Envestnet - Q4 2023

Executive Summary

• Q4 delivered broad beats vs guidance: revenue $317.6M, adj. EBITDA $75.5M, and adj. EPS $0.65 all finished above the high end of Q3-issued Q4 ranges; GAAP was impacted by a $191.8M goodwill impairment in Data & Analytics, driving a GAAP loss per share of $(3.35).
• Momentum improved through 2H: Wealth Solutions revenue grew 11% YoY in Q4; adjusted EBITDA margin expanded to 24% vs ~21% in Q3 and ~18% in Q2 as cost actions took hold.
• 1Q24 outlook implies continued margin progress: revenue $320–$326M, adj. EBITDA $64–$69M, adj. EPS $0.52–$0.57; management targets mid- to

Transcript

Operator (participant)

Greetings and welcome to the Envestnet fourth 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 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Josh Warren, Senior Advisor. Thank you. You may begin.

Josh Warren (CFO)

Well, good afternoon, everyone. I'm Josh Warren, Chief Financial Officer of Envestnet. Thank you for joining us on today's fourth quarter 2023 earnings call. Before we begin, I'd like to point out that our earnings press release, supplemental presentation, and associated Form 10-K 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'll 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 2 and 3 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 Thomas Sipp, Executive Vice President for Business Lines. On our call this afternoon, we'll provide a company update as well as an overview of the company's fourth quarter and full year 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. I'd like to start the call today with a review of our Q4 and full year 2023 results.

Our results in Q4, each of which were above the high end of our range, represent our focus on disciplined execution. Q4 revenue was $317.6 million, representing 8% growth over Q4 2022. Adjusted EBITDA was $75.5 million, representing a 24% adjusted EBITDA margin and nearly 600 basis points of margin expansion when compared to Q4 2022. Our adjusted EPS for Q4 was $0.65, up 44% from the $0.45 we reported in Q4 2022. For the full year 2023, our revenue was $1,246,000,000. Adjusted EBITDA was $251,000,000, representing a 20% overall adjusted EBITDA margin, and our adjusted EPS was $2.12. As we enter 2024 and the next chapter at Envestnet, we have a set of strong fundamentals that we will discuss on today's call that position us well. I now like to turn the call over to Chief Executive Officer Bill Crager. Bill.

Bill Crager (CEO)

Thank you, Josh. As you know, this will be my final earnings call as Chief Executive Officer of Envestnet. For 25 years, it has been a privilege to be part of the amazing journey that is our company. From an idea and a good dose of courage by applying a lot of resilience and creativity, we've built something that is extraordinary. I am proud of what we've accomplished, and perhaps most proud of this: Envestnet is foundational to the financial guidance that advisors deliver to enhance the lives of millions and millions of families. Over the last couple of years, we've worked effectively to make Envestnet even better, taking the necessary steps to bring the company together to enable a highly connected, highly technology-driven, highly data-driven platform to serve the wealth management industry. Today, Envestnet is in a very strong position because of the work that we've done.

The company is the industry leader by assets, advisors, accounts, market share leader across financial planning, our turnkey asset management offering, and the data insights that we generate and offer to our clients. We are embedded with a great roster of clients and partners, driving an industry ecosystem that powers growth and delivers value. We have an exceptionally talented and aligned leadership team to deliver the next phase of Envestnet. The Envestnet strategy is aligned to our clients' needs to drive the growth and productivity of advisors by providing the most comprehensive and capable wealth management platform for our industry. We've created scale and competitive advantage with technology, data, and solutions. We've connected the pieces, and we are able to serve all client workflows and business models. Doing this serves investors by delivering revenue growth, operating leverage, and improving free cash flow conversion.

I look forward to helping Envestnet continue its leadership while advocating for our industry, roadmapping the future of financial advice and the essential impact that it has, while deepening relationships with our clients and our partners. I now want to turn the call over to Tom Sipp, who leads Envestnet's business lines, for an overview of the drivers of our business, and I'll be back at the end of the call for some closing comments. Tom?

Thomas Sipp (EVP, Business Lines)

Thank you, Bill. It has been an honor and one of the great experiences of my career to work alongside you. I am excited about the place we are in and where we are going. I'd like to spend our time today discussing four important topics: the market context and themes driving our business, our position and how it is translating into key metrics and financial results, recent proof points of our strategy winning with clients, and finally, the key growth initiatives that drive us ahead in the medium and long term. First, the market context. Envestnet is uniquely positioned to serve every type of advisory business model across the industry, from standalone RIA to large institutional broker-dealer or bank. We understand better than anyone the themes driving the overall industry, the themes that shape our technology offering, and how we bring solutions to market.

