Envestnet Earnings Call Nuggets: Adding Advisors and Low Market Volatility
Alex Kramm – UBS: Maybe just start, you talked about the priorities and adding existing advisors and enterprises. Can you maybe just flush this out a little bit more of where you’ve seen the most success in adding advisors recently and what kind of like the priorities are in that and going into next year? I mean, I think – I remember a couple of years ago you were talking big about like going downstream to some of the smaller RIAs. Are you seeing a lot of joiners in these large organizations and converting those, or is it coming from a lot of new – I guess, new accounts that you’re adding? So, maybe just a little bit more of, like, where you’ve seen the most success in terms of the sales force of getting new advisors on the platform.
Judson Bergman – Chairman and CEO: So, first of all, in an environment where the overall number of advisors is declining, it’s coming – there is a continued market shift away from wire houses and towards independence. The fastest growing segments of the investment advisor marketplace are duly registered advisors and RIA or Registered Investment Advisors. So, we are focused on where the growth is. We are also focused on supporting the enterprises that we have and in gaining new enterprises. So, the growth is consistent with the growth of the industry. We’re growing our high end advisory firms. We’re growing our mid-sized advisory firms and we’re also taking on advisors who are transitioning from commission-based practices, brokerage based practices to fee-based practices. We are getting growth, meaningful growth and advisors in all of those segments. The growth in advisors comes from both new firms and also from going deeper with enterprises that we are currently serving and we track all of these and we well roll up into a single number, but we are gaining growth in all the relevant segments of this marketplace.
Alex Kramm – UBS: Maybe just a little bit more specific, on the conversion side. I think your comment Jud was the meaningful conversions again this year. So, given the number that you’ve put out. The strong numbers we put out this year I think was $10 billion in asset price and I think license was a bit more than that? I mean, what does meaningful mean, I mean can you be a little bit more specific and maybe even talk about it’s a lumpy when – how the pipeline is looking very near term and throughout the year?
Pete D’Arrigo – CFO: So, Alex, this is precisely what got me in a little trouble about a year ago I think. So I am going to be very careful on how I talk about this. The pipeline is more robust and full than it’s ever been. It’s very strong. We’ve got a backlog of conversion implementations, but it’s a lumpy business, and while the registered investments advisory segment is a little bit more predictable. They also tend to smaller conversions, $1 million to $200 million conversions at a time. The enterprise conversions which can make meaningful improvements in our revenue for subsequent quarters, and can also help move our operating margin to higher degrees of leverage are much lumpier. So as we’ve said in the last several quarters, it remains strong, but I think that it’s probably a mistake for anybody to model in any kind of specific amount in in-specific quarters, because while it’s an important engine for organic growth over the long term, and we certainly expect it to be over the next year, they are lumpy and they are not predictable.
Alex Kramm – UBS: Just lastly for me, maybe a little bit more bigger picture. There’s been a lot of talk here recently about this potential investor rotation from fixed income into equities. Everybody has their own views on if this happening or not. But from your perspective, you have a lot of visibility in terms of what advisors are doing and now it’s only a month plus change so far this year, but maybe any trends that you’ve seen and could speak to this in terms of your gross sales if you’ve seen lot of gross sales in equities and actually more redemptions in fixed income, or do you think what you’ve seen so far actually speaks a lot to what a typical beginning of the year looks like? And then, maybe related to that, if such an asset rotation would actually happen into equities, maybe you can just outline for us again what that actually would mean for you or for your business in terms of the different fee rates and how that would impact, I guess, performance longer term?
