Investment Spending Outlook
Alex Kramm – UBS: So maybe just to start with what Jud’s have said at the end with raising the guidance to some degree. Maybe you can just review a little bit, how you’re thinking about – maybe in the next couple of years, all else equal; the EBITDA, margin expansion, the growth trajectory. The reason why I’m asking is basically, if I think back over the last couple of years since your IPO, I think you had a really strong start where markets were very favorable, the business was hitting on all cylinders and people got very excited but then you kind of went back and said like; well, we are really running ahead here, let’s actually try to capitalize on this and spend a little bit more and try to really grow – accelerate growth over the next few years. So, my question is just because – since you are running ahead so much should we be thinking about you guys maybe bringing up investment spending again, doing some things that you maybe otherwise wouldn’t have not done if the environment was not as favorable or do you really think you can see that operating leverage that we know your business model has?
Judson Bergman – Chairman and CEO: This is the challenge of building a business – building it wisely and making sure that we get the full benefit of the growth opportunity that we have. It was three quarters ago when we outlined what we believed would be a sequential expansion in our margin over the coming quarters and if you go through the guidance that Pete has laid out for the second quarter and do the calculations, we will have developed in four quarters beginning third quarter last year, fourth quarter, first quarter and second quarter this year between 400 basis points and 450 basis points in operating margin expansion. We’ve been able to do that, while still growing the top line. Our backlog is at an acceptable level, but we do have our implementation teams fully engaged. We are growing organically as fast as is prudently possible and there is inherent leverage in the business model as we’ve been able to demonstrate. I think the one big setback that we had during 2012 was the renegotiated license arrangement with the large institutional client, which is now behind us. So, as we are looking forward, we’ve now got a very significant strategic opportunity and WMS is over $20 billion of assets under administration is highly mixed or highly skewed towards separately managed account assets. They have more separate account assets than Envestnet does. Those are the products that have the highest amount of cost of goods associated with it. So, what we are signaling is that beginning in the third quarter, this is going to have a adverse effect on margins, but it will have a significantly accretive benefit both revenue-wise and cash flow-wise, and I would add earnings-wise as we integrate all of that. So, we feel like we’ve made – over this past year, we’ve made the right decisions in terms of balancing investment in the future and enabling us to grow very quickly. We see that that’s going to continue. We do see that there are some elements of our product mix that just over the last couple of quarters have gone faster than what we had anticipated. Pete identified one, that’s the third-party strategist piece, which looks a bit like a separate account in that there is fairly high cost of goods sold with it because there is a third-party manager involved. For the next quarter or two, we see that that’s probably not going to abate, but over time what we’ve been able to do is benefit from our scale and achieve breakpoints in terms of the underlying strategists and managers. I expect that that process will be happening again on this, so we are fortunate to be able to serve a number different advisor preferences. And if everything were to stay stable in terms of mix and channel strategy, these sequential margin expansions would be easier to predict. What we are saying here is for the next quarter or two through this WMS acquisition, there is going to necessarily be a reset in terms what the operating margin is…
Alex Kramm – UBS: Just to sum it up. Excluding any acquisition, so just because things are running ahead and markets are favorable, you don’t see yourself doing anything different anytime soon that would change the core expense base or anything like that?
Pete D’Arrigo – CFO: We do not see any kind of a upping the ongoing operating investment in our operations, like what we signaled an opportunity to do that in early 2011.
Alex Kramm – UBS: No, that’s great.
Pete D’Arrigo – CFO: Again, expenses are going to continue to grow just as our footprint grows. We have more people, we have more offices, we have more growth.
Alex Kramm – UBS: No, no, no. Just wanted to make sure that there is nothing out of the ordinary that would surprise us because things are really growing fast here and you have cash flow and resources to something new, but okay great, thanks. Let me move on. Just a couple of quick ones after the detailed answer; stock-based comp, maybe I missed that but it really jumped up a lot maybe you can just give us a little bit more color, but is that the range we should be thinking about for the remainder of the year here?
Pete D’Arrigo – CFO: No, that was little high. There was a true-up adjustment as we completed the first year after the Tamarac acquisition and so there was a certain amount of shares that reached their performance vesting requirements and that amount exceeded the estimate we had been using prior and that was recognized in the first quarter…
Alex Kramm – UBS: So that should come down like 1 million or so again next quarter, I guess – or a little bit less, I guess?
Pete D’Arrigo – CFO: Little less than a million.
