Envestnet - Q1 2022

Transcript

Operator (participant)

Greetings, and welcome to the Envestnet First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the call over to your host, Mr. Brian Shipman, Head of Investor Relations. Please go ahead, sir.

Brian Shipman (Head of Investor Relations)

Good afternoon, everyone. Thank you for joining us on today's First Quarter 2022 Earnings Call. Before we begin, I'd like to point out that our earnings press release, supplemental presentation, and associated form 10-Q can be found under the Investor Relations section of our website at envestnet.com. This call is being webcast live, and a replay will be available for one month on our website. During the call, we will be discussing certain forward-looking information. This information is based on our current expectations and is not a guarantee of future performance. I encourage you to review the cautionary statements on slides two and three for potential risks, uncertainties, and other factors that could cause actual results to differ from those expressed by the forward-looking statements. Further information can also be found in our regular SEC filing.

During this call, we will be referring to certain non-GAAP financial measures. Please refer to the appendix in our presentation for a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. The presentation is also posted to the Envestnet Investor Relations website. Joining me on today's call are Bill Crager, Envestnet's Chief Executive Officer, and Pete D'Arrigo, the company's Chief Financial Officer. Bill and Pete will provide a company update as well as an overview of the company's first quarter 2022 results. After our prepared remarks, we will open the call to questions. During the Q&A please limit yourself to one question plus one follow-up. You may get back into the queue if you have additional questions. With that, I'll now turn the call over to Bill.

Bill Crager (CEO)

Thanks so much, Brian. Greetings, everyone, and thank you for joining us today. I hope everybody is good and everybody is healthy. The first quarter of 2022 is a case study of when financial advice and access to financial information matters the most. Market volatility and geopolitical upheaval weighed on markets and on the minds of financial consumers. This quarter, like previous quarters of volatility, we saw advisors and the firms that we work with empowered to react and respond to the uncertainty with extraordinary agility, given the technology and data-driven solutions that are powered by Envestnet. Our clients are supporting tens of millions of families who are navigating the challenges of inflationary pressures and rising interest rates, while also the uncertainty of volatile markets. What we do for our clients is really more critical than ever before.

These times underline the importance of connecting people's daily financial lives with their long-term goals, and this is something that Envestnet is delivering today. You know, during the quarter, I was able to spend much of my time on the road with clients and partners, hearing how they viewed the future of financial services. Every company I spoke with is accelerating digital transformation. There is no mistaking the transformation that is coming. What was so gratifying really is that Envestnet is delivering on it. Our clients are focused first and foremost on meeting their customers' digital expectations. As you know, consumers who access digital experiences throughout their lives expect the same from their financial provider. The digital expectations, coupled with this desire for more connected access and more connected insights. Financial planning remains core, but it's shifting from a standalone offering to a fully integrated experience.

This experience leads to answers that are executed to achieve a person's financial plan. It's a breakthrough that each and every one of the clients I spoke with this quarter are looking for. Data is atop most client priorities as well. They know it is a large underutilized resource that should drive actionable insights to better serve their clients and use to scale their businesses much more effectively. Yet, you know, most firms are challenged to do it. They have data everywhere and really everywhere. It's useful, but for most firms it's just untapped. Our clients want help deriving value from this data, and there are thousands of firms that lack the resources to deliver on these really important digital and data initiatives. Envestnet is stepping in, and we can solve this for them.

Another observation from my discussions this past quarter is that portfolio strategy and asset management is undergoing a rapid evolution to be far more comprehensive, integrated, and personalized than ever before. The quarter's volatility highlights this. The ability to reach further to connect a person's goals and the entirety of their financial life has a profound impact on how they experience markets, periods like these and even, you know, strong market, experiences. The personalization is what matters. With inflation and rising rates, whether someone is planning for, you know, short-term cash flows or with volatility, investing for generations ahead, the importance of personalized strategies that can be created and managed at scale is something we keep hearing over and over again from our clients. In the past quarters, as you know, I've hit this point pretty frequently. It is something that we are delivering, at scale today.

The very deep conviction we have about what we are doing comes from our clients. We're delivering for them today, and we are more essential than ever before. At the same time, we are introducing powerfully aligned, data-driven intelligence solutions that will serve them into the future. We have accelerated our investments to do this. Being on the road, being with clients, the feedback we have received has been overwhelmingly positive. Frankly, it is validating, and it is exciting. This year is really that headline. Envestnet is delivering a uniquely scaled digital and data-driven ecosystem to enable the industry to meet the rapidly evolving needs of the consumer. Next week is the Envestnet Advisor Summit in Charlotte, North Carolina. I'm thrilled that we are hosting this premier industry event in person this year.

In Charlotte, we will lift the curtain on what we've been working on for the industry to see. Some of the highlights are these. The newly launched Envestnet Client Portal will be on display. This is the fully integrated, data-driven, white-labeled environment our clients will deliver to their customers and is a game-changing framework that connects all the parts of a consumer's financial life, period. Our data and analytics business will spotlight the upcoming launch of our cloud-based data intelligence solution for wealth advisory firms. This offering will bring an enterprise's data together. It will enrich it and power it with new advanced analytics to help clients grow and to help them scale. We'll also introduce technology that is specifically designed to help advisors build their businesses.

This is the first of its kind and an indication of how the connected parts of Envestnet are creating transformational progress for our clients. Finally, on display will be a host of exciting enhancements of our fiduciary offerings. You've heard me speak about our direct indexing business before. This has grown by 45% year-over-year, and we're continuing to innovate and expand our capabilities here. At the summit, we'll introduce personalized QPs. These are based on a person's financial goals and their preferences. We can create a portfolio for them, individually built for them, really for anyone, and that portfolio evolves with the shifts in the market and a path to achieve their financial plan. As you know, direct indexing is a very hot space in asset management.