First, there is a greater push to achieve platform scale for both the advisor and for the firms that support them. Integrated technology and service are keys to greater efficiency. Another key trend is personalization of portfolio management, investments, and the digital experience. This is more important than ever. Personalization is driven by the fusion of data and insights, robust investment options, and technology capabilities. Next, our research shows that 60% of advisors and firms prefer to buy wealth tech from a single provider. Streamlining technology and maximizing the benefits of an end-to-end platform is imperative to a successful strategy and ultimately drives customers to consolidate providers. Finally, there is a continued evolution toward a more holistic view of advice, powered by data and planning capabilities that serve all client types, which is then delivered through seamless connections to solutions.

We've been at the forefront of these trends with the scale and scope of our technology and solutions in the market for years. Our competitors often talk about their vision or product roadmaps, as demonstrated through static screenshots. Meanwhile, our platform is live, battle-tested, and handling billions of dollars across millions of accounts every day with the most robust features. We are not standing still. We've rolled out a continuous series of enhancements to our platform with true open architecture, both within the connectivity and integration of our native modern experience and as part of our rich API and data library. We are enhancing, connecting, and delivering into the market. This has been our work over the last few years, and it will continue to drive competitive advantages. Here's how that translates into key metrics and financial results.

First and most importantly, our wealth business delivered Q4 revenue growth of 11% versus Q4 2022. Second, over the last 2 years, Envestnet delivered $116 billion of AUM/A net inflows, representing an average growth rate of 8%. We have delivered more than 4 times the net inflows of the second and third largest TAMPs combined. Accounts grew 4% year-over-year, while AUM/A accounts grew 8%. Our gross fee rate in Q4 was approximately 9.8. It's been stable between 9.5-10.5, with lots of short-term variables across millions of accounts. Finally, our client servant scores have gone from the low 40s to mid-60s over the last 2 years. Our leadership with a strong and stable client base is another competitive advantage. We have over 4,500 clients in the broker-dealer and RIA channels, including 48 of the 50 largest wealth management and brokerage firms.

Our top 25 clients have been with us for an average of 15 years. We have made fundamental improvements in both the technology and the service and delivery our clients experience with us. That puts us in a position to capitalize on the trend of vendor consolidation. I will provide you a couple of specific proof points. A large regional broker-dealer with over $50 billion of assets started to transition away from our platform but is now coming back because the promise of a custom platform with a fully integrated advisor ecosystem could not be delivered. Only Envestnet has the solution live and in market with the scale and maturity that can be relied upon. A $15 billion RIA and longtime client recently adopted our managed account capabilities in Q4, moved $400 million of assets onto the platform, including a majority in overlay services or direct indexing.

As a result, the recurring revenues from this client have more than tripled, with potential for significant growth. So we're very focused on our clients, delivering the platform that helps them grow. This is a better position than where we were a few years ago and one that we're leveraging to further our leading position. Before we move on, I'd like to address the impact of M&A across the industry. Typically, Envestnet has been a net beneficiary as our extensive client footprint with both RIA aggregators and enterprise clients has supported additional growth. However, consolidation over the last year or so has resulted in a negative impact to our wealth growth rate. Finally, I'd like to spotlight some of the important initiatives that will contribute to revenue growth over the medium term. Some of these are further along and included in our outlook.

Others are underway and will start to contribute to our growth in 2025 and beyond. First, we have achieved robust year-over-year growth across several of our solutions business lines where personalization and technology drive differentiation, including high net worth, Direct Indexing, tax overlay, and managed accounts to RIAs. We believe these accelerated growth rates will continue for an extended period. Second, pricing initiatives are accelerating, with specific progress in the RIA channel where we package our technology with a broad set of fiduciary solutions, analytics, and planning, deepening our client relationships. Enterprise pricing initiatives will take longer due to the long-term nature of our contracts. Third, our strategy to deliver deeply integrated custody capabilities completes a missing piece in the fully digital and connected advisor and client experience.

