-over-year, reflecting ongoing market share gains with larger fund managers despite macro headwinds. I'm thrilled to share that Enfusion signed a Boston-based alternative manager with approximately $2.5 billion in AUM. The firm opted out of upgrading its legacy OMS, given the resource challenges. As a result, the system became obsolete after several years.

Unlike the legacy provider, our team was able to understand the complexity of the client's workflows and design a well-suited solution. Notably, this conversion resulted in Enfusion providing both software and managed services as a much more cost-effective alternative compared to using in-house resources. Enfusion also signed a New York-based loan-only asset manager focused on emerging and frontier markets.

In this competitive takeaway, Enfusion is consolidating the investment manager's patchwork of disparate solutions, which required manual processes for communication between systems. As a result, the in-house solution became exceedingly complex, drove higher maintenance costs, and demanded more IT resources....

By implementing Enfusion's platform, the asset manager benefits from our fluid front-to-back solution, inclusive of the new launch Portfolio Workbench, tightly integrated with both golden source of truth data sets and workflows, resulting in a minimized operational risk and material cost reduction. In EMEA, revenue grew 29% year-over-year, as the market continues to embrace our differentiated offering. We're excited about our momentum in the region as we diversify our revenue portfolio, move into larger and more complex markets, and expand into new regions. For example, we signed with another London-based, multi-billion dollar global institutional asset manager.

The fund manager outgrew its legacy incumbent provider and faced multiple challenges, including manual trade allocation and inadequate cash reconciliations. They selected Enfusion because of their robust front-to-back platform, allowing them to streamline and automate their workflow and scale as they grow. With Enfusion, the client now has a unified view across all funds and products, can execute swift trade instructions, and benefits from our multi-asset class and AV generation capabilities.

We also signed a large, newly launched distressed debt manager, the largest distressed specialist launch in recent history, demonstrating our ongoing success with credit strategies. They selected Enfusion platform because of its flexibility to support the company's future growth and robust major support across various asset classes, as well as workflow automation. Importantly, we continue to expand our geographic presence in Europe.

I'm thrilled to announce that we entered into an agreement with Oslo-based investment manager that runs a loan-only equity strategy. The manager is part of a newly formed entity with a large, well-known team with a significant track record. This particular client will be leveraging Enfusion software and managed services offering. We also won a mandate from a South African-based loan-only fund.

This client plans to leverage Enfusion software and services to streamline their workflow and realize cost savings. In APAC, we grew revenue by 13% year-over-year. We're seeing early signs of improvement in the launch market and getting traction with our upmarket motion. For example, we signed a Hong Kong-based global macro alternative manager. The fund manager was looking for a platform to enable them to launch quickly with robust end-to-end architecture and a single source of truth for data and operations.

Additionally, by partnering with Enfusion, the fund manager leverages Enfusion's value at risk and other risk measurement in the reporting capabilities. Finally, we entered into an agreement with another recent fund launch, an Australian alternative asset manager based in Sydney. The fund manager chose Enfusion because they were looking for a flexible platform that would facilitate a timely launch and set up the company for future scale from day one. Let's move to some updates on the product front.

As I've said many times, innovation is one of our core values, and has always differentiated Enfusion from our competition. It is embedded in our culture and permeates throughout everything we do on a daily basis. I'm thrilled to announce the recent formal launch of our Portfolio Workbench, a highly intuitive capability that enables investment managers to rebalance their portfolios across multiple strategies and investment vehicles.

By leveraging in-grid portfolio editing and an intuitive user interface, Portfolio Workbench works in concert with our OMS functionality and allows PMs to easily manage performance and risk against the benchmark. As a result, PMs can test pre-trade compliance rules, monitor post-trade compliance, and model upcoming subscriptions and redemptions across multiple investment vehicles within one user interface without concerns about data integrity. The Portfolio Workbench is a strategic product launch for several reasons.

First, Portfolio Workbench is a critical component in our stated strategy to move upmarket to larger and more complex asset managers. It expands our traditional operational capabilities into the decision-making segment of the workflows in a way that is tightly integrated with decision implementation. Second, it's an intermediate step to support investment managers that deploy both proprietary and third-party risk models, facilitating their portfolio optimization and the risk management frameworks.