There's lots of secular current behind it, and this demonstrates how we are connecting data in tech with our deep quantitative fiduciary team and our distribution to drive substantial growth. Hopefully, you can sense my excitement for next week. Really, I can't wait to get there. What's really great is that our team will showcase the exact implementation strategy we have highlighted for you over these last quarters because it'll be very evident that we are doing these things. We are going deeper in our existing client base with value-added solutions. We are modernizing the digital marketplace to pave the way for the future, and we are opening our ecosystem to more and more providers. I wanna just spotlight now a few results for you, things that I think are very important. Our revenue is up 17% versus Q1 2021.

The assets we serve is up 14.5% year-over-year to $5.5 trillion. The number of accounts we serve is up 29% year-over-year. In the first quarter, Envestnet posted AUM/A net flows that were consistent with our quarterly average pace during the last several quarters, despite the market conditions we experienced. Our annualized organic AUM/A growth in the quarter was 10%, which included, importantly, annualized organic assets under management growth of 14%. Envestnet continues to meaningfully outpace the industry as this compares to annualized organic growth rates closer to the mid-single digits for most other publicly traded firms in our industry.

Given the volatility and uncertainty of the quarter, we were extremely pleased with the continued growth that we are seeing, although we had anticipated a step-up in our asset flows in the quarter. Taking a step back just for a minute to dig a little deeper on some of the underlying data that I think is important to understand. Value-added fiduciary solutions, including our direct index, tax overlay, and sustainability offerings, are growing impressively. Over the last year, the number of advisors using these solutions grew by 66%. The AUM of these solutions grew by 45%, and the number of accounts that we serve with these value-added services grew by 76%. We've created a waterfall effect that moves from assets under administration to AUM to flows into our value-added services. The stats that I just cited are near the end of this funnel.

From our $5.5 trillion that we serve today to now seeing real momentum in the execution end of our pipeline. We are accelerating our progress. We are using data insights today. I've spoken about this in the past. Today, we generate more than 11 million of these a day to identify accounts that are opportunities for advisors to pursue. We are growing the number of people focused on these insights and engaging with advisors on the appropriate solutions. Wait until you see the technology we will introduce next week. This will surface client and business priorities for advisors on their desktops every day and create far more streamlined workflows that advisors will soon have one-click access to all of these offerings. One last note I wanted to make sure I highlighted this quarter.

We often talk about our technology in the context of how our clients are using it, but as important is how Envestnet uses it. We serve more accounts and more assets. We process more trades and more service requests than anyone in the wealth advisory business. We do that across more than 20 different custodial or trust environments, and we reconcile and post execution-ready information for our clients before they log on every single morning. We do this, we do the same in our data business, collecting more data from more data sources on more consumer accounts than anyone in the aggregation business. The scale of Envestnet, I believe, is very important to understand. The competitive assessment of our space should begin here. We do more for our customers than anyone has ever done before.

Simultaneously, we are innovating, we are automating, we are streamlining, and we are driving up our customer satisfaction. Simply put, Envestnet is executing. As we invest in the data, technology, and solutions our clients use, it's important to know that we are also investing in our infrastructure, creating even greater scale, greater efficiency, and ultimately driving meaningfully higher profitability for our business over these next few years. While the needle will begin to move in the quarters ahead, we are increasingly confident in our opportunity to deliver on 25% plus Adjusted EBITDA margins by 2025. I'll include more detail on these efforts over the next few quarters. Envestnet is executing on its strategy, and we are making very meaningful progress. The market will do what it does. The world will twist and turn.

After being with so many people this past quarter, the very clear conclusion I've come away with is that more than ever before, Envestnet is incredibly well-positioned to help our clients drive more intelligent, connected advice and better outcomes for their customers. We are laser-focused on our strategy. We are validated, and we are energized by the engagement this past quarter offered us, and we believe this will drive long-term success for the company and for all of our stakeholders. With that, let me turn the call over to Pete for his review of our first quarter results.

Pete D'Arrigo (CFO)

Thank you, Bill, and thank you everybody for joining the call this afternoon. Picking up where Bill left off, the business today is operating more and more effectively. The organizational work we've done is yielding important productivity gains. An example is our technology output is up more than 30% this year compared to last year. This is allowing us to bring the data, technology, and solutions together across our company against tight time frames with higher quality. Our clients have noticed. We are seeing these types of operating efficiencies across the company, from data to wealth, service to operations, and so on. It's driving the activity we are focused on, going deeper, modernizing, and opening the platforms up to the ecosystem. At the same time, of course, we are managing through market volatility and the inflationary pressure many consumers are feeling. Our data shows how it's impacting people.

Our analytics insights show that quarter-over-quarter discretionary spending by consumers was down 5%, which is higher than any other post-seasonal spending decrease over the last couple of years. We also saw that over the quarter, activity at our digital fintech clients is plateauing, and in some cases, beginning to pull back. In the wealth business, we see how advisors are rebalancing and looking after their existing client base to better position them for market volatility. Our technology has made it pretty turnkey for our clients to address these market turns across their businesses. Our business is performing well given the push and pull of these dynamics, and it is with this context we provide our Q1 results and the basis for our guidance. Adjusted revenue for the first quarter grew 17% year-over-year to $321 million.

The wealth segment was modestly softer than we originally expected, due mainly to the equity and fixed income markets both down greater than 5% for the quarter, impacting revenue from accounts billed monthly and billed on average daily balances throughout the quarter. Revenue within the quarter was softer, and the way we calculate our effective fee rate for the quarter was also lower since the revenue that was billed was billed on these lower asset values than the asset values were at the beginning of the quarter. The effective fee rate appears to be a little lower than we would have expected. The data and analytics business also experienced the pressures of challenging macro trends in the economy and marketplace.