We are delivering the account opening, funding, and servicing workflows between our wealth management platform and custody back-office functions in one single experience. We will launch this solution, as previously announced, with FNZ. Finally, our retirement business continues to gain momentum. The team is focused on efficiently delivering retirement solutions to wealth advisors utilizing the best products, technology, and user experience in the marketplace, essentially providing the easy button for wealth advisors. This business will then scale by leveraging distribution partnerships with retirement and asset management industry leaders. What we have in the marketplace is meaningful for our clients and driving results. The continuous delivery of enhancements of our technology, tools, solutions, and service drive discrete revenue opportunities and furthers our competitively advantaged platform. We've connected the components to meet client needs and drive deeper relationships. That underpins our 2024 wealth revenue growth guidance of mid to high single digits.

Thank you, and I'd like to turn the call back over to Josh.

Josh Warren (CFO)

Thank you, Tom. I'll spend a few minutes discussing three things: first, our results; second, our balance sheet; and third, our outlook and focus. As we enter 2024 and a new chapter at Envestnet, we look forward to continuing to deliver our connected ecosystem and our unique capabilities. Our model supports our attractive growth algorithm and enables operating leverage and free cash flow generation. As of the end of 2023, Envestnet served over 108,000 advisors, and those advisors are doing more business with Envestnet. During 2023, while our total number of advisors grew by nearly 3%, our number of accounts grew by over 4% to over 19 million, evidencing higher adoption. Taking a longer view, demonstrating the scalability of our platform, the number of accounts per advisor on Envestnet has grown approximately 50% between the start of 2020 and the end of 2023.

While historically, Envestnet expected to grow costs in line with accounts, the completion of our platform infrastructure investments means that account growth becomes increasingly beneficial to our ability to expand profitability and generate consistent operating leverage to deliver growing and robust free cash flow. To achieve this framework, we'll focus on both revenue growth across both of our segments and disciplined expense management. First, let me focus on our recurring revenue dynamics. As a reminder, our wealth solutions segment generates both asset-based and subscription-based revenues, while our Data and Analytics segment generates subscription-based revenues only. In wealth solutions, asset-based and subscription-based pricing constructs provide the breadth of solutions to fit the industry and enable Envestnet growth. I'll start by reviewing the asset-based revenues of our wealth solutions segment. During Q4, Envestnet recorded net inflows of $7.9 billion into AUMA accounts.

For the full year, Envestnet generated $58.5 billion in net flows into AUM/A accounts, representing 8% organic asset growth. We believe consistent net flows are one of the most enduring attributes of our business. Envestnet has not had an outflow quarter since going public in July 2010, meaning that Q4 2023 was the 54th quarter of inflows consecutively. This is because flows on the Envestnet platform are among products within a portfolio and are underpinned by multi-year contracts. Amidst this backdrop of strong and consistent asset growth, Envestnet has faced some headwinds from clients allocating more of their portfolios to cash due to the inverted yield curve environment. Investors have responded to higher short-term rates by holding more of their money in deposit accounts outside Envestnet or in retail money market funds. Naturally, this has affected our results.

We expect money invested in the debt or equity markets to produce a higher fee mix. During 2023, total asset-based revenue generated by Wealth Solutions was $745 million, representing a 1% increase over 2022. Our growth accelerated in the second half of the year. This was particularly pronounced during Q4 2023 when asset-based revenue grew 13% compared to Q4 2022 to nearly $189 million. The subscription-based revenues of our Wealth Solutions segments are generated by our software as a service offerings, which primarily serve RIAs and financial planning tools. First, I'd like to cover one reporting item. As announced on our last earnings call, to align our reporting with how we manage our business, we transferred our wealth analytics business, which generated about $4 million of revenue each quarter of 2023, to our Wealth Solutions segment.

This contribution to Wealth Solutions, the Wealth Solutions subscription business, is reflected in the Q4 numbers provided. To facilitate comparability, I'll be describing our segment results on a recast basis, and historical financial information is available in our earnings supplement. In 2023, subscription-based revenue in Wealth Solutions outgrew asset-based revenue, increasing 5% on a pro forma basis to $325 million. During Q4, our Wealth Solutions subscription-based revenue of over $84 million grew 4% on a pro forma basis over Q4 2022. On an overall basis, Wealth Solutions revenue grew by 3% during 2023. During Q4 2023, our Wealth Solutions revenue of $279 million represented 11% growth over Q4 2022. As we look ahead, while double-digit growth remains our goal, we expect to deliver a Wealth Solutions growth rate in the mid- to high single digits for the full year 2024.