Judson Bergman – Chairman and CEO: So, several dimensions to that question, Alex. First of all, we’re, what, six weeks into a new year. I will say that net flows have started the year very, very strong. We have not seen meaningful changes in the asset allocation of new money coming to the market, nor have we seen meaningful rotations. We have seen for net new business coming in weightings that are less in long-only fixed income. We’re seeing weightings more to non-traditional or to non-correlated asset classes. We have not seen material increases yet to equity allocations. But again, this is a snapshot and it’s very early in the year. So, obviously, this would have effects on the business – on advisors’ businesses as well as our own, because in an environment where macroeconomic policies are, I won’t say, punishing to the saver, but very difficult for the saver – to the (saver), it’s going to be difficult for an advisor or a platform to generate meaningful yield off of fixed income asset allocations. So, there’s some cautious optimism about an improved product mix going forward, but my comments or Pete’s comments don’t reflect any change in basic product mix as of yet going forward. It’s just too early to make any conclusions on that.
Alex Kramm – UBS: No, I totally get it. It’s pretty early in the year, but I think the color you gave was actually very helpful. So, thanks very much. That’s it for me.
Low Market Volatility
Hugh Miller – Sidoti: One question, just – you gave some great color on the flows for January. I was wondering, we’ve seen obviously an exceptionally low level of market volatility. What are you guys seeing on the redemption side and how should we be thinking about that? I know that there is a link, but it hasn’t kind of been as strong of a relationship as we’ve normally seen in the last year or so.
Judson Bergman – Chairman and CEO: So, we’re projecting 2% per month for the year. We think that that’s not an overly conservative projection. Could it be lower? Yes. What we’ve found in the past is that there is a correlation between volatility and redemption rates, but when it comes to the retail investor, there is a fat tail on the other side of increases in volatility. So, volatility goes up. It comes down much faster than redemption rates do. And so, we’re again, encouraged by the low levels of volatility and eventually that should translate into lower redemption rates. But it has moderated. 2012 was better than 2011 and I wouldn’t be surprised to see that continue, but we haven’t projected that.
Hugh Miller – Sidoti: It’s great information there. I mean, you guys talk about how that it could be a fat tail, but have taken a look and to see historically what that duration is between when you get to a low level of market volatility and when the confidence level starts to come up and you see that improvement in redemption?
Judson Bergman – Chairman and CEO: We have. You can bet that we’ve looked at that. There are not – our PhDs tell us that at PMC that there’s not a statically numerous enough instances to make any bold claims as to when that’s going to be, but we’ve seen it anywhere from three to four months of a fat tail, two, in one case as long as almost a year.
Hugh Miller – Sidoti: I understand it is not statistically significant given the limited information you have to look back, okay. One housekeeping question just on the GAAP tax rate coming in a bit higher than expected, was wondering is that just kind of true-up or there something else that’s kind of influencing that during the quarter?
Pete D’Arrigo – CFO: Hugh, this is Pete. I don’t know if I taught a true-up, but there was some finalization of expenses that were related to the acquisitions during the year. and those were not deductible, so there an expense for GAAP purposes, but we don’t get the tax benefit of that expense, so that made the percentage relative to the pre-tax number a little bit higher.
Hugh Miller – Sidoti: Looking at the headcount growth of advisors in the quarter was up 350 on a net basis, while obviously it’s great to see the growth there, the growth on a sequential basis is up a little over 2%, it has been kind of a slower pace what we’ve seen normally, and I assume that can be lumpy from time to time, but is there anything you’re seeing with regards to trends there, and with the potential rollout of this – the new products you’re looking at, I think you mentioned towards the March period, would you anticipate that you might see an acceleration there as advisors get a little bit more excited about some of the new products?
Judson Bergman – Chairman and CEO: We think so, obviously. Again, macro, this is in an environment where the number of financial advisors are declining. Now, the channels that we’re targeting are growing or stable, but we’ve targeted internal growth targets in growth of advisors in the high single-digits per year, and then the more important one is the number of accounts per advisor as they grow their practices, as they transition their practices, and we expect to see that in the low double-digit range per year. So, really, anything higher than 2% is coming in line with our target, and when it’s higher than that that’s exceeding our target. And I don’t really think you can expect more than an annualized rate of 7% to 8% advisor growth going forward, although we would certainly like to see higher than that.
