Financial Engines Earnings Call Insights: Inflows, Pricing Environment

On Tuesday, Financial Engines, Inc. (NASDAQ:FNGN) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Inflows

Robert Napoli – William Blair: Question on the inflows for the quarter, the one area that was lighter than our model. It’s obviously lumpy looking at it by quarter, but $1 billion of inflows, I think your sponsors increased by two in a quarter 477 to 479. Just wondered if there is something going on there, if it’s timing or what the pipeline looks like, some thoughts around that?

Jeffrey N. Maggioncalda – President and CEO: So yeah, it is little bit lumpy, as you said. Last quarter, when we did Q4, we had what we characterize is atypically large inflows and we said last quarter that we had pulled some of the campaigns forward and sort of expected that Q1 would be a little bit lighter for that reason. In terms of the number sponsors, that’s really not much of an indicator. A lot of what drives AUM from net enrollees is ongoing campaigns and ongoing enrollment, which isn’t really even specific to adding new sponsors let alone (ruin the math). So, I’d say that the metric on new sponsors is not that big of a factor that would drive that. In terms of how this stacks up to other measures, it was a little bit light. Like I said, we were sort of expecting that we do expect for the rest of year to have good steady AUM from net new flows and Q1 was a little bit light mostly given Q4.

Robert Napoli – William Blair: You’ve done your guidance, you raised your revenue guidance, but didn’t change your EBITDA range, is there a reason for that?

Raymond J. Sims – EVP and CFO: Yeah, a couple of things are happening. As we mentioned in the text, because the markets were up, we hit the largest of our remaining ratchet with providers a little earlier than we expected. So, there will be an extra quarter at a higher rate and we also, as you probably know, will be paying rent on the old facility and the new facility that has a minor effect, but the new news really is that there is an extra quarter of the higher ratchet payments than we expected and that accounts for the difference.

Robert Napoli – William Blair: Last question on Income+, just on – I mean announcing of JPMorgan this morning, how many companies how many sponsors have you rote out Income+ to and can you comment on the penetration rate when you market your product with Income+ versus without?

Jeffrey N. Maggioncalda – President and CEO: This is Jeff. We often get questions about the number of sponsors that we have. We started reporting that nine quarters ago, and I often have to let people know that it’s really the AUC that matters, because that’s really the asset opportunity and that is if you get conversion whether revenue really comes from, so we’re focusing more on the AUC, we also decided to report the number of members who are eligible. I think that’s a little bit more important than the number of companies. So, we don’t plan on reporting the number of companies although if you can probably imagine, each of these providers when they rollout has a set of companies to which – to whom these services are available. As I’ve mentioned in previous calls and I think again on this one, in many cases we are building up a bit of a pipeline even before the connection is live in anticipation of that, so I do expect to see a nice ramp up every time we get a new connection live as we are able to now rollout some of that backlog AUC. I think what you should expect with respect to the Income+ AUC is that we will be growing the early rapidly and we expect to be growing the penetration of our services and an in-plan solution into the plan sponsor market faster than our competitors, and When we designed it, the idea behind the Income+ design is to make it really easy for planned sponsor to turn on once the connection is in place. So we would expect fairly broad and reasonably rapid deployment of this once we get those connections in place and so you’ll be able to track that from the $19 billion that we announced in Q1, see how that progresses over time. On the enrollments, it still is fairly early days. We currently are not planning to break out any particular enrollment by segment or by product. Generally speaking, what we’ve been saying is that we’re fairly pleased with some of the positive indications that people who are closer to retirement seem to enroll in Professional Management at higher rates than populations of the same age who don’t have Income+ available, but again it is still a little bit early days on that and so we are going to mostly focus on the market deployment of our services in our attempt to become an industry standard for income and defined contribution plans.

Pricing Environment

Abhishek Kantor – Cowen and Company: My first question is regarding pricing, can you just talk a little bit about the pricing environment?