This growth outlook is premised on a flat market for the full year. As demonstrated by the margin expansion delivered during 2023, we believe we can continue to drive margins in 2024 as we leverage the investments we have made in our platform. Turning to our data and analytics business, which generates subscription-based revenues, in Q4, our revenue was $38.6 million. On a like-for-like basis, Q4 DNA revenue declined by 7% compared to Q4 2022 but was 3% higher sequentially versus Q3 2023. For the full year, our DNA segment generated over $150 million of revenue, declining by 14% on a pro forma basis. In connection with this performance, we are taking a non-cash impairment charge of approximately $192 million during Q4 based on a reevaluation of Envestnet's goodwill related to the DNA segment. 2023 had several commercialization challenges for this segment, including banking turmoil and client delinquencies.

While performance was less than Envestnet had anticipated, there are a variety of strategic and operational initiatives in process that we believe will position the business well going forward. We believe the sequential results in Q4 provide early evidence of the returns on these initiatives. Now moving to expenses. The platform infrastructure investments we've made over the last few years enable us to achieve operating leverage by growing revenues ahead of costs to expand our profitability and grow our free cash flow. As announced on our November call, we have successfully reduced our annual expense run rate by $60 million across compensation-related, non-compensation expenses, and CapEx since the start of 2023. We consider our costs to be manageable as those three general categories constitute the majority of our total cost base.

Envestnet also has certain non-controllable expenses which are common in the industry, consisting of payments to third parties for investment management, clearing, custody, and brokerage services. As of Q4 2023, we expanded adjusted EBITDA margins nearly 600 basis points from Q4 2022 and nearly 700 basis points from our Q1 2022 margin. We expect to continue to expand margins and improve free cash flow generation in 2024. I'll note that we revised our accounting treatment of certain cloud hosting arrangements with third-party infrastructure providers to be operating expenses and not capitalizable. There is, of course, no cash impact from this adjustment, and our historical reporting has been revised to reflect this change. In addition to adjusted EBITDA as defined by our credit agreements, we're committed to providing greater transparency regarding our free cash flow.

Three items that are not included in our 2023 adjusted EBITDA but did impact free cash flow were, first, severance expenses of $35 million. Although we will continue to look for ways to optimize our organization, we do not anticipate these 2023 severance figures to be appropriate run rates going forward. Second, capitalized software development of $94 million. In aggregate, we expensed or capitalized $234 million of total technology development in 2023, including stock-based compensation. We expect this overall total technology development spending to reduce in the mid- to high-single digits year-over-year because of the investments already made but will remain significant as part of our continued commitment to drive scale and ensure client success. Third, our 2023 CapEx was $19 million. CapEx for 2024 is expected to be approximately $10 million.

When taken together, our free cash flow for Q4 2023 was $57 million, reflecting our strong performance and some working capital benefits. Envestnet's free cash flow during the first three quarters was negative. Following Q4, I'm pleased to report that for 2023, free cash flow was positive at $42 million. Our focus will be on improving this number in 2024. Turning to our balance sheet, cash on hand increased nearly $50 million during Q4 to $91 million. Similar to the seasonality observed in previous years, we expect cash to decrease in the first quarter of 2024. Our first tranche of convertible debt, which we pay 75 basis points of interest on, is due in Q3 of 2025. As of December 31st, our leverage ratio, defined as our total debt less cash over trailing adjusted EBITDA, has been reduced to below 3.2 times.

In total, we believe our liquidity position gives us flexibility. We expect to continue to be disciplined and prudent with our capital allocation as we look to further reduce our leverage ratio during 2024. Looking ahead to the first quarter of 2024, consistent with how we've provided information previously, we expect revenues to be between $320 million-$326 million, representing 8% growth over Q1 2023, assuming the midpoint of the range. Adjusted EBITDA to be between $64 million-$69 million. Using the midpoint of the range, this represents approximately 250 basis points of margin improvement over Q1 2023, and adjusted EPS to be between $0.52-$0.57. As we enter a new chapter at Envestnet, we have three areas of focus. First, our clients. Our clients are our compass, and our commitment is unwavering.

Second, we are committed to a growth algorithm for delivering more value to those clients and Envestnet. And finally, operating leverage, where we can optimally balance revenue and profitability, supporting execution excellence with scale so when we grow, we will generate compounding free cash flow per share, which can be utilized to drive even greater shareholder value. I'd now like to turn the call back to Bill for closing remarks.

Bill Crager (CEO)

Thank you, Josh. The decisions that we've made, the work we have done over the last years to expand and connect the ecosystem to align the organization has put Envestnet in a very strong position. We sit at the center of the wealth industry, creating unique opportunities for our clients, our partners, and for our company to drive value and to grow. The bedrock of that position is the client relationships that we have. These are tenured, these are aligned, and they're very deep relationships. This is because Envestnet is built around our clients' needs to drive the growth and productivity of advisors by providing the leading wealth platform in the industry. It creates a competitive advantage through connected technology, data, and solutions.