Hugh Miller – Sidoti: Yeah, I mean, obviously, it was up somewhere around 21% this year, so that’s very substantial, but – okay, so, that’s how we should be thinking about it more in the high single-digit area for (indiscernible)?
Judson Bergman – Chairman and CEO: And what that does is that compounds out very nearly to 20% in terms of same-store organic and new advisor organic growth rates. And then enterprise conversions round out that organic portion and that’s how we get to the 20% target on long-term revenue growth.
Hugh Miller – Sidoti: Then I guess my last question I had was just with regards to some of the commentary you made about the M&A environment and the opportunities there, but you also mentioned how you want to remain disciplined. If you could just add a little color there? Is the disciplined part just purely on the valuation and what you’re willing to kind of pay for these organizations or is there something more into that you want to make sure that these things are accretive immediately or what are your thoughts there?
Judson Bergman – Chairman and CEO: So, there’s a couple of dimensions of the discipline that we’ve employed. We’ve talked before and it was very clear to us and our own language doesn’t always convey. So, please forgive me if I go through it again. But in our merger and acquisition activity we look at two broad types of transactions. One is the consolidating transaction and this would be from a platform provider, some firm that is already providing similar services or similar technology to what investment does. And for these firms we have a very clear pricing discipline where we are looking to achieve a 25% internal rate of return on the investment and that we are looking to achieve as close to a 20% cash-on-cash return within the first 90 to 120 days of expense synergies or consolidation synergies. So, these are transactions that are financially accretive. They have very little, if any, implementation risk. They are just like a very large conversion and I would by – for an example use FundQuest as an example of that where we were able to onboard 90,000 accounts and do the conversion on those accounts in about a five to six-week period. So, it’s a very – it’s a price discipline, but there’s also a discipline on the core business. If we believe that the business has not stabilized on a consolidating transaction, if we believe that there are issues like excessive reliance on 12b-1 fees, or excessive reliance on brokerage commissions which we don’t support that part of the business, that would also fall outside of our discipline on a consolidating transaction. On the strategic front – and on the strategic front, this is transactions or companies that will be either a deepening of our existing features or functionality in our platform or broadening of our capabilities into something that we’re not doing right now. So, while we have a very successful liquid alternative offering that PMC is rolling out, and we are bringing out later this year PMC’s concentrated portfolios – these are low cost stock baskets that compete with ETFs but they are better, it’s a way to get low cost market exposure or beta exposure for advisors and they’re beneficial and that you can actually control the basis of the underlying stocks which you can’t do in an ETF, or you can customize a large cap growth portfolio around concentrated holdings. Let’s say, that you are Silicon Valley engineer and you don’t want to double up on software, then we create a basket around that. These are examples of things that we can do internally to develop our capabilities and we’re doing that. But there are areas that we may be looking for to round out or deepen capabilities, and these are just examples. We may want to deepen our capability in traditional alternative or traditional non-correlated asset classes. We may want to go more deeply integrated on an application that is related to wealth management, but it’s nearby. And a perfect example of something like this would be Tamarac. Tamarac had a proven record of a high-end rebalancing CRM and reporting solution, a unified platform for the very high end investment advisor who is a portfolio manager. And there may be other times when we would want to deepen the other benefit from Tamarac; is it really strengthened our presence in the high-end advisory market. I want to say there are no known gaps in our product and platform offering right now. There may be opportunities to deepen a functionality or a feature here or there, and we may be looking at broadening the footprint of our end-to-end platform at some point as well. So, it’s a very long answer, but the discipline on the strategic side is we’ve got very clear priorities as to where we’re trying to improve our business going forward, and the discipline on the strategic side will be making sure that those firms fit into that in a meaningfully productive way so there can be value accretion over the long-term.
A Closer Look: Envestnet Earnings Cheat Sheet>>