Envestnet - Q3 2023

Transcript

Operator (participant)

Greetings, and welcome to the Envestnet third quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A brief 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. It is now my pleasure to introduce your host, Mr. Josh Warren, Incoming Chief Financial Officer. Thank you, Mr. Warren. You may begin.

Josh Warren (Incoming CFO)

Thank you, and good afternoon, everyone. I'm Josh Warren, Incoming Chief Financial Officer of Envestnet. Thank you for joining us on today's third quarter 2023 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 under the Investor Relations section of our website as well. 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 statement on slides two and three of the supplemental presentation for the potential risks, uncertainties, and other factors that could cause actual results to differ from those expressed by the forward-looking statements. Further information can be found in our regular SEC filings. During this call, we'll be referring to certain as adjusted financial measures. Please refer to the appendix in our supplemental presentation for a reconciliation of these as adjusted financial measures to the most directly comparable GAAP measures. Joining me on today's call are Bill Crager, Envestnet's Chief Executive Officer, and Tom Sipp, Executive Vice President, Business Lines. On our call this afternoon, we'll provide a company update as well as an overview of the company's third quarter 2023 results. After our prepared remarks, we'll 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 turn the call over to Bill.

Bill Crager (CEO)

Thank you, Josh. Envestnet leads the wealth industry because we serve better, we scale better, and we have consistently and repeatedly delivered on the future needs of our clients. We had the vision and conviction that our industry's ability to deliver greater advice required an automated, connected technology platform with a broader set of solutions that is powered by data intelligence. We are delivering this industry-leading environment, making us more embedded and more essential to our clients. Over the past two years, we invested very specifically to extend our market-leading position and to take share, and also to increase the operating and leverage, and margins in our business. Our investment cycle was necessary, and it is now complete. We've integrated systems, embedded automation in our processes, and upgraded our technology. As we review our results and accomplishments tonight, there are three things to focus on.

First, our competitive position is unparalleled and is being validated by the marketplace we serve. We are significantly extending our competitive position by delivering a fully connected environment with, by far, industry-leading scale. We're confident in the growth opportunity ahead, which is evidenced by client and market share gains in a challenging macro environment. Second, we are better servicing our clients with greater efficiency, leading them to increase their engagement with us. Over the last 18 months, enabled by our investments, our client service scores have risen dramatically, which shows up in our 95%+ wealth client renewal rates. Also, our clients are contracting to do more with us, using more of our integrated services and solutions with our contract addendums up 30% year-over-year. And then third, the long-term sustainable operating leverage we have created will meaningfully increase shareholder value.

The automation and consolidation of our platforms is delivering greater operating and expense efficiency. Since the start of 2023, we have reduced our operating expenses by over $60 million on a run rate basis. We are structurally a higher margin company than we were before. Our leading competitive position and the ability to take share, along with significantly enhanced operating leverage, are the gains we are experiencing based on the success of our investment cycle. I now want to introduce you to Tom Sipp. Tom leads the Business Lines for Envestnet, and he's going to review our third quarter results.

Tom Sipp (EVP of Business Lines)

Thank you, Bill. Our performance in the third quarter reflects Envestnet's focus and execution within a demanding macro environment. We are enhancing our platform, strengthening client satisfaction, and winning market share. With the investment cycle now firmly in the past, we've become a more efficient, effective, and profitable company while accelerating additional cost reduction measures. Here are the key highlights for Envestnet for the third quarter. Revenue in the third quarter grew 3% year-over-year to $316.8 million, within our guidance range, despite softness in the subscription revenue. Adjusted EBITDA grew 26% year-over-year to $67.2 million, above the high end of the guidance range. The adjusted EBITDA margin was 21%, an improvement of 380 basis points year-over-year, and adjusted earnings per share was $0.56, also above the range.