It has important implications for both passive managers that are tracking benchmarks with periodic rebalancing, and active managers focused on outperforming benchmarks by taking active positions. This will drive more quantitative and systematic portfolio construction, in addition to heuristic and manual portfolio adjustments. Third, Portfolio Workbench continues to build on Enfusion's all-in-one product philosophy, where we insist on eliminating fault lines across all segments of investment management workflows.

It's just another set of functionality that is a fluid and natural extension of the existing platform. Lastly, it further expands our competitive advantage by widening our moat from legacy competitors, responding to market demand, increasing client retention, and expanding Enfusion's value proposition. Here's just one of many examples of how Portfolio Workbench allows us to expand into the loan-only segment.

It was a key element that helped convert a large emerging markets equities and credit-focused manager that initially went with one of our competitors. In addition to Portfolio Workbench, Enfusion rolled out 366 additional enhancements and features across our portfolio management and OMS. The frequency and scope of the software updates is an important dimension of our competitive advantage and value creation mechanism. With that, I would like to highlight two other important enhancements the team released this quarter.

The first is Bloomberg real-time mobile support, which connects Bloomberg's real-time pricing in their terminal with third-party applications, so that the investment team can stay connected, leveraging Enfusion's mobile app. The other is native support for an OTC product, iBoxx Total Return Swap, which provides investors with a cost-effective and optimal way to obtain exposure to corporate bonds and leveraged loan markets.

Enfusion's full front-to-back platform remains well suited to support complex instruments and solve for simplicity that legacy vendors simply cannot. These new features are the result of long-term efforts by our product and engineering teams to deliver value-added capabilities highly requested by our clients. Now, moving on to market dynamics. We see some green shoots and managers planning to launch new hedge funds. However, the overall launch dynamics remains at a historic low.

Be that as it may, while we continue to successfully protect and expand our hedge fund home turf, our book of business is increasingly less dependent on launches. Importantly, Enfusion continues to benefit from secular tailwinds as the entire investment management industry is reevaluating its software stack, workflows, and the related costs and risk. Our upmarket motion keeps gaining momentum as we continue to scale our technology, execute on our product roadmap, and listen to our clients.

All of this is reflected in our recent robust market share gains and continued shift in the revenue mix away fromlaunches or smaller conversions and away from pure hedge fund managers toward institutional investment managers. As I have said multiple times, Enfusion is a painkiller, not a vitamin. As a side benefit of killing our clients' pain, we inflict an increasing amount of pain on our competition. Now, let me review some key elements of our long-term strategy.

Our strategic positioning continues to evolve as we unlock new market opportunities and diversify our client base toward institutional asset managers and asset owners. Enfusion is a business in transition, and we continue to prove our business model as we optimize our go-to-market strategy, shorten the sales cycle, and increase the velocity of our onboarding process.

Measurably, all of that drives TAM expansion, improvements in durability and speed of our growth, margin expansion, and client retention. Importantly, this framework is designed to protect our business economics from excessive macro headwinds. As evidenced by our performance over the last year, we continue to spread our growth wings globally, shifting our book of business away from money-center cities and targeting regions where competition is thin. We continue to maintain our focus on returning to Enfusion's historical financial profile.

Enfusion's value creation machine is back to its normal virtuous cycle as we exercise surgical precision in our pipeline generation, operational excellence of our client services, product innovation, optimization of our revenue strategies, and relentless fiscal discipline. In conclusion, we delivered solid third quarter results. We remain focused on sales execution, moving upmarket, and expanding our global footprint.

I'm very grateful to all my Enfusion colleagues for hard work, passion, and focus on our clients. I will now turn the call over to Brad to discuss our financials.

Brad Herring (CFO)

Thanks, Oleg, and thank you everyone for joining us today. Speaking on behalf of the entire Enfusion management team, I'm glad to report yet another quarter of top-line growth, combined with strong profitability and cash flow generation. For the third quarter, we generated revenue of $44.4 million, an increase of 13% over the same quarter last year. Just as we reported last quarter, these results represent a slowdown in our historical growth rates. However, we're seeing some positive indicators in our underlying growth algorithm.