As I mentioned, we saw the impact on our large fintech and bank clients who saw a decrease in user volumes, as well as in our research business, which primarily serves asset management firms. Adjusted EBITDA was $55.7 million, reflecting the expected progression of expenses we outlined on our call in February. Adjusted earnings per share was $0.47, $0.02 higher than our guidance for the quarter. Before I go through the detail about our outlook for the remainder of 2022, I'd like to add a little more context. First, our wealth business, as I said, performed well in the quarter, especially in light of the market environment. We saw continued strong growth and net flows, largely consistent with last year's strong pace. That said, we had anticipated an acceleration of flows.

As we look forward to the rest of the year, our revised outlook does factor in the current market environment, including a more muted outlook for flows through the rest of 2022 as advisors are focusing on making sure their clients' current portfolios are best aligned. Second, our subscription businesses continue to grow steadily in both segments. While data and analytics made significant progress from a new product standpoint, our revised outlook for revenue growth this year is a bit more modest given what we've seen in Q1. As Bill mentioned, the technology modernization efforts should begin to benefit our cost structure in the quarters and years ahead. We are also actively managing our expenses given the macro environment as we are moving into the second year of our accelerated investment initiatives.

Reiterating the way we're approaching expenses, first is normal expense growth to support the needs of the business today, including supporting additional customer activity as the business grows. Second is a partial restoration of spending levels that we experienced prior to the pandemic for certain items such as travel and entertainment. Finally, we continue to anticipate the accelerated investments announced last year to have a full-year impact of $45 million-$50 million, as we have discussed on the past several earnings calls, which will affect adjusted operating expenses by $15 million-$20 million year-over-year. All that said, we will be scrutinizing all of our spending activity. Given the top-line impact we are seeing in the business resulting from the market, we are ensuring that we continue to manage our expenses.

Now, looking forward to both the second quarter and the full year, we're updating our guidance as follows. For the second quarter, we expect adjusted revenues to be between $324 million and $326 million, showing growth of 12%-13% compared to 2021 as the business benefits from higher subscription-based revenue, somewhat offset by the market declines in the first quarter. Adjusted EBITDA to be between $55.5 million and $56.5 million as we anticipate the accelerated investments to continue to impact profitability on a comparative basis. Adjusted EPS to be between $0.45 and $0.46 per share. You'll note an increase in professional services revenue in Q2 as well as cost of revenue, both of these items related to the Advisor Summit and are in the range of $5 million-$6 million each.

For the full year, we expect adjusted revenues to be between $1.330 billion and $1.340 billion, up 12%-13%. Adjusted EBITDA to be between $255 million and $260 million and adjusted EPS to be between $2.17 and $2.23. The change in revenue guidance reflects a roughly $30 million dollar impact from the market through March 31st, with the remainder being a more conservative outlook for flows in the wealth business and lower utilization in data and analytics, more consistent with what we experienced in the first quarter. Our guidance, as always, does not assume any changes in the capital markets from the prior quarter end and is based on market levels as of March 31st.

On our EBITDA margin, we are still estimating that the first quarter was the low point, and we expect adjusted EBITDA margins to improve in the second half of 2022 as our revenue growth combined with modernization efforts and general cost actions should drive margins higher. Q3 and Q4 will not have the impact of the Advisor Summit, so the margins are expected to clearly increase beyond Q2. Long term, the financial implications of our strategy should be powerful as we unlock access to the addressable markets Bill discussed, realizing greater depth of relationships with our existing client base, increased adoption of portfolio solutions within our captive addressable market, and strengthening the engagement between advisors and their investor clients. By 2023, we expect to be driving higher revenue growth and growing profits and profit margins meaningfully.

Turning to the balance sheet, we ended March with $360 million in cash, a debt of $862.5 million. The outstanding debt consists of two tranches of convertible notes due in 2023 and 2025. We are actively monitoring opportunities to refinance or retire the twenty-threes as we are approaching within a year of maturity, and we will update you accordingly of our progress. Our $500 million revolving credit facility was undrawn as of March 31st, and our net leverage ratio at the end of March was approximately 2x EBITDA. Thank you again for your support of Envestnet. With that, I will turn it back to Bill for his closing remarks.

Bill Crager (CEO)

Thank you, Pete. True transformation for our industry demands talented people driving new technology, new data, and new ideas. Envestnet is delivering on all three fronts. We've made meaningful progress breaking through to enable what we introduced last year as the Intelligent Financial Life. The feedback we are hearing is incredibly validating. The results we've been focused on are moving the needle, and they will accelerate. What's made it possible is the work we have done to bring the parts of Envestnet together. What it creates is access to the power of an interconnected ecosystem that is fueled by the largest data set in the industry, carrying the broadest, most intelligent technology platform in the industry that is networked to the most comprehensive marketplace of solutions and partners in the industry.

This is transformative and drives important value for all of our stakeholders, for the incredible team here at Envestnet, for our valued clients and the tens of millions of families they serve, and very much for our shareholders as we make progress toward driving higher revenue growth and a higher profitability into the future. Thank you for joining us today and for your support of Envestnet. I will now turn the call back to the operator for questions.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Your first question comes from Devin Ryan with JMP Securities. Please go ahead.

Bill Crager (CEO)

Hey there, Devin. How are you?

Devin Ryan (Director of Financial Technology Research)

Hi, Bill. Hi, Pete.

Bill Crager (CEO)

Hi.