Now moving on to expenses. Q3 personnel costs, as adjusted for severance and non-cash compensation expenses, were down 15% year-over-year. These reductions primarily reflect our planned exit from the investment cycle, as well as expense management actions that have been fully implemented. It's important to note that even with reduced personnel costs, we are more efficient, delivering new products, technology, and solutions to our clients with greater service levels. Increasing automation of service and operations is a key benefit of our investment plan. Overall, the macro environment in Q3 continued to present challenges for clients and prospects, as well as our business. In the wealth segment, our Q3 revenues grew to $275 million, up 7% when compared to Q3 2022. We are pleased with our performance in light of a difficult market environment, where industry-wide flows remain challenged.

Envestnet continues to generate positive net flows into both AUM and AUA, but the mix in the quarter was unfavorable for our fee rate. Our asset-based revenues increased to $193.9 million, up 9.5% when compared to Q3 2022. Our ealth business continues to increase market share. Our Q4 results are impacted by markets during Q3, where the blended 60/40 portfolio was down approximately 3%. For Q4, we anticipate asset-based revenue to be between $183.5 million and $186.5 million. Assuming the midpoint, this leads to our projected asset-based revenue growth to be approximately 0.5% for the full year 2023. As a reminder, all of Envestnet's asset-based pricing models are in our wealth segment.

Our subscription-based revenues in wealth increased to $76.8 million, up 1.1% when compared to Q3 2022. Our Q4 performance in wealth will be negatively impacted by timing delays in connection with new client conversions and new programs coming online that we now expect to begin recognizing in 2024. We do not believe that the Q4 wealth sub-subscription performance reflects the underlying opportunity for this business. Recent pricing actions and new customer wins gives us confidence in an accelerated subscription revenue growth rate in the next few years. All in all, our expectations remain to grow our wealth subscription revenue at approximately 6% in 2023.

In our Data and Analytics business, our revenues declined 15% compared to Q3 2022, to $41.8 million, but grew sequentially by 2.4% compared to Q2 2023. As discussed in previous quarters, the banking crisis led to client cost-cutting initiatives and implementation delays, continuing lower than forecasted subscription revenues in bank and tech channels. That being said, our revenue has stabilized and business metrics, including pipeline and bookings, are strengthening, giving us optimism as we go into 2024.

As we look out to Q4 and the full year, and consistent with how we provided information previously, for the fourth quarter, we expect revenues to be between $309 million and $314 million, Adjusted EBITDA to be between $64.5 million and $68.5 million, and adjusted earnings per share to be between $0.51 and $0.54. Therefore, for the full year 2023, we expect revenues to be between $1,237 million and $1,242 million, Adjusted EBITDA to be between $245 million and $249 million, and adjusted earnings per share to be between $0.98 and $2.01. With that, let me turn it over to Bill to highlight the conviction we have for the opportunity before us.

Bill Crager (CEO)

Thank you, Tom. Let me share our marketplace perspective with you. For the first time in a generation, there is the option to place assets in money market funds and secure higher yields. In Q3, the industry once again saw negative long-term fund flows, and public commentary from asset and wealth managers has noted that account cash balances are rapidly growing. Retail money market fund assets are up 50% in the last year. Financial advisors are asset allocators and fiduciaries, and given the environment, we are seeing them shift to securing and protecting capital while they are creating and revisiting financial plans with their clients. We've seen a significant influx of reporting-only accounts as investors allocate more to cash. There will always be market cycles, and the current cycle of higher interest rates and depressed equity flows are a challenge.

However, and this is important, our operating metrics are strong. We are taking share. Our annualized AUM&A organic growth of 11% in the quarter compares to low to mid-single digits for other companies. On a trailing twelve-month basis, our organic asset growth rates have been 8% for AUM&A. That is well ahead of the industry. Also, advisors are using more of what we offer, with increasing adoption and activity on our platform. Something I track very closely is our AUM&A accounts per advisor, and those are up 9% year-over-year. That is impressive, given the environment. We are focused on ensuring that as assets begin to rebalance into investment portfolios, we are extremely well-positioned for the demand and growth that will come.