First, bookings in both new fund launches and conversions continue to be strong as the sector continues to look for effective and efficient solutions to manage back-office tasks. Second, the quality of our pipeline continues to improve as we expand our market opportunities by deploying new product features such as portfolio benchmarking and additional capabilities around credit.

Finally, we are starting to see some favorable trends in the underlying revenue drivers within our back books. Specifically, we are seeing both improvement in net organic growth as well as lower churn. Third quarter ARR was $177.9 million, up 12% year-over-year and 4% higher than what we reported just last quarter. As a result of the trend improvements in the back book I mentioned, net dollar retention in the quarter, excluding involuntary churn, was 107%, while net dollar retention, including involuntary churn, was just over 102%.

For both NDR measures, this is the first quarter in the previous four where we've seen NDR increases, which leads to confidence that the headwinds related to the macro challenges facing the sector are either stabilizing or modestly reversing.

Adjusted gross profit increased by just over 9% year-over-year to $30.2 million. This represents an adjusted gross margin of 68%.... As we've talked about in previous earnings calls, we expect adjusted gross margins to remain between 68% and 70% for the next several quarters as we continue to invest in our client onboarding and servicing capabilities in support of our growth strategy. Adjusted EBITDA for the quarter was $8.2 million, up over 50% compared to Q3 of last year.

Against current quarter revenues, this represents an adjusted EBITDA margin of 18.5%, up 460 basis points from the same period a year ago, and this is largely consistent with what we reported in Q2. Our end quarter results represent a 53% pass-through rate on incremental revenues.

For the quarter, we generated adjusted free cash flow of $9.5 million, compared to $6.9 million in the same period a year ago. Cash flow conversion in the quarter of 116% was higher than normal due to the timing of various cash inflows and outflows that is somewhat typical for the third quarter. While the quarterly conversion rates will fluctuate, we remain confident in our ability to convert approximately 50% of our Adjusted EBITDA into free cash flow on a rolling twelve-month basis. GAAP net income for the quarter was $2.7 million, compared to $2.6 million in the same period last year.

Against our fully diluted share count of 127.8 million shares, our current quarter net income results in a GAAP EPS of $0.02 per share.

With respect to our balance sheet and capital considerations, there are a few items from the quarter to discuss. First, we ended the quarter with approximately $32 million in cash and cash equivalents and no outstanding debt. Second, through our partners at Bank of America, we have recently secured a revolving credit line of $100 million, with an additional $50 million available contingent on certain conditions. This line was exclusively put in place to provide access to liquid capital should we identify strategic targets that could help accelerate our growth trajectory.

Finally, we are pleased to say that we completed the distribution of shares to holders of our management incentive units that were connected to our 2021 IPO. The most notable impact of completing these distributions is that all tax withholding obligations related to these shares are now fully satisfied.

Moving on to guidance, we are reaffirming the revised revenue and Adjusted EBITDA figures that we provided in our Q2 earnings discussion. Just to confirm, that was a range of $170 million-$175 million for full year 2023 revenues, and a range of $30 million-$32 million for full year 2023 Adjusted EBITDA. With that, we'd like to open up the call to questions. Operator, please go ahead.

Operator (participant)

Thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll take our first question from James Faucette at Morgan Stanley.

Michael Infante (VP, Equity Research)

Hi, everyone, it's Michael Infante for James. Thanks for taking our questions. I wanted to ask on Portfolio Workbench, obviously currently in beta, expected to go GA by the end of the year. Oleg, I think you called that out as a driver of a win or two in the quarter, but I'm curious how you would characterize the early feedback thus far from clients and perhaps how it's priced in the potential uplift from an NDR perspective over the medium term. Thanks.

Oleg Movchan (CEO)

Thanks, Michael. Great question. So, you know, this is one of the products. I just want to emphasize it again. It's not something that, you know, we went to the, you know, our design lab and, you know, created without consulting with our customers. Actually, it's a result of many conversations.

We're simply responding to what market is asking us to do and on one hand, and on the other hand, it's a part of our deliberate and purposeful strategy to create a product offering for institutional asset managers and move our traditional portfolio that is a mix, as you know, between middle and back office offering, more toward investment decision-making as opposed to investment decision implementation part. And so that's the strength of the product, where it's, it doesn't stand on a stand...