Devin Ryan (Director of Financial Technology Research)

Good, good. Good afternoon. First of all, thanks for all the detail. I guess since I'm first, I'll kick off with the obvious one. You know, you just laid out, Bill, kind of a multi-year plan, which I appreciate, and I promise I'll have a question on that as well. You know, there have obviously been some recent press updates just suggesting a sales process is progressing and then some other press that we've gotten questions about around you know, Stuart DePina potentially leaving the firm. I guess, can you provide any additional context around even maybe at a high level whether we hear from the firm one way or another if a process was still ongoing or had ended?

is kind of one point. Then just at another kind of high level but related, you know, I appreciate we're in a volatile market backdrop, but how do you guys think about valuation, for the firm and kind of either where we are today versus kind of the long-term value proposition in the company or any insight you can share there as well?

Bill Crager (CEO)

Sure. Thanks, Devin. You know, last year we really laid out the roadmap and what we were aiming to achieve and the time period in which we were going to achieve it. That was coupled with our accelerated investment. We're a year and a quarter into it, and I would say that you know, the work that has been done organizationally to bring us much more closely collaboratively together to bring the parts of Envestnet together from a technology standpoint to begin to derive new, more streamlined experiences for our advisors, leveraging the data across our platform to provide insights and power new solutions and connecting that to our market-facing teams.

I'm going to tell you that we checked the box across the board there, and we're beginning to move the needle. When I look under the hood at the data that I'm seeing is we're driving more penetration of our advisor base. We're going deeper with them, and we're doing that in an incredibly effective way with higher yielding solutions, both gross and net revenue, that'll drive both top line and bottom line. We're modernizing the technology. You know, hopefully you noted how excited I am about getting to Charlotte next week to really lift the curtain for the industry on what we've done because it is a going to be perceived as transformative. Then lastly, open the network up to more and more partners.

You know, I would say that we've done an extraordinary amount of work, and we're making material progress, and we're beginning to move the needle. I won't comment on any rumor or speculation that's out there in the press. You know, if there was ever anything that we felt we needed to convey, announce, we would, of course, do that. You know, our focus has been very much on execution. On the comment about Stuart DePina, I mean, Stuart and I have been partners for a very long time. You know, he ran that Tamarac business. He ran the Yodlee business after Judd's tragic passing.

You know, we said, "Hey, this is the work we need to do." We put our heads down, and everything that I just outlined has really been led by Judd. I'm sorry, by myself in partnership with Stuart. I think we've accomplished an incredible amount. Again, if there's anything that the company needed to announce there, we would announce it.

Devin Ryan (Director of Financial Technology Research)

Yeah.

Bill Crager (CEO)

Your question on valuation, look, there's incredible value being created here. We have market share lead in multiple categories, and that, you know, that's been validated again and again in the discussions I've had over the past quarter. Industry surveys, again, just reiterate that Envestnet is leading. You know, we're moving the needle to really support a sustained higher growth environment, and we've targeted 15% a year, and then that's net of market. We've also focused on returning Adjusted EBITDA of 25% a year. You know, the market will tell us what the valuation or the multiple is on that, Devin.

At our scale and our size with our market position, with those sorts of supporting, you know, financials, I think you've got a very valuable enterprise that will continue to invest, to disrupt, to create better and better, more connected solutions so that our clients can provide more holistic financial advice and financial information to their clients so that we're driving something that's transformational. That's what's happening here.

Devin Ryan (Director of Financial Technology Research)

Yeah. Got it. Well, thanks, Bill. I appreciate it. I know it's kind of a complicated question to answer, but I guess I'll move on and try to ask kind of a bigger picture question. I'm trying to look at the slides here with the new advisor portal and the developer portal, and I appreciate we're probably not gonna front run next week, but I'm having a hard time with my eyes seeing kinda all the nuance of it. I'm curious on the advisor portal side, I guess, is the recommendations engine going to be essentially built into that, so there's kind of additional ways to monetize, you know, that portal? Or maybe it already is.

Bill Crager (CEO)

Yeah.

Devin Ryan (Director of Financial Technology Research)

I'm curious kind of like is that a new aspect of it? The other piece is just on the developer portal side, maybe again this is for next week, but like at a high level, what's different there relative to I guess beyond the interface, relative to kinda what has existed before?

Bill Crager (CEO)

Yeah, yeah. Devin, thank you. Love that question because the answer is yes. On the advisor portal, if there is an opportunity that we see in the advisor's practice, that recommendation will be surfaced to their front page. It'll be bucketed. Accounts that you'll want to review from an investment standpoint, an insurance standpoint, credit standpoint, trust standpoint, and all of those, the advisor will be able to click through. Not only will they be able to then click through to execute on the opportunity, but they're also going to see the value that that derives for their business. We're connecting the parts of advice to what it means for the advisor to grow. That has never been done before. We will show that. We will introduce that at our advisor summit.

The advisor sees what's in it for the client. They can add value, deeper value, but they also can almost instantaneously see what it means for their practice, not only from a revenue standpoint, not only from a productivity standpoint, but from a valuation standpoint. Again, Devin, that is a very profound step forward for the advisor's desktop. Regarding the developer environment, I think that you know, what's so unique about that is that you've got our data aggregation, our Yodlee, you know, our complete set of APIs from our data business. You've got our complete set of APIs from our financial planning business, and you've got the complete set of APIs from our wealth platform and our wealth business.

For the first time ever, our industry has a developer environment in which our clients can take and put the parts together within their own existing infrastructure to thread that into their workflows and the products that they're offering their clients in a very turnkey, streamlined way. It's been a lot of work on our part, but we are the first of its kind in opening our platform to those APIs. That is an outbound initiative, meaning, for clients to, you know, to take that and build into their environment.