This is the advantage we have in the scale and depth of our installed base, as we serve more than 107,000 financial advisors and $5.4 trillion in assets. Envestnet is more deeply engaged and connected with our clients and partners than ever before. Our clients are adapting to the environment and using this cycle to look at their cost structure and operating environment. They are focused on making their technology and solution stack simpler, more connected, and more efficient by doing more with fewer partners. Our focused engagement model and the work we did to integrate our capabilities has put us at the center of many vendor consolidation discussions.

At a recent meeting with a large client of ours, they told me that their analysis discovered that Envestnet could help them consolidate over 68 different applications they use there to operate their business today. There's proof of our progress that's evidencing itself in many ways, including new logo wins and deepening contracts with our installed base of clients. Our recent announcement of our partnership with First Command is a bellwether of what we're accomplishing. As First Command stated, Envestnet has all the capabilities, solutions, and tools that we need to serve our military families. Envestnet is the leading platform in this space. First Command is signing up for our full platform and our full suite of solutions. A long-time, significant customer of ours is another example of a client doing more with us.

They've expanded beyond our managed account platform to include a broad set of our services, including a mandate to carriers and advisors that 100% of annual annuity contracts will be processed through the Envestnet Insurance Exchange. This is a long-term client who is consolidating vendors, leading to the expansion of Envestnet's reach. Adding more solutions to our contracts is a leading indicator of future results. Our enhanced operating environment has led to deeper engagements, and this is evidenced by addendums to our contracts, which are up 30% year-over-year. We're seeing a convergence point for our partners as well, as they position themselves to benefit from our distribution footprint. It is because we have connected the components of Envestnet and engaged more advisors, that now we have more levers to drive incremental revenue streams through partnerships. Among these are asset managers.

We're expanding our relationship model, adding new distribution and collaboration opportunities as the leading asset managers focus on capabilities that will drive their growth. Another area is custody partners. We sit at a key convergence point for a truly integrated wealth plus custody platform that the market needs for greater scale and operating flexibility. We're incredibly bullish on the long-term revenue opportunity for the... that this creates for our shareholders. We're leaning into this partnership with FNZ and are building out a differentiated option for the marketplace with growing customer interest. Additionally, we've seen increased interest from existing custodial relationships to integrate more closely with us, and this is a recognition of our scale and our distribution strength. A brief update on our Data and Analytics business. Last quarter, we outlined the critical factors for stabilization of this business.

While there continues to be softness in banking and aggregation sectors, the research business reached a significant milestone as the new data sets have been onboarded. After only one month, we are seeing a meaningful rebound in our business indicators and results. In Q3, new bookings are up $2 million year-over-year. There are also 21 opportunities that are in the research trial queue, representing $8.3 million of potential Q4 bookings. This is progress. We're on an improving path for this business, and we'll report on the progression we achieve in next quarter's meeting. To summarize, we're operating with deeper client engagement, quality of service, and efficiency. Let me be clear, client feedback is strong.

Our service scores have risen by 40% over the last 18 months, and in the second half of this year, we'll have lifted our Adjusted EBITDA by 19% versus the first half of this year. We are confident that this will continue. Now I'll hand it over to Josh Warren, who we are very excited to welcome to Envestnet, and be fully installed as our Chief Financial Officer next week. His comments set the stage as he steps into his new role. Josh?

Josh Warren (Incoming CFO)

Thank you, Bill. I'd also like to thank the entire team at Envestnet for a warm welcome, and Pete D’Arrigo, Envestnet CFO for the last 15 years, in particular, for helping me with the smooth transition. I'm excited about the journey ahead because Envestnet holds a distinct position within the ecosystem that others have tried and failed to replicate. This position is important and impactful, powering financial advisors and the millions of clients they serve. I'd also like to emphasize that the long-term sustainable operating leverage created will meaningfully increase shareholder value. You're seeing the benefits of the investment cycle being completed, more automation, scale, and an ability to reduce costs while delivering an industry-leading platform and operating environment for clients that are looking to have fewer and deeper partner relationships....