It doesn't exist on a standalone basis outside of the core system. Then there is another layer of integration that brings those orders into overall core. It's actually part of the fluid, Enfusion ecosystem, and so once the decision is made, which is what Portfolio Workbench is all about, it's being seamlessly executed within our OMS. So it's basically, again, it's a response to what market's been asking us to do and a result of multiple iterations that the product team and the technology team has performed with our clients. Naturally, it will, we believe, it will make a serious impact on our client retention capability.

I mean, look, the reality of it is, you know, Enfusion is becoming, as opposed to just operational support platform, it's also becoming a collaboration platform, where portfolio managers, you know, the very people that think about how to position the portfolio, allocate capital, allocate risk, continue to interact with analysts, continue to interact with front office teams, portfolio, excuse me, order management capabilities, traders, and so on and so forth.

And so that part is facilitating that collaboration, that part is facilitating that interaction, and therefore reinforces the quintessential nature of the platform and thereby translates into the high retention rates.

Michael Infante (VP, Equity Research)

... Got it. Makes sense. Maybe just on some of the strategic commentary you made, obviously good to see the incremental credit facility, the health of your balance sheet, and the free cash flow generation that you guys are having. But how are you thinking about the capacity for near-term M&A? And I'm more curious about the types of assets and/or geographies that you would be interested in.

Oleg Movchan (CEO)

Sure. Great question. So, we have, I mentioned a couple of quarters ago, first of all, we're very deliberate in what we're looking at as far as our M&A targets are concerned. Our thesis of all-in-one system, fluid one, you know, one fluid, coherent set of code, framework, workflows, remains intact. Therefore, the bar for finding something where we have completely blindingly obvious value creation, proposition, technology, stack compatibility, and of course, culture fit is pretty challenging, right?

On the other hand, because our system is so open and so flexible, it does facilitate interest in place, both in terms of scale, where we can, you know, bring something on board that will simply accelerate our travel from growth perspective within the core product strategy, or from scope perspective, where we would position the business within areas where we're simply not, such as private equity markets or private credit markets. But from that perspective, it's not so much geographical approach. We're global. We're looking at things both in Europe and in U.S. Of course, in the U.S., there is plenty more to look at.

But it's more related to a choice, whether it's a scale deal where we, you know, look along our vertical and see what our technology platform allows us to bring on board, or we'll look at, you know, look at this from scope perspective, where we're seeing what's available from modern technology perspective that would allow us to get into areas where Enfusion is not currently represented or doesn't have capabilities to sell.

Michael Infante (VP, Equity Research)

Got it. Thanks, Oleg.

Oleg Movchan (CEO)

Of course.

Operator (participant)

We'll take our next question from Faith Brunner at William Blair.

Faith Brunner (Equity Research Senior Associate)

Hey, guys. Thanks for taking my question. Wanted to start on the international side. You guys are seeing strength, especially in EMEA, and I was just wondering how you're thinking about this opportunity, how you guys are thinking about allocating resources, and your competitive positioning to sustain momentum in these areas.

Oleg Movchan (CEO)

Well, big focus for us. Thank you for the question. I mean, as you've seen, you know, for the last couple of quarters, it's been a strong driver for our growth, 29% year-over-year growth this quarter. We see a lot of opportunity there. You know, people typically think about EMEA as one monolithic market. From our perspective, it's anything but. Every country in Europe is relatively unique in terms of go-to-market strategy, in terms of how people think about technology, how people think about buying decisions, you know, who are the gatekeepers in the industry, and so on and so forth.

And so our strategy is nuanced, and I have to give credit to our both revenue team and product team, thinking through those nuances and designing that go-to-market strategy to attack those markets.

Those markets also, from our perspective, tend to be less, less competitive and less crowded, more stale, slower, and therefore, in some sense, ripe for disruption by companies like Enfusion. They still either relying on a lot of legacy systems, legacy infrastructure, homegrown, proprietary, or relying on relatively clunky, you know, obsolete legacy providers, where, you know, people are still babysitting capabilities and spending tens of millions of dollars without significant ROI. So we're very excited about the opportunity.