Judson Bergman – Chairman and CEO: Little less than a million
Alex Kramm – UBS: No, I got it. And then just lastly – and again this is detail too, but given – thanks for giving us the early look in the second quarter on the conversions, I mean, 5 billion that’s pretty impressive. Is that going to impact — that into math yet, is that going to impact revenue already in the second quarter too given that we are only half way through or is this not going to get priced until the end of last – next quarter. And then while we are on the topic of conversions maybe you gave some color, but anything else you can add in terms of the outlook here it seems like first quarter and second quarter looked really strong – is looking really strong anything else you can comment on the pipeline here and in particular when it comes to AUM and AUA because I think last time you said lot of it would be coming in licensing it looks like it is actually – a lot of it is fee-based now?
Pete D’Arrigo – CFO: The revenue that’s related to some of those conversions are included in the guidance that we have given. As those came on earlier in the quarter, so we are aware of them and we are building on them now. So, we know about them, we have included that. In terms of the pipeline, I’ll let Jud elaborate.
Judson Bergman – Chairman and CEO: Alex, it’s a very strong pipeline and there are dependencies that we don’t always control and our insight or whatever you want to call it is that it’s an important part of our long-term organic growth, but it’s lumpier. It’s harder to predict. It’s probably on an overall growth basis that may add anywhere from 200 basis points to 400 basis points per year in topline growth, but it’s lumpier and the pipeline is as strong as it’s ever been, maybe stronger than it’s ever been.
Christopher Donat – Sandler O’Neill: Just one quick detail question on the re-audit expenses. Can we expect something similar for the second quarter or is this largely done here?
Pete D’Arrigo – CFO: Well, it’s still ongoing. The amount is probably not quite as much, but I don’t want to quantify the amount until we are done and we know what it all looks like.
Christopher Donat – Sandler O’Neill: Then just a geography question. Did that — which lines of the income statement did that hit?
Pete D’Arrigo – CFO: It’s G&A.
Christopher Donat – Sandler O’Neill: It’s all G&A. Then just more strategically here on a competitive landscape, it seems like there is some relatively young firms coming out of California like (Wulfrun), Addepar that — they are more software focused. I’m just trying to understand where you — how you see yourself competitively and what advantages you have against start-ups given the relationships you have now and a lot of growth comes from existing advisor relationships. I’m just trying to understand if there’s something that can come from left field that would be disruptive to you or if that’s a low probability event.
Judson Bergman – Chairman and CEO: We are paranoid about competition. We worry about it. Comes from a lot of different potential quarters or sectors. Our basic competitive position is that we provide a unified end-to-end solution that can be deployed fully as an end to end solution, but the component parts are all best-in-class in terms of their standards, their features, their functionality. So we in some cases have to compete against a portfolio accounting system or a portfolio rebalancing or a performance reporting, or a research or in some cases a portfolio analytics package. In other times, we compete against platform providers who are called TAMPs, Turnkey Asset Management Platforms. We are winning our share of business, I would say more than our share of business where they were going up against other platforms or where they were going up against single point applications. Part of this is that when we started the business, we started it as a web-based solution, people now are calling that a cloud solution. When we started business, it was very difficult to get enterprises to even consider using a young firm that hosted the solution, that didn’t put it on the enterprises mainframes. We overcame that. We overcame that in the early part of the last decade. So, now there seems to be a new growth of a number of wealth management companies, a lot of them are essentially business to consumer plays, direct plays to investors. They’ve got their work cut-off for them. There are some very interesting technologies, some very interesting approaches. Our researchers has consistently shown that while young people of modest means will use online resources and affluent and high net worth individuals of substantial means will use online services for a sliver of their portfolio, while we have found that. What we have also found is that affluent and high net worth investors, by definition of substantial means, are growing in their dependence on advisors, and in particular they are growing in their dependence on independent advisors. So, the trends that have fueled our growth are the trends that we are enabling and we like those. So, a lot of firms that are (prompting up out west) are looking to short circuit that advisor experience. What we are investing in is in ways of creating an electronic or a web-based store front for advisors and enable them over time to be more efficient in how they are rendering their advice to their target marketplace and maybe even enabling them to go down somewhat in terms of that target marketplace. So, that’s where a lot of the activity is. We watch it. Neither of the firms that you identified have we come up against in any business setting. So, we haven’t — we have not come up against them nor have we lost any business to the firms that you’ve identified.
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