We ended September with $43.2 million of cash and $892.5 million of total debt from our two tranches of convertible notes. Based on the operating results that Tom outlined, we reduced our net leverage ratio, our net debt over trailing adjusted EBITDA, to just shy of 3.7x as of September 30th. Based on the rest of the year outlook outlined previously, we expect to reduce our net leverage ratio to approximately 3.5x by the end of this year. We're in the process of our annual planning cycle, and we'll give an appropriate outlook for 2024 on our next call. But let me share how we're thinking about the outlook to provide some added visibility and transparency. Envestnet is now a structurally more efficient company following the conclusion of our investment cycle.

Bill and Tom mentioned the investments made in automation and scale. During 2023, these initiatives are expected to yield approximately $27 million in expense savings, with the additional expense savings to be recognized in 2024 and beyond, in a combination of compensation and non-compensation related expenses. Further, given our scale and our operating leverage, we expect future revenue growth initiatives, such as those that Bill and Tom outlined, will all be margin accretive as they scale. Those who have followed Envestnet are familiar with our as-adjusted metrics. On our income statement, we're naturally progressing to our 2025 target of 25% Adjusted EBITDA margins, the metric we've used in our debt covenants and provided guidance on. I would also like to add some additional commentary here as it relates to free cash flow, compensation expense, and software development as we look forward.

This year, Envestnet will pay approximately $34 million of cash for severance expenses, which we expect will impact our free cash flow during 2023. We expect severance expenses to be significantly lower going forward. Given our lower employee base, we expect our non-cash stock-based compensation will be down by approximately 15%. We anticipate providing visibility on our free cash flow generation going forward for transparency and comparability. Our free cash flow will deduct both our capital expenditures and our internally developed software, or IDS, capitalized under GAAP based on the stage of development and deployment. While our 2023 CapEx, as previously stated, will be approximately the same as it was in 2022, our internally developed software costs for 2023 are expected to be approximately $93 million, representing a 4% increase from 2022 IDS.

Now that the investment cycle is complete, we anticipate both our CapEx and our IDS to be lower in 2024. To summarize, because of the investment cycle in 2022 and for the full year 2023, Envestnet's free cash flow was and will be negative. This will not be the case in 2024, and we'll give greater detail on our February call. One final note before I move on. As of October 1, the advisor-focused wealth analytics business transferred over to the wealth segment to better align reporting with the way we manage the business, focused on the clients that we serve. We anticipate this transfer to be approximately $4 million of revenue in Q4, and it is reflected in the outlook that Tom provided earlier. As stated, in February on our next earnings call, we'll provide an update and outlook at that time.

Thank you, and I'll now turn it back to Bill for closing remarks.

Bill Crager (CEO)

Thank you, Josh, and once again, welcome to Envestnet. I want to spend just a moment to recognize and thank our departing Chief Financial Officer, Pete D’Arrigo. Since joining Envestnet in 2008, Pete has made invaluable contributions to our organization and to our success. He helped to lead our successful IPO, and he's helped guide our company through multiple market cycles. Pete has been an exceptional colleague and leader, and his tenure as Envestnet CFO has been vital. Pete, thank you. Now, let me wrap up our prepared remarks, and I'll conclude with this: Our investment cycle is complete and has been successfully implemented. Our competitive position is unparalleled, and our long-term growth thesis is being validated by the marketplace that we serve. We're better servicing our clients with greater efficiency, leading them to increase their engagement with us.

The long-term sustainable operating leverage we have created will meaningfully increase shareholder value. We're doing what we said we would do, and it is working. Despite negative industry flows, we are gaining share and have solidified the right to win in the marketplace. We're using our leading technology, solutions, and data intelligence as powerful competitive advantages to go deeper and become even more essential to our customers. And importantly, we will build on the progress we've already made on delivering increasing economic and operating leverage. I'm incredibly grateful for our clients, partners, and the employees of Envestnet for making such a difference in the advice that thousands of advisors offer to millions and millions of American households. I'll now turn it over to the operator for questions. Thank you very much.