It also has a profound inbound effect because it helps our partners find ways to thread themselves more deeply into the Envestnet ecosystem, and that's an additional revenue line that begins to show up in the second part of the year.

Devin Ryan (Director of Financial Technology Research)

Great. Well, I'll leave it there, but great to hear, Bill. Thanks so much.

Operator (participant)

Next question, Michael Young with Truist Securities, please go ahead.

Michael Young (VP of Business Connect Advisor)

Hey, thanks for taking the question.

Bill Crager (CEO)

Sure, Michael. How are you?

Michael Young (VP of Business Connect Advisor)

I'm doing just fine. Looking forward to next week.

Bill Crager (CEO)

Good.

Michael Young (VP of Business Connect Advisor)

Just wanted to start off maybe just, you know, obviously, appreciate the color on the guidance as of March 31, and I see the representative example in the back of the slide deck here. You know, as we move into 2Q, that's obviously been under pressure a bit in capital markets broadly, are there other opportunities, you know, to kinda trim or reduce some costs or expenses, anything that'll be, you know, sort of sunset as we kinda roll through some of the new products, that can have some cost savings attached to it? Anything like that would be an offset we should think of going forward?

Bill Crager (CEO)

Yeah. Michael, thank you for your question. You know, if there's ever been a mini case study here the last two days on trying to figure out the market, it's why you know, we don't really want to. It's not how we're modeling, right? We're modeling with knowns, and the volatility of the last two days has been you know, definitely noteworthy. You know, from a cost standpoint, I would say that we are you know. We've got a lot of integration going on across our organization. The teams that have been you know, in the development organization, in the service organization, et cetera, are beginning to fuse into single team.

What we're getting there is more lift and more productivity. Pete cited the lift in engineering, 30% plus output year-over-year. I could cite those statistics for you in our operations team from a trading service request standpoint, our service environment, and even in our go-to-market, how we're kind of deriving more and more productivity. We are, you know, continuing to assess expenses. I think we're balancing that with the progress that we're making, Michael, because, you know, as we go forward here, we're really beginning to move the needle. We don't wanna disrupt that.

Where I think we'd look at is you know if there's a slate of new hires from here that we'd be contemplating you know we're gonna be prudent in how we do those things. We'll also take advantage of you know other opportunities for cost savings you know throughout the business discretionary type things that we can absolutely manage. We also as you know have a reasonably good forward look of the quarter ahead. Depending on the degree of volatility we do have that visibility Michael and of course we take action if we saw something dramatic occur.

Michael Young (VP of Business Connect Advisor)

Okay, great. You know, I guess, you know, more broadly in the long-term scheme of kind of the EBITDA margin outlook, it seems like, you know, we'll probably bottom here over the next quarter or two with the advisor summit and then lower markets. You know, you expressed confidence in 25%+ kind of EBITDA margins long term, and it sounded like you were feeling more confident about that. You may have given us a little bit of color, but are there specific things that you're pointing to? I don't know if it's from the conversations with clients or otherwise that are kind of making you think it might be even higher than 25% longer term?

Pete D'Arrigo (CFO)

You know, I'll start with that one and then Bill can chime in. I think maybe in the near term, you've got the idea that we're conveying on the Advisor Summit. That's gonna be a little bit of a negative this quarter. Without that, our margin would be up almost a full percentage point, maybe 75 basis points, from Q1 to Q2. We do expect to continue to see our revenue grow and margin expanding for the rest of this year. That kinda fits what we've guided longer term.

When we think about, you know, the long term, you know, it's really driven by growth, but, you know, Bill talked about some of the modernization that's going on in our infrastructure and our ability to continue to scale and improve the breadth of the organization. That will continue to accelerate our ability to expand margins.

Bill Crager (CEO)

Michael, I just add, when we're talking about modernization, we're talking about systems that we operate the firm on. Our portfolio accounting, our trading systems, a lot of our service infrastructure.

What we've had a long-range plan for and been working towards is to really create more digitized environments so that ultimately we're just not going to need the same cost to support the technology because of modernization, because of automation that we're able to create. Our confidence is growing there. What we needed to do is get our code up into the cloud, check, done. Now we're able to move much faster through the process of modernizing those systems. What it does, again, is help us operate more effectively, gives us tremendous scale. We're at $5.5 trillion today, where we're anticipating growing to greater than $10+ trillion.

You know, how we can operate it and how we can serve it from a cost standpoint. That will drive material cost savings as we move out through this five-year period to 2025. As I mentioned on the call earlier, I'm gonna dig in on that over the quarters ahead to get to provide more detail to you.

Michael Young (VP of Business Connect Advisor)

Okay. That's great. Thanks, Bill.

Operator (participant)

Next question, Alex Kramm with UBS, please go ahead.

Alex Kramm (Managing Director and Senior Equity Research Analyst)

Hey, good evening, everyone. Hopefully not too detailed here, question on the personalized solutions. Obviously great traction, 45% up year-over-year. I think that's what we wanna see. A question, though, when I look at it quarter-over-quarter, I think last quarter you said it was $61 billion, now it's $57 billion, down a decent chunk and obviously markets were soft. You know, the trends there were actually worse than in your other AUM/AUA line. Just wondering if there's any mix effect from the underlying assets or if this was an environment where maybe your advisors were focused on other things, the personalized sales were maybe not as strong because of what's going on.

Just trying to understand the dynamics in those newer products a little bit better, I guess, in the last three months is where the question's going.

Bill Crager (CEO)

Yep. Thank you, Alex. It was a good quarter for us. Again, the flows into AUM and the services was, you know, positive. I would say it was at the same pace as it was in the third and fourth quarter of last year, right? Given the market climate, that was very good. What we did anticipate was that we would accelerate from 2021 to 2022, and that we didn't see. We saw very comparable flows, engagement of new advisors, opening of new accounts and also assets during the quarter.