As we deliver, like we have for the industry, it enhances the strategic and economic profile of the company by increasing revenue growth, operating leverage, and improving the free cash flow conversion. I'm incredibly thankful to all those who have been partners and my friends over this incredible journey that has been the history of Envestnet. Thank you to our clients who have supported us and have grown with us, to our partners who strengthen the ecosystem, to investors who have had long-term conviction in us, and particularly to my colleagues at Envestnet, the thousands who have done such extraordinary work and made such a profound impact on our industry, and I will say this, such a profound impact on me. It has meant so much, and I have nothing but gratitude and immense pride. A 25-year journey, how can an idea, an effort, become something so substantial?

It has been the blessing of my professional life, it has been an extraordinary ride, and I am incredibly grateful. I'll now turn it over to Josh and Tom and our operator, Camilla, for the Q&A session. 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 J.P. Morgan. Please proceed with your question.

Michael Cho (Equity Research Analyst)

Hi, good afternoon, guys. Thanks for taking my question. Bill, first, it's been a pleasure interacting with you and always appreciated your insights. It's just a big picture question for you. Yep. Just a big picture question for you on your final earnings call here. As you look at your own transition, as you mentioned, after 25 years with Envestnet and the roadmap that's been implemented for Envestnet ahead, I mean, where do you think the next leadership, the next CEO of Envestnet could be of most value and most impactful for the company in the years ahead?

Bill Crager (CEO)

Yeah. Thank you, Michael. And just appreciate your coverage and your support over the years very much. I think, Michael, my perspective is that we've built such an extraordinary position in the market, and as the most flexible, scaled operating environment tied to now a broad network of solutions, the company has invested to become in this position to deliver on the holistic advice model. And so when I thought about my transition, I really thought about a transition point of time. And as on the heels of the investment cycle, this became a pretty clear moment as we flipped the page into the next year. And so I think what we have ahead of us is an incredibly well-positioned company that has a very strong and deep and tenured client base. With the solutions and the capabilities that we need to be successful, it's all about execution from here.

Michael Cho (Equity Research Analyst)

Great. Thank you. And just a follow-up for Josh and Tom. I think on the 2024 guide, I think I heard mid-singles, the high singles on the wealth solutions in terms of revenue growth. Can you just talk through some underlying assumptions that you're embedding in there in terms of maybe flows and fee rate trends? I think you talked through some puts and takes, so I was hoping you could flesh some of that out in the context of what your expectations. Thank you.

Thomas Sipp (EVP, Business Lines)

Yeah. Thank you, Michael. This is Tom. I think the fee rates, as I said in my comments, the gross fee rate has been between 9.5 and 10.5, and it's been relatively stable in that range. And we think that will persist through 2024. And then from here, it's really our flows, particularly our AUM flows. We did about $30 billion in AUM flows in 2023. We think AUM is gaining traction, and those growth rates will persist. And they'll deliver on a much higher average fee rate. And then our AUA flows, we did about $28 billion of AUA flows last year. We think that we've got some good momentum there as well. That will be impacted by one-off conversions or M&A activity as the year progresses.

But the overall kind of underlying health at the individual firm level or at the per-account level, our growth flows are very, very persistent. That will help drive that growth. Then you look at all the other cross-selling our solutions, that continues. We've got a lot of good progress with RIAs, taking up managed account solutions. We've got continued growth with our MoneyGuide planning capabilities. We're cross-selling analytics and insights to RIAs, so that will start to come through, the wealth growth rate next year. The retirement progress that I mentioned and the partnership with Empower, that's going to start to kick in as we scale up those efforts. So it's really continued progress across the client base, strong AUM flows. Later in the year, you're going to see us get to market with our custody solution that we've been working on.

It's continued to drive the overall ecosystem that will drive that growth rate throughout the year.

Michael Cho (Equity Research Analyst)

Great. Thanks, Tom.

Thomas Sipp (EVP, Business Lines)

Thank you, Michael.

Operator (participant)

Our next question comes from the line of Devin Ryan with JMP. Please proceed with your question.

Devin Ryan (Managing Director, Equity Research)

Thanks so much. Good afternoon, Bill, Josh, and Tom. And would echo the remarks. Bill, really been a pleasure working with you and just want to wish you the best year going forward.