Jeffrey N. Maggioncalda – President and CEO: This is Jeff, the pricing environment, I’d say that the environment in the defined contribution market continues to get more scrutiny with respect to fees. I’d say that some of the more egregious practices have been seen at the small and mid landmark and frankly that’s where you see lots of layering on top layering and fee sometime in excess of 2% or 3% and so I think there is a lot of focus there in the mid and small market. The large plan sponsors, generally speaking have been pretty attentive to fees, I would say that the scrutiny continues to increase, they are certainly looking at the use of lower-cost investment products and I think you’d continue to see fees coming down from investment products. I think as more visibility is placed on fees there is certainly places more visibility on our fees, but we have not responded to that visibility by reducing our fees and as you look at our plan sponsor contracts, we have really seen no reduction in the fees that we are actually charging to plan sponsors probably participants. What we’ve had to do though is add a lot more value at the same price. So, what you are going to continue to see us do and this was exemplified in both Income+ for which we charge the same fee as well as advice on outside retirement accounts, which we are offering at no additional fee, is you will continue to see us broadening our services and delivering more value at the same price as opposed to keeping the service offering the same and reducing our price. The other thing too is that we do offer ways to get lower fees if you provide volumes. so, we provide the sponsors a way of getting lower fees based on enrollment breaks, in terms of the enrollments in their plans and if sponsor choose to (outside) enrollment, which generates three to four times higher enrollment rates, we waive the platform fee and lower the fees as well. So, I think the combination of adding more value for the same price and providing ways to get discounts for providing volume so far has been pretty attractive strategy that has resulted us in not reducing our pricing so far.

Abhishek Kantor – Cowen and Company: My next question is on your advertising strategy. I think most used of your advertising id done directly to the individual, not a whole lot of mass advertising, is that going to stay as it is?

Jeffrey N. Maggioncalda – President and CEO: There are questions that are – as our AUC base continues to grow, the services are now available, our advisory services are available to more than 8 million participants, our Professional Management services are now available to more than 5 million participants, it’s starting to get to be a pretty big universe that arguably you could market to on a bit of more global basis. What we found though is that, the value of aligning our marketing and awareness and education campaigns with the plan sponsor, the employer who helps introduce us to the employees and really building visibility and presence within the workplace and then delivering through services like integrated enrollment, where we actually introduce ourselves where we have personalized information that can specifically talk to how our services might help you as an individual given your personal circumstances, we’ve just seen that the ROI on that kind of advertising seems to be far greater than the ROI on mass advertising and we believe there are a lot of opportunities to continue to do more targeted personalized in the workplace marketing before we’d have to expand much beyond that. So, I would not expect to see any material increase in broad based marketing expenses outside of the workplace anytime in the near future.

Raymond J. Sims – EVP and CFO: Yeah, if you watch the Kentucky Derby this weekend, you notice the distinct absence of any Financial Engines’ advertising and I expect that if you watch the Super Bowl next season, you will see an equally large absence of any Financial Engines’ advertising.

Abhishek Kantor – Cowen and Company: You’re not going to be in the Olympics?

Jeffrey N. Maggioncalda – President and CEO: No. We’re competing, but not advertising.

Abhishek Kantor – Cowen and Company: Any specific trends on cancellation rates, any notable trends?

Jeffrey N. Maggioncalda – President and CEO: Our cancellation rates although they bounce around a lot month-to-month and quarter-to-quarter, have really been pretty consistent with historical observed patterns. What you typical find is on average over a period of time we see about 15% of our AUM voluntary and involuntarily canceled, that breaks out roughly two-thirds voluntary, one-third involuntary. Involuntary is when people just leave the plan. Today, we lose every dollar when it rolls out of 401K plan. When markets are good our cancellation rates go down. When the market goes down, the cancellation rates go up. Generally, speaking the patterns have been pretty consistent and we’ve seen real noticeable change in those patterns in 2012 so far. As you think about Income+ though and the ability to provide our services over long period of time, we do think that there are way that we can really reduce those cancellation, the cancellation rates and frankly one of our enrollment initiatives has to do with decreasing cancellation rates, and so you’ll probably hear a bit more about this over the coming quarters. As our AUM gets bigger, that same percentage results in a bigger headwind to the AUM from net new enrollees as you kind of back out or subtract off the cancellations and So, we’re starting to get excited about some of the things that we might be able to do to move the needle on cancellation, but still early days there.