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 that 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. One moment, please, while we pull for questions.

... Thank you. Our first question comes from the line of Michael Cho with JPMorgan. Please proceed with your question.

Michael Cho (Analyst)

Hi, good evening, guys.

Bill Crager (CEO)

Hi, Michael.

Michael Cho (Analyst)

How are you, Bill?

Bill Crager (CEO)

Good.

Michael Cho (Analyst)

Thanks for taking my question here. I guess my first question, I appreciate all the color around, you know, the expenses and the 2024 kind of initial thoughts. I guess I'm just kinda curious if, you know, if you could elaborate a little bit more in terms of kind of how we should think about, you know, margin progression, you know, over the course of 2024, as you think about the 25% targets for 2025. And I think, Bill, you mentioned the $60 million kind of run rate savings. And Josh, I think you said $27 million of expense savings in 2023 to date.

You know, maybe if you wanna, you know, talk through maybe a run rate, exit run rate in 2023 and, and how we should kind of, you know, think about that for, for 2024 as well. Thanks.

Bill Crager (CEO)

Great. I'm going to ask Tom. Tom Sipp is going to begin, and then Josh will finish.

Tom Sipp (EVP of Business Lines)

Yeah. Michael, I would think about it a couple of ways. First, you know, we've seen some pretty good margin expansion over the past, you know, 12-18 months. You know, we are well on our way to the 25% target. You know, we think it will not be back-end weighted. We will evidence some pretty material progress in 2024. You know, so think about it as more of a linear progression, you know, from 2022, 2023, all the way out to 25%. You know, there's expense initiatives that we've already implemented that will flow through next year. And then the other thing that you should think about is our free cash flow conversion rate will improve as well. So we're on our way to the 25%.

It'll be a linear progression, and more will drop to the bottom line, you know, going forward. And with that, Josh?

Josh Warren (Incoming CFO)

Yeah. Thanks, Tom. And Michael, let me just say, you know, first, as a reminder, just, with regard to our 2023 OpEx that Tom mentioned, given our outlook to the full year, you know, a headline to take away is on roughly a flat top line during 2023, which is, of course, a composite of wealth and DNA. Our 2023 expenses have been reduced by approximately $27 million. And in connection with that, you asked about the $60 million of run rate savings. That's based on actions already taken. About half was recognized this year, and the remainder of the $60 million will be recognized next year in a combination of operating and capital expenses by the end of 2024.

But to be clear, our priority going forward is free cash flow generation, and we're, of course, very focused on delivering a robust and sustainable free cash flow-generating franchise going forward as we continue to deliver the highest quality platform in the industry.

Michael Cho (Analyst)

Perfect. Thank you. And so for my follow-up, I just want to switch gears a little bit, just kind of zooming out here. I mean, we've kind of talked about the opportunity set for the custodian for some time now. Just kind of, one, kind of curious on an update on timing there. And then, two, you know, Bill, you talked about kind of a large set of long-term revenue opportunity there for Envestnet looking ahead. I mean, how do you think about sizing this kind of opportunity for this custodian offering over the medium term for Envestnet? Is it really just merely offering custody to clients, or are there other synergistic areas that might create, you know, further value for Envestnet?

Bill Crager (CEO)

Yeah. Awesome, Michael.

Yeah, no, making very good progress with our partners at FNZ. They have recently transitioned to their operating platform that is mostly trust focused and will be in market with them either in Q2 or Q3 of this year. When market analysts as well as clients take a look at the operating environment that we're going to be able to offer them, it is differentiated, and there's a great deal of interest. So again, we're making a lot of, you know, engagement progress, integration progress, and now to get to market by Q2 or Q3.