Bill Crager (CEO)

Thank you, Dev. Really appreciate you.

Devin Ryan (Managing Director, Equity Research)

Yeah. Thank you. So I guess first question, just to appreciate the guidance and a little bit of a different structure here than we've seen. And so I guess just want to understand, is this Josh more just how you're going to be framing things moving forward? And so we're not going to have kind of a full-year guide, or is that something maybe for the incoming CEO? So just kind of tactically how to think about that. And then if it's possible, just given some of the puts and takes you guys just outlined and kind of growth commentary for 2024, is there a way to bridge to 2025? I know that's quite a ways out, but just you guys had put out, obviously, some growth targets and adjusted EBITDA, margin targets, and so people are still curious about how you're thinking about those.

So is it possible to kind of hit on any of that yet, and at least how you're thinking about kind of going from where we are today to something in 2025? Thanks.

Josh Warren (CFO)

Sure. Devin, this is Josh. Happy to take the one. Look, we believe this is more appropriate with regard to full-year guidance based on the nature of our business. As you know, you know Envestnet well, most of Envestnet's revenue is market-driven. To go a step further, one thing we wanted to make sure that we did was for Q1 to provide guidance the same way Envestnet had historically done it, same format, a pricing model-based format. But for the full year, we're providing our expected growth rate for wealth solutions premised on a flat market. And that is the mid-to-high single-digits growth rate. With regard to the questions about 2025, long way to go. And as you know, it's difficult to speculate about the macro, particularly in an election year, with an election in the second half of the year. But we believe our client foundation is strong.

The flows, as Tom outlined, may be seasonal, may be episodic, may have a little bit of volatility, but we believe Envestnet is a structural grower. We think we're incredibly well-positioned to capitalize on that.

Thomas Sipp (EVP, Business Lines)

Yeah. I would just add, Devin. You look at the progress we've made over the past couple of years. From a margin progression perspective, we've gone from 17% to 20% to 23% in Q4. That did have some one-time benefits, but it's definitely a lot higher than the 20%. And we're delivering more and more operating leverage as we grow. And we think the margins will continue to expand. And it'll lead into more free cash flow, as Josh outlined. So I think we've made a ton of progress. We've brought the company together. We've integrated the firm. And the client feedback is really positive from all that work. And I would expect our margins to continue to expand from here.

Josh Warren (CFO)

And maybe one, just to be super, super clear on the point, Devin, to answer your question. Look, as Tom mentioned, we're continuing to make progress on our margin expansion, including our EBITDA margins. Q4 was a strong free cash flow result, and I would not expect quite that level to continue in Q1, given some of the seasonality. But the adjusted EBITDA targets, that's a milestone. That's a milestone on a journey to durable and robust free cash flow generation, not a destination, not an ultimate goal. We intend to continue to grow our margins, and we believe what we've done in 2023 has demonstrated our ability to do that.

Devin Ryan (Managing Director, Equity Research)

Got it. Understood. Appreciate all that color. Just as a follow-up on flows, clearly, you guys are outperforming kind of the broader industry, as you mentioned, I think, four times, kind of the peer camps. But at the same time, there's some environmental headwinds. And so I'd love to just maybe think about, if possible, if there's a way to quantify the effect of whether it's M&A and the dynamic you mentioned, Tom, or just interest rates. And to the extent interest rates start to move lower, how much of a tailwind that could create? Just trying to think about the, because there's the core piece of Envestnet, and there's a lot of positive momentum and irons in the fire around new growth, at the same time, environmental headwinds. So just trying to think about the effect of those environmental headwinds that hopefully do reverse here at some point.

Bill Crager (CEO)

Yeah. I think to start with the cash point, that has been a headwind over the past couple of years for us with the higher rates. As rates come down and as more money moves back into the markets, equity, fixed income products, we realize a much higher fee rate on those assets. And a lot of those assets don't even sit on the Envestnet platform. They may be off-platform today and will come on as rates come down. So I think from here, it can only help, would be our perspective, as they move into more active products. So I think that will be a tailwind at some point as we go forward. And then I think the headwind around M&A, historically, this has been an advantage because our footprint is so large.

We have such great relationships with RIA aggregators, with enterprise clients, and we've been a net beneficiary. It just so happens right now, we've got some deal activity that's away from us. That will affect our growth rate. But let me be clear. That M&A activity, these clients that were affected were very, very happy clients. They were doing a lot with us because we're really well-positioned. The feedback from our clients has really never been better, and it's all off the back of the work we've done over the past couple of years. The M&A activity, the recent activity, will be dilutive to that growth rate. But the medium-term prospects for the business are very, very positive from our perspective.