Both Europe and Middle East very interesting, and as you've seen, we're gaining traction in multiple countries: France, Norway. You know, of course, we're seeing opportunities in U.K. as well. It's still our home turf.

We still are obviously controlling pretty large market share around in major center cities like London, and of course, outside EMEA, like Hong Kong and New York. But again, our strategy is very deliberate to rebalance portfolio mix away from those centers toward markets where we're much less represented and where competition is not as high. But also, you know, rebalance our book of business. As you— If you track our performance over the last three, four years, this is why the revenue is so stable. Sometimes when, you know, when Asia doesn't work, U.S. picks up slack.

When U.S. is slowing down, we're rebalancing towards Europe, and we will continue to do that going forward.

Faith Brunner (Equity Research Senior Associate)

Okay, cool. Thanks for the call, and if I could sneak one more in here. Just a lot of strength in private strategy, too, as you guys are a beneficiary of capital flow. So, wondering how you're thinking about these fund types of clients and their overall willingness to get infrastructure up and running quickly.

Oleg Movchan (CEO)

I'm so sorry. I did not get the first part of your question. Could you repeat that?

Faith Brunner (Equity Research Senior Associate)

Just as you're continuing to see strength in multi-strategy, you know, -

Oleg Movchan (CEO)

Mm-hmm

Faith Brunner (Equity Research Senior Associate)

... asset managers and capital inflows, how are you thinking about clients and their willingness to kind of adopt broader solutions?

Oleg Movchan (CEO)

I got it. So, you know, that's an interesting one because you know, the multi-strategy, multi-manager businesses, you know, to some extent, they actually represent a challenge for us because they have, you know, very custom blends of different things. And actually, to the extent that they're competing for talent, oftentimes it's nearly impossible for them to impose specific system requirements on people that are coming in with, you know, people coming in with a team that has some kind of history with another system, some kind of a preconceived notion of how they like their workflows to be organized.

And so, you know, the platform has to be dynamic and flexible enough to absorb the team without necessarily imposing those technical or workflow constraints.

You know, on the other hand, precisely because they've captured such enormous economies of scale, they have virtually unlimited technology budgets, and therefore, their ability to run a lot of proprietary things to satisfy-- to develop and run a lot of proprietary things that satisfy their firm-wide requirements is also much higher. And so the cost pressures are, in some sense, a secondary there. From my perspective, it's much more driven by what makes sense for the business.

On the other hand, you know, those firms have become big magnets for talent, and therefore, they're actually pressing down on the number of launches naturally.

As PMs who are looking to launch, they make a choice whether they, you know, they go it alone, and they launch a fund, or they go on a platform, like one of those multi-manager platforms, and they just get a seat and get capital allocated and just begin trading. And so from that perspective, we have a pretty strong nucleus of clients like that. But in some sense, you know, this is not a market where, you know, we see unlimited growth.

What is interesting, though, and you see some recent announcements on the subject, more traditional, fully integrated asset managers typically start competing with those and actually allocate capital internally, and this is where we come in.

This is our blend of multiple capabilities, middle, back, and front office, actually matters because those guys care about cost, and they care about scale, and they actually start coming in into those markets with much more palatable cost structure that makes more sense for investors.

Parker Lane (Director, Equity Research)

Okay. Awesome. Thank you, guys.

Oleg Movchan (CEO)

Sure.

Operator (participant)

We'll next to Alexei Gogolev at J.P. Morgan.

Elyse Cantor (Equity Research Analyst)

Hi, this is Elise Cantor on for Alexei Gogolev. So my question was, talking about your average onboarding period, kind of how you plan to reduce this to better compete with other players in the space?

Oleg Movchan (CEO)

Yep. Big, big area of focus for us. You know, we think about that part as, not just a cost structure part or pulling revenue forward part, but also as a competitive advantage. Typically, our onboarding framework and onboarding cycle is much shorter than that of, our competitors in that space, you know, specifically legacy providers that have on-prem installs. And so even if we mention capabilities, we typically win business, precisely because our onboarding is much more reliable and, and, and much shorter than that of our competition.

And in terms of, you know, leveraging that, you know, there is only one way to do it. You design the organization the right way, and you build technology capabilities around that, so that your team is much more effective, effective, and efficient.