You know what I think, the data reflects slightly is that some AUM and AUA accounts that are in some of the administrative side of that, especially in our Impact Platform, were transitioned. That would be the, you know, it's not notable, but that would be the decrease there. Again, from an activity standpoint, I would tell you that the 1Q looked a lot like 4Q.

Alex Kramm (Managing Director and Senior Equity Research Analyst)

Oh, okay. That is. My question was specific to the personalized solution. Is that the same comments? We can obviously follow up there later if.

Bill Crager (CEO)

Yes, exactly. It would be our direct indexing business.

Alex Kramm (Managing Director and Senior Equity Research Analyst)

Okay.

Bill Crager (CEO)

It would be our tax overlay. It would be our Sustainable Platform. Yep, exactly.

Alex Kramm (Managing Director and Senior Equity Research Analyst)

Okay. We can follow up there later. Like secondarily, just maybe I should know this, but just wondering on the Yodlee or data analytics side, when I look quarter-over-quarter, again, the subscription revenues were actually down $2 million quarter-over-quarter. And then when I look at your presentation, it seems like the number of accounts was actually down there as well. Was there a, and I guess paid users as well. Was there a client loss at Yodlee that I should know about that maybe I forgot or what's going on there? Cause I thought Yodlee was expected to stabilize and it looks like it ticked down again. Just wondering if there's like one event that I'm forgetting about here.

Bill Crager (CEO)

There's no client loss that's involved there. There is again just really we saw it across the board in terms of user volumes at large fintechs and at large banks that just saw a decrease in utilization, decrease in spending. That was, you know, as best we can tell from talking to clients, driven largely by the broader economic outlook or economic environment.

Alex Kramm (Managing Director and Senior Equity Research Analyst)

Okay, fair enough. Thanks again, guys.

Bill Crager (CEO)

Thanks, Alex.

Operator (participant)

Once again, if you would like to ask a question, please press star one on your telephone keypad. Next question comes from Ryan Bailey with Goldman Sachs. Please go ahead.

Ryan Bailey (VP of Investment Research)

Hi. Good afternoon, everyone.

Bill Crager (CEO)

Hey, Ryan.

Ryan Bailey (VP of Investment Research)

Hi. I wanted to come back to the point on valuation. Bill, I believe you recently made a comment at a conference that you thought you had the talent in place to get the company to a $20 billion market cap. I was wondering if you could help frame that comment and how you arrived at that number specifically?

Bill Crager (CEO)

Sure. Yeah. No, we again, I'm gonna start with the talent. You know, we have done a lot of organizational work here to bring the teams more closely together. We've brought new leadership in to complement the incredible team that had to help build the company. We are, you know, one of the points that I would make, which I think is an important one, Ryan, is that, you know, we believe that a, you know, vast majority of the people that we brought on in 2021, they're hitting the ground and they're really beginning to contribute, and you can feel the lift. You know, you can feel the throughput inside the company. I'm really pleased by that.

But if you roll forward, we're in a $2 billion top line. We're restoring with 25% Adjusted EBITDA. We're not gonna stop there. You know, we've created an engine, you know, we're creating an engine that will grow on a sustained basis over a long period of time. I'm confident in that. Here's why I'm so confident in that. The architecture that we have now installed is cloud-based. Our dataset is growing massively. We're using our dataset to power more and more applications and more and more partners. As those partners come into the ecosystem, we expand our offering, we do more things, and we're expanding our footprint. It is a very virtuous cycle that we are beginning to see unfold.

As you walk out through the 2025 period, again, $2+ billion top line, 25%, Adjusted EBITDA, you know, rate. But that doesn't mean we're stopping there. That means that that's the momentum we're carrying into 2026 and beyond. As you look at the uniqueness of the company, the value that we're providing, the distribution that we have today and will have continued to go deeper in, you know, that's a one-of-a-kind business. I think that being able to operate that at scale, I think is something that is gonna be highly valued.

Ryan Bailey (VP of Investment Research)

Okay. Thank you very much for the color. It definitely helps frame things. Maybe I'll sneak in another one.

Bill Crager (CEO)

Sure.

Ryan Bailey (VP of Investment Research)

I guess this is gonna be kind of obvious what I'm trying to get at here. I was wondering if you could expand on the outlook for organic growth for the rest of the year, and that potentially being a bit more muted, in terms of flows. Just as we think about the timing of that slowdown and then relative to the potential offsets that could come from the asset-based solutions, how that might help, on the AUM side.

Pete D'Arrigo (CFO)

Yeah. Well, focused on the AUM/A side, you know, we are moderating our outlook on our growth sales activity to look a little bit more like what we experienced in Q1. Again, that was closer to the average that we saw in 2021, instead of the acceleration that we had anticipated. We expect to see more modest than initially expected growth in Q2, and then some narrowing of that difference, but still more moderate sales and flows activity for Q3 and Q4.

Ryan Bailey (VP of Investment Research)

Got it. Okay. Thank you.

Operator (participant)

Next question, Chris Donat with Piper Sandler. Please go ahead.

Chris Donat (Senior Equity Research Analyst)

Hey. Good afternoon, Bill and Pete. Wanted to ask one around, when I look at the advisor growth, it's decelerated over the last couple years, and there's everything you're doing with the organization of Envestnet and the technology. I'm wondering, from the advisor perspective, are you kind of pushing on a string with selling to advisors, particularly with the pandemic? Bill, since you just were on the road, I'm wondering if you feel like the receptivity of advisors might be different in this environment than it has been for the last couple years, or if anything's likely to change in your sales process because of everything you've done over the last few years.