That does not include their broker-dealer registration, which they filed with the regulators and we're hopeful that they receive that and we're in operation with the broker-dealer side of the offering at some point in 2024. But we're encouraged. The other dynamic, Michael, that I would just spotlight is that overall, I think that the custody environment sees that the integration of what we do and what they do as a very meaningful step forward in operating efficiency, helping our clients take out costs, helping them open accounts and manage accounts with less friction. So we're deeply engaged with legacy custodians on how we offer that. And in each of those environments, both the FNZ and with our current custody partners, we believe there's financial benefit for Envestnet.

So we're, you know, working hard, and that's a focus point of ours. The other area of opportunity I spotlighted when it comes to strategic partners is asset managers. And, you know, we own and have a very critical distribution footprint, and as we've brought the platforms together and all of our advisors have access to all of what we do, it becomes an incredibly valuable conduit to reach more and more advisors with capabilities that asset managers are focused on and investing more in, which includes personalization, which includes overlay and adding value, alpha to performance through things like tax overlay, risk overlay, and individualized portfolios that are defined by the industry as direct indexing. Tom, would you add anything to that?

Tom Sipp (EVP of Business Lines)

I would just add on the custody, Michael. You know, we're going to retain revenue on custody economics. You know, think of that, you know, as 2-5 basis points, and we'll provide an integrated custody, you know, wealth custody ecosystem, you know, real-time account opening, real-time trading, so a better solution, and we're going to have several options. You know, FNZ will be one option, and then we'll have, you know, at least one, if not more, options from the, you know, established players in the U.S. market. And initially, we'll be in market with bank trust departments and RIAs, call it the middle of next year. And then, you know, we will then cross-sell to our broker-dealer clients end of next year into 2025.

But, you know, for the first time, Envestnet's then participating in those custody economics, which include, you know, the money they make on cash. And then, you know, when Bill is talking about the asset managers, you know, we're seeing a big trend in personalization. We have, you know, we work with 800-900 asset managers, you know, as part of our marketplace today. There is an opportunity. We've invested a lot in personalized capabilities. So think of direct indexing, think of high net worth solutions, trust solutions. We're going to work with a smaller group. You know, it's going to be, you know, call it a handful of major asset management, you know, partners, and the economic relationship with those partners will be very different than what Envestnet's, you know, experienced with the asset management community before.

Then they'll also lean in from a marketing distribution sales footprint perspective. So you're seeing a theme here where we're participating in more economics from the custodians and from the asset managers, which, you know, over the next couple of years are going to start to be a meaningful impact to our P&L.

Bill Crager (CEO)

Which really is all made possible because we brought the platform together into an integrated conduit to reach so many advisors, Michael. Thank you for your questions.

Michael Cho (Analyst)

Perfect. Thanks, guys.

Operator (participant)

Thank you. Our next question comes from the line of Alex Kramm with UBS. Please proceed with your question.

Bill Crager (CEO)

How are you, Alex?

Alex Kramm (Managing Director and Senior Equity Research Analyst)

Good, good. Thank you. Good evening, everyone. First off, maybe on the topic of pricing, and this may be a two-parter, but maybe it's a one-partner, but, I think, Tom, you made some comments, and I think it related to the subscription side, that you've taken some pricing action and, and looking for things to turn around. So maybe you can just flesh out what exactly you did and, and what that meant. And then connected to that, just quickly, I think the, the, the revenue guide for the fourth quarter, assumes some sort of pricing deterioration on the AUM and AUA side, like maybe like 3%-4% or so at the midpoint. So maybe... I don't know if those two things are related or different, so, maybe just flesh out those two things. Thanks.

Tom Sipp (EVP of Business Lines)

I'll take both those, and I think they're not related. You know, so one, the fee rate, what's going on there when you're kind of backing into the fee rate for the fourth quarter, that's being driven by really two primary things. There was a big client conversion, about $17 billion of assets, that starts off as low-fee reporting only assets. And then next year, we're going to see the managed accounts convert onto our platform. So that will lead to higher fee incremental assets next year. So that's one of the drivers, you know, in the Q4 fee rate. The other is just the mix between AUM and AUA and clients, when they move more to cash, you know, it affects our fee rate because that's mostly a reporting-only relationship. So again, nothing to do with pricing.