So that's what drives the cost down, this what enhances the velocity of the process.

Elyse Cantor (Equity Research Analyst)

Great. Thank you so much. And then real quick, on EBITDA margins, so I know your guidance remain the same. I was wondering if 20%+ EBITDA margins are sustainable for the next two years, and where you see the trajectory of margins going, perhaps back to 40% someday?

Brad Herring (CFO)

Yeah, this is Brad. I'll take that question. You know, we've talked about, you know, expanding margins. It's also why we mentioned, I mentioned the pass-through rates when we talk about incremental revenue and how much of that is flowing through at EBITDA. So we've targeted, you know, a 45-55% pass-through rate. So what that translates in, into certainly is margin expansion. So we've targeted exiting this year around 20%, and we certainly see those numbers not only sustainable, but also, you know, show the ability to expand those margins, you know, both in the near term, and the long term.

We're not setting necessarily targets to say when we'll get to, you know, 30%-40% margins, from an outlook perspective, but we certainly have the ability to take where we'll exit this year and expand those further into 2024.

Elyse Cantor (Equity Research Analyst)

Got it. Thank you so much.

Operator (participant)

Our next question comes from Parker Lane at Stifel.

Parker Lane (Director, Equity Research)

Hey, guys. Thanks for taking the question here. Nice to see the reiterated guide and the improvement in NDR quarter over quarter. Brad, curious, as we head into the fourth quarter here and, and into 2024, what are your expectations around that trend line of, of NDR? Do you think we get back to the levels we were at last year? You talked about quality of the pipeline improving and maybe some stabilization out there. Just, just curious where we should expect that to go.

Brad Herring (CFO)

No, and it's a great question. We spent a lot of time looking at it. Just like you, I was very pleased to see that NDR trajectory turn in the quarter to start kind of flipping the other direction. You know, we posted the 107 number when you exclude in-vols. You know, we targeted that number getting back at least to a 110. You know, I think reality is probably a number that stabilizes in the 110-115 rate over time. You know, when it gets there is gonna be an interesting question. I certainly I'm appreciative to see the trend going in the right direction. So-...

I think it's probably gonna hover around these levels for the next, you know, maybe quarter or two, but I do think that 110, 115 number is a sustainable target once we get past that.

Oleg Movchan (CEO)

Parker, Oleg here. Thank you for the question. I just wanted to, to pile on, Brad's comments. So another thing that's important to think about is, you know, we try, you know, as hard as we possibly can to control what we can control. You're absolutely right. You know, big driver here is that we-- and again, I have to give credit to our revenue organization and client services organization about this, maniacal focus on discipline execution of the sales, making sure we understand the client's problems.

You know, our solution engineering team involved at early, you know, early-- during the early stages, client services team involved, gets involved in the early stages, and therefore, you know, not just the velocity.

Back to the previous question by Alexei, not just the velocity of our onboarding is higher, but the quality is higher, and therefore we continue to reignite this, you know, virtuous cycle of creating happy clients, and therefore, retention is higher.

Parker Lane (Director, Equity Research)

Thanks for the feedback. That's all for me.

Brad Herring (CFO)

Thanks, Parker.

Operator (participant)

We'll go next to Crispin Love at Piper Sandler.

Crispin Love (Director, Equity Research)

Thanks, good morning, everyone. Appreciate you taking my questions. Just first on revenue growth, which has decelerated recently in just a challenging landscape here. Curious on your views for near to intermediate trends, and if you think that growth may have bottomed in the third quarter and could begin to inflect higher and approach and perhaps surpass 20% in 2024, just given your comments about optimism for the future here.

Oleg Movchan (CEO)

Thank you for the, for the question. So, you know, we're pretty constructive. I mean, we think that the bottom, you know, is probably-- we've seen this. Again, we don't have a crystal ball. I don't know what the macro environment is going to look like in 2024. What gives me comfort personally is, you know, our ability to pivot.

As you know, you know, we-- you can grow or sustain this growth rates, you know, through multiple sources, and we all know that the, the asset management industry at large, right, is, is going to grow, you know, in single digits, and maybe at best is going to be, you know, anywhere between 4%-5%, depending on the segment. So how do you grow? How do you grow at 20%+?