I'm just wondering if advisors have been more focused on kinda getting through the pandemic rather than using new technology, expanding their offering and doing different things.

Bill Crager (CEO)

Yeah. I think, you know, Chris, to that point, a few of the areas of need, right? Not like to, but need for firms, whether you're an RIA or you're a broker-dealer, and that is a much more robust digital engagement model so that they can engage their clients the way, you know, the typical business engages from a dot-com or web standpoint. Our client portal is now in market. Feedback we're receiving is just, you know, off the charts positive. You know, inside that is a pretty cool infrastructure. Underneath that portal sits a high degree of configurability. I don't wanna get too detailed, but it can be built and distributed in our frame or as widgets or as APIs.

It's got maximum flexibility as well, and unlimited kind of capacity to bring data in and apps in to combine, to render what we call the Intelligent Financial Life. That's a need. It's not a kinda a wanta. It's a need because consumers are going to find that, and that's where they're going to consolidate their financial lives. Firms see it, they get it 100%. The other one is around data. Data is a bit of a challenge for firms. You gotta think about the R&D concentration in our industry and the talent, right? Envestnet's got a pretty substantial engineering team, a pretty substantial data engineering and science team.

Your local RIA does not have that, nor does, you know, up to the very largest firms on Wall Street, they don't have it. Our expertise is something that we can flex, we can scale, and we can help firms with the data issue. Why? Because they're, you know, they don't have the organization of data. They're getting regulatory pressure. They're asking their advisors to continue to grow. They're looking for a greater insight, all things that we can deliver to them. Chris, you know, as I look forward, those would be two needs to have, right? Something that we are leaned in on both of those and pretty excited about them.

The other thing that I would note is that most advisors, you know, you've also got a demographic issue from you know an age standpoint, succession thinking about the future of their practice. There is no standardized valuation metric in our industry. It ranges from 5x-19x rev for a lot of these firms. Okay, so now how do I measure that? How does my firm stack up? Data drives a lot of those insights, and our technology will drive that. Those are things that are in the self-interest of the financial advisor beyond what they do for their clients. You know, we're just bringing the client portal, our wealth data solution, and the business platform to market.

That's gonna expand the number of advisor users. I would also tell you that over the year, while the head count on AUM/A accounts has been reasonably steady, there are other users of the platform, meaning investment specialists that have expanded pretty substantially year-over-year. They're not registered investment advisors, not registered advisors, but they're using our platform to provide services, not advice to clients. If you recall, there was a pretty significant conversion last year, and I would assign that to that type of environment.

Lastly, our software business, financial planning particularly, is growing substantially and touching many more advisors than the 107,000 that we serve from an AUM/A standpoint, and that continues to grow at a very healthy clip.

Chris Donat (Senior Equity Research Analyst)

Got it. That's helpful to understand. Okay. Just a question that sort of surprised me is looking through your numbers today, at least as I'm calculating, which could be wrong, but it looks like by my math, your annualized redemption number is actually at a multiyear low for the first quarter. One, are you seeing the same thing, and do you have any explanation for that? 'Cause I would've thought with a little more volatility and even, you know, demographics, that it might be working more the other way, but are redemption trends.

Pete D'Arrigo (CFO)

No, you're

Chris Donat (Senior Equity Research Analyst)

Is that the better way to ask it?

Pete D'Arrigo (CFO)

Yeah. Sorry, Chris. Yeah, no, you're looking at it the right way. The number came in much lower. You know, really what I think we have seen is the impact of the technology allowing advisors to reposition portfolios without necessarily closing accounts, changing accounts, or redeeming accounts. Making that accessible in just a few clicks with solutions that are all available on the platform has allowed a little bit more stickiness maybe on the platform. Again, it's one quarter, so if the volatility that we're experiencing continues in any prolonged way, that may change. You know, really kind of a quiet quarter from that perspective.

Bill Crager (CEO)

Yeah. You know, let me just give a shout-out to our advisors. You know, throughout COVID, throughout this whole period, they have been very engaged with their clients, and they're aligned to plans. Planning-based advice, you stick with the plan. Advisors have done a great job of coaching, nurturing, tweaking, and people are aligned to plan. Now, you know, we sit on so many assets, so I can't assign the majority of it to that fact but, you know, advisors are absolutely stepping up and doing their jobs. You know, it's a shout-out to our industry because they've navigated these years incredibly.

I think, you know, it's a small data point, it's a quarterly data point, and we'll know after, you know, the upcoming quarters, but it's also an important one. It speaks to something that we're seeing in the quality of advice that's being offered.

Chris Donat (Senior Equity Research Analyst)

Okay. Thanks very much for that.

Operator (participant)

Next question, Surinder Thind with Jefferies, please go ahead.

Pete D'Arrigo (CFO)

Hello, Surinder. How are you?

Surinder Thind (Equity Research Analyst)

Yeah, pretty good.

Bill Crager (CEO)

Good to see you folks, guys.

Surinder Thind (Equity Research Analyst)

I'm doing well, thank you, despite the market today, right?

Fair enough. It's a tough, challenging environment. Maybe just following up on the question about organic growth, any way that you guys can kind of quantify what you're seeing more in the sense of where I think your projections were versus, you know, where they are in terms of the flows? It sounds like that obviously, growth sales might be impacted a little bit in terms of there's some maybe some market fear out there. Just any additional color that you can provide that you're sensing from clients? I just wanted to kind of understand the big picture dynamics. If I remember correctly, when the markets are volatile, there's also maybe advisors have a preference for more of an AUA type model versus an AUM model. Is that also true as well?

If you can just talk about those dynamics.