Devin Ryan (Managing Director, Equity Research)

Okay. Thanks so much.

Operator (participant)

Our next question comes from the line of Surinder Thind with Jefferies. Please proceed with your question.

Surinder Thind (Equity Analyst)

Thank you. Like everyone else, Bill, I definitely echo that it's been a pleasure working with you. So wishing you all the best here.

Bill Crager (CEO)

Thank you, Surinder. Thank you very much.

Surinder Thind (Equity Analyst)

Great. I think from my perspective, I'd like to just take a step back. Big picture here, one of the I think the pillars that you guys talked about was just kind of the growth algorithm. Any just kind of color on how you're thinking about the team is thinking about the growth algorithm on a go-forward basis? Is this driving more flows into the wealth solutions business? Is it more about the first-party managed assets and trying to get the fee rate up? How should we think about the various drivers just from a big picture perspective?

Josh Warren (CFO)

Sure. Hey, Surinder. It's Josh. I mean, the growth algorithm, it's fairly simple. After all, Envestnet, as you know, it's a relatively simple business. At the foundation, our wealth business is going to benefit from the combination of market appreciation and secular flows into the independent space. On top of that, our growth is built on our industry leadership. As Tom talked about, clients want to go deeper with a fewer number of trusted partners. That's a trend that should benefit us well as the industry leader. And the way in which we capitalize on this growth opportunity through both of our pricing constructs, our asset-based and subscription-based pricing models, help fit the needs of the industry and provide compounding growth for Envestnet.

Bill Crager (CEO)

Yeah. Let me add, Surinder. I'll add a couple examples. So you look at what we're doing with RIAs off of our Tamarac platform, which is trading, reporting, CRM. We've invested a lot to connect that platform to our managed account infrastructure. So really cross-selling fiduciary solutions, and that is really starting to take track to get real traction. And then as the RIA, as we establish that fiduciary relationship, they then start to buy tax overlay services, direct indexing services. And then we're going, and now we're bundling and cross-selling data and analytics. And when they start to use those data and analytics, especially through our client portal that we're rolling out, that will lead to further adoption of those solutions. So the way it'll be evidenced, it would be more AUM, especially AUM that requires personalization. So think of high-net-worth solutions, direct indexing, tax overlay.

And then what we're doing is partnering more and more with the biggest asset management partners, where we're going to integrate their products in a unique way to deliver that personalization. And then their sales teams, their distribution efforts, their marketing efforts will lean in to help drive overall growth of the platform. So cross-sell AUM, bundle it, expand the relationship, and then more personalization. The products where we have personalization are really growing at a very, very high growth rate, and we think that will persist for a long time period.

Surinder Thind (Equity Analyst)

Got it. I guess just as a point of clarification there, so as you think about what you're capable of and positioning, is it that you want to grow a certain basis points above the market, or how are you guys assessing? I guess that was kind of what I was trying to get at in terms of as you think about what you're trying to do and what you're trying to accomplish here.

Josh Warren (CFO)

Sure. So, Surinder, I would say double-digit growth is our goal. And that comes from a combination of market growth plus simply delivering an integrated firm. Delivering an integrated firm that's now possible for us to show up as Envestnet and get the benefit of clients just wanting to go deeper, do more with us, clients that we already have. We don't have to go out and win new clients, though we will continue to strive to, but we just have to go deeper with those clients that we have, monetize, and serve our advisors more effectively and more capably. So for us, it's grow with the market and then add on top of that.

Surinder Thind (Equity Analyst)

Got it. That's helpful. And then just hopefully as a quick follow-up, just the outlook for the data and analytics business over the next year?

Josh Warren (CFO)

Sure. So I think, look, for data and analytics, look, a couple of thoughts. The first is, as you know, that business has had a lot of challenges in 2023, a combination of the banking turmoil in March of 2023. It's also had some idiosyncratic issues with regard to a data loss, which we've now restored. We believe that there's a tremendous amount of we believe some of these initiatives that we've put in place are going to bear fruit, and actually, the Q4 sequential results are early evidence of that. But our plan is to keep you updated on how those initiatives are going to play out over the course of the year.