So you can do it two ways. You can either create very aggressive market share capture, which is precisely where our focus today, which is also precisely where Enfusion's sort of what I would call downside convexity has been when, you know, macro headwinds are strong, we always rebalanced and took business away from competition, thereby sustaining the growth and actually capturing market share.

When market is really good again, you know, assets are flowing and the returns are high, you know, funds are launched, we are back to our, you know, hyper-growth stage again. And so this is sort of our tactical solution number one. Tactical solution number two could potentially be an M&A strategy. But again, as I said before, we are very careful and surgical about, you know, that aspect of growth.

You know, at the end of the day, it also is about profitability from our perspective, as much as it is about growth. I understand your question is about top line, but what we are trying to do is balance both top line and bottom line, and oftentimes, as you know, those two are connected.

Brad Herring (CFO)

This is Brad. Let me just add, you know, a little bit of ways of the way we look at our growth algorithm. You know, if you think of even if we bottomed out here and call it the mid-teens from a kind of market share and macro-level growth rate, which I will kind of chime in, is still substantially better than our competition because of our share grabs. So start off with at mid-teens. You know, you pick up another, you know, 300-500 basis points out of NDR, 'cause we've mentioned we're running a little bit lower on NDR than we would historically.

And then tack on another, you know, 300-500 basis points for, you know, additional product capabilities and additional market opportunities that we're expanding with things like Portfolio Workbench, with things like credit, with things like new geographies we're gonna go into. You know, you, you compile those numbers, you can easily get back into this, this 20% sustainable growth rate. So that's, that's kind of the way we dissect it and the way we look at it.

Crispin Love (Director, Equity Research)

Thanks. I definitely appreciate the color there and just balancing the top and bottom line. Second question from me is just, can you give an update on net incremental seat license trends at current clients? Are they positive but slowing here? Just curious what you're seeing in the current environment and the drivers there.

Brad Herring (CFO)

Yeah, this is Brad. I'll take that one, too. So this is kind of supporting my commentary about a little bit of a trend shift we've seen in that net organic growth. So we actually are starting to see a term we use called upsells, where our existing clients are adding seats at a faster pace than they are declining seats. You know, the last couple of quarters, when we saw those reductions in NDR, we saw that trajectory flip a little bit as most of our customers were resetting their cost base.

We are starting to see, on a net basis, that organic growth number is turning substantially more positive than it has in the last couple of quarters.

So they're not necessarily, you know, massive increases in seat counts, but we certainly are seeing, as clients are expanding their own fund capabilities, they are picking up seats at a much faster pace than they are declining seats. So that's a nice trend that we saw, and it's representative in that NDR number, picking up 100 basis points.

Crispin Love (Director, Equity Research)

Great. Good to hear. I appreciate you taking my question.

Operator (participant)

We'll move next to Gabriela Borges at Goldman Sachs.

Callie Valenti (Equity Research Associate)

... Hi, this is Callie Valenti on for Gabriela. Wanted to start on kind of how you feel about your current investment levels and what kind of macro signals would lead you to increase investments, potentially, or are you just comfortable with your current investment level in a world where macro increases, and, and you feel like you can take advantage of that opportunity?

Brad Herring (CFO)

You know, that, that's a great question, Callie. So it kind of hinges back to, to Oleg's comment a minute ago about balancing top-line growth and profitability. We always have a list of investments that we feel like we could prioritize, you know, should the economic environments, you know, present the opportunities.

The good thing about the growth rates that we're able to put, to put out, is it allows us to make, you know, not only sustaining the investments we make, but it does allow us to make incremental growth, incremental investments in our P&L, both flowing through OpEx and as well as CapEx, 'cause as you'll know, some of our investment flows through as CapEx software.

So we do plan, in fact, as we're building out our plan for 2024, we still have meaningful investments that we are targeting to make in 2024, based on the growth trajectories we're seeing in the macro environment. So those two things, to your point, are very intertwined, and we pay very close attention to them. And candidly, if the economic environments accelerate, that allows us the opportunity to make even more investments. So they work pretty close in tandem.