Pete D'Arrigo (CFO)

Yeah. Surinder, this is Pete. I'll start with some of that in terms of what our assumptions are. Bill can get into the color on the advisors. Yeah, I think we had expected that we would be seeing closer to low- to mid-teens growth this year in terms of our organic asset growth. Q1 came in at about 10%, which is, you know, again, still healthy and we think highly competitive in the marketplace, just not where we might have otherwise expected.

Bill Crager (CEO)

Surinder, I would just add, you know, organic AUM up about 14% during the quarter. But as we look forward, you know, or as we had planned for the year, we were looking for a slight uptick to that. We've modified that as we've provided our outlook for the rest of the year to something that's very reasonable, I believe. You know, we'll continue to grow through this period of time. Industry-wide, if you look into the beginning of this quarter, 2Q, I don't wanna provide any real data here, but the industry has seen outflows during the beginning of the quarter.

Anecdotally, you look at asset managers, you talk to asset managers and you know, they're feeling some softness. I would say anecdotally, you know, we're continuing to kinda clip along at where you know, where we were at in 1Q of the year. Again, you know, today, the volatility that comes up each and every day may change people's attitudes as we get through the quarter. What we did was we provided a pretty reasonable outlook going forward.

Surinder Thind (Equity Research Analyst)

Fair enough. I guess more of a philosophical question. I'm not sure there's a right answer or a wrong answer here, but obviously there appears to be leaks to the media regarding you know, potentially strategic options, whether or not you are pursuing them or not. Can you just talk about the strategic rationale of not commenting on them in the sense that obviously the market itself is speculating based on what may be leaks or not? Obviously, we saw a leak at the Supreme Court, and then the chief justice came out, and he effectively confirmed what was going on. Just any color on the strategic rationale or the path that you've chosen regarding the leaks that may be out there?

Bill Crager (CEO)

Yeah. I appreciate that question a lot, Surinder, because, you know, what I would say is that there are always more of them before you count them. I get that from something I read recently. It was Ulysses S. Grant. He was a young in the army, and he was with a salty guy in West Texas on horseback. At night they'd hear these howls of the wolves. The next day, that salty guy asked Grant, "How many you think there are?" Grant underestimated and said, "Oh, there's about 20 of them." Well, they came upon the wolves. There were two. You know, so there's always a little more noise than we would want. But we are head down on the execution of our strategy.

I don't believe it does any good to spend a lot of time thinking about it, dwelling on it, Surinder. You know, it's noise. I'm not focused on it. You know, I hear it, but we're head down and focusing. I am, as I said earlier, you know, I'm not gonna comment on any rumor. If there was something to it, we would clearly announce it. That's, you know, essentially what we've told the media.

Surinder Thind (Equity Research Analyst)

Okay. No. That, I appreciate that response, Bill. Thank you. That's it for my two questions.

Bill Crager (CEO)

That was kind of a philosophical response.

Surinder Thind (Equity Research Analyst)

No, I appreciate that. There's multiple ways to address that, right? There's no right or wrong answer here.

Bill Crager (CEO)

Yeah. No, I appreciate that a lot, Surinder, so.

Surinder Thind (Equity Research Analyst)

Thanks.

Bill Crager (CEO)

Yep.

Operator (participant)

Next question, Patrick O'Shaughnessy with Raymond James, please go ahead.

Patrick O'Shaughnessy (Managing Director of Capital Markets)

Hey, good afternoon. What kind of view do you guys have into the pipeline for customer adoption of personalized solutions and Wealth Data Platform and various exchanges? Are you able to see building demand ahead of time to have a sense of when that revenue's gonna come online?

Bill Crager (CEO)

Patrick, we have visibility into flows about a quarter ahead on solutions. We have a proposal pipeline that sits in our platform. In that pipeline, in that proposal are solutions. There are portfolios. Those portfolios have parts. Those parts are parts that we can understand, and we understand what the historic close rate is on those, and we can understand the timing of those. Yes, we have visibility there. We also have visibility in our data business because people are spending, they're earning. You can begin to anticipate the climate, and you can understand also from an anticipatory, you know, begin to anticipate the activity, the usage and things like that, especially around something like verifications.

We do have visibility with our data ahead.

Patrick O'Shaughnessy (Managing Director of Capital Markets)

Got it. Helpful. Thank you. Pete, I think it was last quarter you spoke to the impact of a 5% market move as $7 million-$8 million of EBITDA, if I remember that correctly. In the slide today, it speaks to a 5% move being $16 million of EBITDA impact. If I'm remembering correctly and have the math right, can you speak to what you refined in your sensitivity analysis?

Pete D'Arrigo (CFO)

Yeah. The 5% before was really focused on the equity markets assuming a 60/40 mix, and that fixed income markets were virtually flat, as they have been over time. What we've updated here is to assume a similar move in that illustration in both the equity and fixed income markets, and so that virtually doubles the impact.

Patrick O'Shaughnessy (Managing Director of Capital Markets)

Got it. Makes sense. Thank you.

Operator (participant)

Thank you. I will now turn the call over to.

Bill Crager (CEO)

Yeah. It's also, Yeah. I'm sorry. It was also 12 months versus 9 months, I think, right?

Pete D'Arrigo (CFO)

Yep.

Operator (participant)

Okay. There are no further questions. I will now turn the call over to Bill for closing remarks.

Bill Crager (CEO)

Thank you, everybody, for joining the call this evening. I wanna thank everybody on the Envestnet team. You all are driving amazing things. We're making extraordinary progress and excited for the week ahead for Envestnet. I wanna thank everybody who joined the call tonight and for your support of Envestnet, and I look forward to speaking with everybody next quarter. Thank you very much.

Operator (participant)

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.