It's, you know, that conversion, and then as clients move, and that's happening across the industry. More AUA, more cash, and that affects your blended fee rate. And then if you move to the pricing, I'd say that, you know, we're making a lot of progress with RIAs, where our unit pricing is going up, but then also what we're doing is we're bundling, you know, more with our RIA relationships. So we are. You know, with our Tamarac RIAs, it's a operating platform relationship, trading, reporting, rebalancing. We've now bundled insights and analytics. You know, so the fee goes up, but they're also getting, you know, more for, you know, more enhanced platform. And then from our perspective, strategically, when they use those insights and analytics over time, that will lead to further adoption of our solutions.

So we not only get the higher fee, you know, with that bundle, but you're going to get better penetration rate for our fiduciary solutions over time.

Alex Kramm (Managing Director and Senior Equity Research Analyst)

Great. Thank you. That's helpful. And then maybe for my second topic, and this is for Josh. I mean, I know you're not taking over as CFO until next week, but obviously, you made some comments here. So just, I guess, bigger picture, you know, you're stepping into the role with the stock being down year-to-date, I think 39%, and the market is up 15 or 14, 15. So from the outside looking in, this is looking like something is broken. So I heard your comments. Obviously, it sounds like you're very supportive of what's been going on and the, I guess, what's in place, in terms of the operating leverage.

But just wondering if you look from the outside in and now having a chance to look from the inside a little bit more, what else do you think you can enact here, to obviously improve the picture? Because the market is obviously not buying in what's been laid out so far. Thanks.

Josh Warren (Incoming CFO)

Sure. Well, thank you for that question, Alex. I mean, look, I'd, I'd say this: I've gotten to know Envestnet over many years, as a partner, as a counterparty. You know, all of this is public information and, and well known in the marketplace, but Envestnet is a core partner of BlackRock, where I worked for the last, eight-plus years. It's a core partner of iCapital, an alternative investment marketplace where I, where I've been on the board, and audit and risk committee for the last four. As the leading vertical provider that serves the needs of financial advisors, Envestnet delivers the operating environment, and as Bill talked about, that operating environment is the gateway for many in the ecosystem. I think that creates a unique opportunity to grow from.

Alex Kramm (Managing Director and Senior Equity Research Analyst)

All right. Fair enough. Looking forward to more.

Bill Crager (CEO)

Thanks, Alex.

Operator (participant)

Our next question comes from the line of Pete Heckman with D.A. Davidson. Please proceed with your question.

Pete Heckmann (Managing Director and Senior Research Analyst)

Hey, good afternoon. I appreciate being able to ask the question. I just want to go back to that pricing issue that we on the last question. It does appear, you know, that the fee rate declines really quite a bit in the fourth quarter, and I can't remember. I heard the one thing about the one big client conversion was $17 billion. But on that base of assets, I wouldn't think that would move the needle quite so much. So you said once they move the managed accounts over, the fee rate should go up, and then as you continue to collect assets in the what, first party managed, you know, should we start to see the fee rates start to move higher in 2024?

Tom Sipp (EVP of Business Lines)

Well, Pete, thank you for the question. So that $17 billion comes over at a very low fee rate. The managed accounts don't come over till next year. So that, that's when we'll make, you know, 6-7 basis points on the, on that asset base versus, you know, 1 or less than 1. But, you know, there's two things that are driving your Q4, you know, calculation. One is that specific client, and then two, the mix of AUA versus AUM, more money across the industry, and our platform is in AUA, and then more money as within AUA is moving to cash. So as money... more money moves to cash, it shifts from AUM higher fee assets to, you know, really a reporting only, you know, fee for us.

So those two are the drivers, you know, that are affecting that fee rate. So it's not price degradation, you know, prices decreasing with existing clients. It's really that new client and the mix issue that's affecting that fee calculation.