Oleg Movchan (CEO)

And Callie, I just want to echo what Brad said, and also make another point, which is, you know, the good news for us is that we still have a lot of white space in front of us to make investments that actually are here, clear and present. You know, not like, you know, a lot of people follow this hype with AI and machine learning and, you know, kind of having a lot of solutions out there, you know, in search of problems, so to speak. We have very specific targeted product roadmap.

You know, again, credit to our engineering team and product team, thinking through it in a very disciplined and careful way, where we, again, will listen to the market, and therefore, those investments that we're making, you know, have very high ROI.

So it's not just about making investments in our mind, it's looking for investments with highest potential return on equity. And you can look at our return on equity, as you know, it's north of 30%, and this is what we're thinking about every time we deploy dollar, we think about what we're going to get back. And again, like I said, the good news for us at this point in time is not, you know, what to do with capital, it's, you know, there is a lot of clear and present product, present product opportunities, excuse me, that would you know, help us capture both growth and market share.

Callie Valenti (Equity Research Associate)

That makes sense. Thank you. And then, second one from me, quick, is just wanted to hear anything about kind of how you're thinking of the Portfolio Workbench pricing and, and how that compares to your other modules.

Oleg Movchan (CEO)

You know, I think, you know, we still... Here's an interesting conundrum. So Portfolio Workbench is not something that we sell separately, right? As you know, we don't have a pricing package where we sell an order management system separately from PMS, from accounting and GL capability. And Portfolio Workbench is something that is just part of the overall platform right now. Going forward, we are working on different, you know, bundles, if you will, that will allow us to sort of maximize commercial relationship with our clients.

You know, right now, Portfolio Workbench is in this sort of... It's a green shoot of our overall product strategy, and we will think through, you know, how to optimize that entire package.

So the point is, we're not thinking about product, Portfolio Workbench, you know, as a standalone product that we're pricing, but we're definitely, definitely thinking about, number one, how the—how it works as overall, in the context of the overall package that our clients to buy, and also how that pricing will be driven as a function of what the Portfolio Workbench is going to work in conjunction with. Because remember, you know, at this point in time, it's just a tool, it's just an environment, it's just a framework, right?

It still has to be, you know, if you will, parameterized and enriched by benchmark data, by risk model data, by market data. And those partnerships, in turn, they drive the pricing structure of the product.

So there's a lot of dimensions here, and rest assured, Brian and his team and, you know, are hard at work and talking to our revenue team, thinking about how to capture that the best possible way.

Callie Valenti (Equity Research Associate)

That makes sense. Thank you.

Operator (participant)

We'll take our next question from Koji Ikeda at Bank of America.

Brad Herring (CFO)

Hey, this is Natalie Howe on for Koji. On ACV, so on an absolute basis, it grew this quarter more than it did last quarter, which is good to see, but overall, the past few quarters, the growth rate has been decelerating a bit. Do you see that potentially stabilizing or holding in the upcoming quarters? And what could help drive growth there?

Oleg Movchan (CEO)

Well, it's a natural, you know, natural again, expansion of our strategy. We're just landing bigger clients, longer contracts, bigger tickets, and we expect this trend to continue. You know, we again, we play very well in, you know, in lower market segments. In very low market segments, just for clarity, we don't conform to price-driven competition. We still compete on capabilities, not on price. But we keep seeing, you know, a lot of, you know, a lot of interest and opportunities in this higher, higher ACV space.

And so our, you know, our overall ability to land clients, you know, $300,000-$600,000 type range, is much stronger than it's been before. And we have an interest in opportunities and pipeline that is already in seven-digit type territory.

And so, you know, as we move slowly, as I said, you know, Enfusion is a business in transition. This is precisely where that transition is happening. So as we move towards that segment, we, you will see more and more of that.

Brad Herring (CFO)

Natalie, I would add, you might see some quarterly fluctuations in that growth rate, just depending on when clients are onboarded. So on a quarterly basis, you could see some bouncing around. You know, I would push you to probably steer a little bit more toward looking at it kind of on a year-over-year basis. You'll get a better number.

Operator (participant)

Got it. Thank you. That's all from us.

Brad Herring (CFO)

Thanks.

Operator (participant)

That does conclude today's question and answer session, and today's conference call. We thank you for your participation. You may now disconnect.