Bill Crager (CEO)

But, Surinder, if you look at our Q3 to Q4 sequential revenue growth was up in the data business, and we think we're very focused on stabilizing that revenue base, which so you're up Q3 to Q4, and we think it'll be stable as we look out at Q1. And then we've recovered the dataset. So that issue, we're in a much better place. And then we're launching new products to drive kind of medium-term growth. But I think the sequential revenue growth and the stable revenue base would be important milestones from our perspective.

Surinder Thind (Equity Analyst)

Thank you. I appreciate all of that.

Josh Warren (CFO)

I would say, Surinder, the other thing I would add would be we've done a lot of work to transfer the wealth data capabilities into our wealth segment. What that means is, from an organization, it's fully integrated, and from a client, it's fully integrated. We're now delivering data and analytics where our clients want to receive them, where they're doing business. The response from our client base is really, really positive. I think we're delivering about 25 million insights off of the back of 80 or 90 use cases. The reception from our client base from that fully integrated data and insight capability to wealth clients has been really positive.

Surinder Thind (Equity Analyst)

That's good to hear. Thank you, guys.

Josh Warren (CFO)

Thank you.

Michael Cho (Equity Research Analyst)

Thank you.

Operator (participant)

As a reminde`r, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from the line of Pete Heckman with D.A. Davidson. Please proceed with your question.

Pete Heckmann (Managing Director, Equity Research)

Hey, thanks for taking my question. I echo all the other analyst comments to you, Bill. We're going to miss working with you, and I appreciated all your class and professionalism over the years.

Bill Crager (CEO)

Thank you, Pete. Back at you. Really enjoyed the relationship very much. Thank you.

Pete Heckmann (Managing Director, Equity Research)

Great. Great. Well, I think moving to the results and the outlook, I think all of the analysts are struggling a bit. The call format changed a little bit. Clearly, we're not giving as much guidance. I think that the knee-jerk reaction can sometimes be that there is no visibility in data and analytics. And I don't want to walk away thinking that if that's not the case. I appreciate the adjusted numbers, down 7% year-over-year, up 3% sequentially. But can you flesh that out a bit more in terms of how long do you think it's going to take before the turn? And at that turn, can that business resume growing and resume margin expansion, or is there something fundamentally broken there?

Bill Crager (CEO)

No, Pete, I would just kind of go back to the sequential revenue growth is up Q3 to Q4.

We think we have stabilized the revenue base. Recovering the dataset is a big deal that we worked hard on throughout last year. That was a big driver of the decrease, especially in our research business. You hit issues in the banking channel. We had issues with fintech clients. So last year was a tough year with revenue down 14%-15%. We believe it's now in a stable situation. There's been a lot of work to develop and create new products. And now that you have a more robust, fulsome dataset, we're better positioned to do it. But it's not going to happen overnight either. So we are investing. And over the coming quarters and then 12-18+ months, we think the position will be much better. The segment will be much better positioned from there.

But it is off the back of a restored dataset, stabilized revenue base, and a more efficient. We've reduced the cost base as well, so a more efficient, better margin from there. But it's stabilized and then investing in new products and then medium-term back to growth.

Pete Heckmann (Managing Director, Equity Research)

Okay. I appreciate that. And then just back to custody. I think I've been paying attention pretty closely, and I know that that's been delayed a bit. But you made a comment early on, and I just want to see that make sure that that's still on the table and see if there's been any further changes in the dates of the rollout or the sizing of the opportunity.

Bill Crager (CEO)

Yeah. So it's extremely strategic. It's very important. It's a big priority to deliver. So as we've announced, we've partnered with FNZ. There's been a ton of work over a year plus. They are doing the work to localize a international platform. And to localize a platform in the U.S. market, it takes time. It's complicated. They've hit some pretty important milestones to date. They've converted a legacy platform onto their technology. They're standing up their operations, their trading efforts. And then they're getting the required regulatory framework in place. And all that just takes time to put in place as a new entrant into this market. The technology is fantastic. And we've been working with them to integrate that technology throughout our ecosystem. And that is really lining up to be in place in the next couple of quarters.

And then we'll be in market at some point this year. But it's very, very important, very strategic, that custody solution.

Josh Warren (CFO)

And then Pete just to add that, if I could, and depending on the speed of adoption, the speed of the rollout, you should think about FNZ as representing upside both on the top to the top-line guidance that we gave. Our expectation is this is a long-term bet.

Okay. Yeah. This year is really about standing up the capability and getting to market, and then you'll start to realize the benefits beyond this year. Thank you.

Pete Heckmann (Managing Director, Equity Research)

Thank you.

Operator (participant)

Thank you. There are no further questions at this time. With that, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.