Yeah, Pete, this is Bill. Yeah, it's the dynamic, and I would just spotlight the overall market net flow environment. And in the past quarters, I've spotlighted, and I'll do it now, the success we're having in selling into our existing client base, more of these high-value solutions. But, you know, year-to-date or year-over-year, for our high net worth solutions, account growth of 63% and assets of 55% year-over-year.

Bill Crager (CEO)

Direct indexing, assets of 48% growth year-over-year, and account growth of 27%. Overlay, 41% year-over-year growth with account growth of 28%. So we're being successful, but it's not enough to defy the overall AUA flow that is coming in the platform. That AUA flow is healthy. We're able to see more of the advisor's business as they position their clients in more cash or defensive positions, and ultimately will rebalance into these types of solutions when the market normalizes and the rate environment becomes clearer. So that's just the dynamic, and we're managing it. And, you know, again, there, there's a conversion, good thing, $17 billion, low fee rate ultimately becomes higher fee rate.

There's a big flow of AUA, but our focus and our success, our continued success in penetrating our current book of business is meaningful.

Tom Sipp (EVP of Business Lines)

I would also... So we see our fee rate as stable, you know, you know, you know, both on our AUM and AUA. It's the mix that's changing the, the, you know, the calculation. But then, as you look forward and think about our subscription revenue, you know, we've got a lot going on in the retirement space, so there will be growth in subscriptions driven by those initiatives. You know, we, we've talked about a partnership with Empower. That will come through as subscription revenue. It'll also come through as fiduciary revenue, as we're the default manager on those plans. We have a lot... You know, we talked about the asset managers.

You know, we're going to get different economics going forward from the asset managers, and that's that will mostly come through incrementally as subscription revenue. And then we have organic growth, you know, new clients coming on board. We talked about First Command. That's a pretty material client. It's about 500,000 accounts, $35 billion of assets. It'll come on, you know, second, third quarter of next year. And then we see, you know, solid growth in our insights and analytics, you know, based on the signed deals in the pipeline. And then our RIA growth, it's one, the subscription standalone platform.

We bundle analytics, and then we cross-sell from there, fiduciary-managed accounts, tax overlay direct indexing, and then at some point next year, call it the middle of next year, you know, we'll start to cross-sell custody, you know, to those existing relationships.

Bill Crager (CEO)

And the only thing I'd add to that, Pete, not to pile on, but, also stabilization in the DA subs line, because that has not been the case. That has been a heavy weight that has kind of dragged down our overall subs growth. And so, we have made a lot of progress this past quarter, and we'll report on more, as we get to the end of the next quarter that we're in now.

Pete Heckmann (Managing Director and Senior Research Analyst)

Okay. Okay, that's helpful. And then I should probably remember why, but professional services and your guidance is up, you know, over 90% year-over-year. Remind me, what's driving that dynamic?

Josh Warren (Incoming CFO)

So this is Josh. I'm happy to, I'm happy to take that. That's effectively a single client, which is an existing client of our D&A business, where the new service that we're providing for them in connection, in some respects, with the new data sets that Bill mentioned, is effectively a net new build and therefore, professional services revenue. Still revenue to Envestnet, but for the quarter, will be booked as professional services.

Tom Sipp (EVP of Business Lines)

Yeah, and you had some revenue shifting between subscription and professional services, you know, throughout the year as well.

Pete Heckmann (Managing Director and Senior Research Analyst)

Oh, okay. All right. I appreciate it. I'll get back to the queue.

Bill Crager (CEO)

All right. Thanks, Pete.

Pete Heckmann (Managing Director and Senior Research Analyst)

Yep.

Operator (participant)

Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. There are no further questions at this time, and I'd like to turn the floor back over to CEO, Mr. Bill Crager, for closing comments.

Bill Crager (CEO)

Thank you, Camilla. Thank you, everyone, for your interest in Envestnet and for joining us this evening. I once again want to thank all of my colleagues at Envestnet for the incredible work that you do. Thank you and have a good evening.

Operator (participant)

This concludes today's teleconference. You may disconnect your lines at this time.