Q2 2024 Envestnet Inc Earnings Call

Participants

Joshua Warren; Chief Financial Officer; Envestnet Inc

James Fox; Chairman of the Board, Interim Chief Executive Officer; Envestnet Inc

Presentation

Operator

Hello, and welcome to the Envestnet second quarter 2024 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded. There will be no Q&A session following prepared remarks.
It is now my pleasure to introduce Josh Warren, Chief Financial Officer. Thank you, sir. You may begin.

Joshua Warren

Good afternoon, everyone. I'm Josh Warren, Chief Financial Officer of Envestnet, thank you for joining us on today's second quarter 2024 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 statements 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 will be referring to certain as adjusted financial measures. Please refer to the appendix in our supplemental presentation for a reconciliation of these adjusted financial measures to the most directly comparable GAAP measures.
Joining me on today's call is Jim Fox, our Board Chair and Interim CEO. On our call this afternoon will provide a company update as well as an overview of the company's results during the second quarter. Due to our pending transaction with Bain Capital. We will not be taking questions on today's call and will not be providing guidance for the third quarter.
I'll now turn it over to Jim.

James Fox

Thanks, Josh. As you know, on July 11, the company announced that we have entered into a definitive agreement to be acquired by Bain Capital and related parties. Earlier today, Envestnet filed its preliminary proxy statement relating to this pending transaction. It includes comprehensive details of the process conducted by our Board, and we encourage you to read the filing for further information.
As noted in the proxy, the Board and the company's senior management team regularly reviews company's business and operations competitive position, historical performance, future prospects and long term strategic plan with the goal of maximizing stockholder value. As part of these ongoing evaluations, we have from time to time considered various strategic alternatives, including the execution of the company's strategy as a stand-alone public company or the possible sale of the company to or in combination of the company with a third party.
This transaction is the result of a thorough process by the Envestnet Board and our advisers and provides certain and immediate value for our shareholders. Our Board unanimously concluded that transaction is in the best interest of the company and our shareholders. We remain on track to close the transaction in the fourth quarter, subject to customary closing conditions, including obtaining approval from Envestnet shareholders and receiving the necessary regulatory clearances.
We look forward to engaging with our shareholders in the days ahead. The road ahead is incredibly bright for our clients, our partners, and our associates. As a private company and with the support of Bain Capital, we expect to continue executing our strategy through organic and inorganic initiatives and investing in our platform to make it more customized connected and intelligent.
Before handing it back to Josh, I'll turn to this quarter's results, which reflect our commitment to deep client relationships. Our Q2 revenue was $348 million, representing 11% growth over Q2 2023 and above the high end of our range. Our adjusted EBITDA was $78 million, also above the high end of our range, representing a 22% adjusted EBITDA margin and nearly 450 basis points of margin expansion compared to Q2 2023. Our adjusted EPS was $0.55 lower than our guidance in connection with certain noncash charges that Josh will detail, but nevertheless, up 20% from the $0.46 reported in Q2 2023.
With that, I'll turn it back to Josh.

Joshua Warren

Thanks, Jim. At our annual investment elevate client conference in May, nearly 2000 advisers and professionals experienced firsthand the growth and productivity made possible by our leading wealth management platform. Consistent with other second quarters, this conference caused slightly higher professional services revenue, which offset the associated direct expenses incurred.
During Q2 2024, our advisor count increased to over 110,000, representing 3% growth year-over-year. We reported 4% account growth compared to Q2 2023. Accounts on our platform declined during Q2 to over $19.4 million, driven by a programmatic effort to reduce unfunded dormant accounts among certain clients that won't have a meaningful revenue impact.
In our Wealth Solutions segment across diversified client channels. The extent of our platform and both asset and subscription-based pricing constructs provide the breadth of solutions to fit the industry's needs. Traditionally, we've defined asset-based revenues as primarily consisting of variable fees for providing access to our platforms.
Our asset-based revenues include both fiduciary and technology services and our offerings range from consolidated performance reporting to higher touch tailored solutions such as full discretionary portfolio management that blends traditional indexing with the customization of managed accounts to improve after-tax and risk-adjusted results.
We have experienced structural inflows into wealth solutions asset asset-based revenue account. During Q2, our total inflows of nearly $11 billion reflects expanded relationships with existing clients. While there are always specific events in any quarter that impact flows strong and consistent growth with our clients is at the center of our strategy.
We delivered over $13 billion of AUM flows in Q2. Our $26 billion of AUM flows during the first half of 2024 compares to approximately $30 billion of AUM flows for all of 2023. During Q2 2024 total asset base, revenue generated by Wealth Solutions was over $219 million, an 18% increase from Q2 2023, supported by improving market conditions.
Our subscription based revenue represents our software as a service oriented offerings. During Q2, we delivered well solutions subscription based revenue of over $84 million, representing 6% growth over Q2 2023. During Q2, we deconsolidated FedEx from our results in connection with the recent funding round led by insurance company partners and investment clients.
During 2023, FedEx contributed approximately $9 million of consolidated revenue to investment with approximately 90% of this contribution in subscription revenue. Envestnet is the largest shareholder in FedEx, despite not participating in this funding round. In total Wealth Solutions segment revenue grew to over $312 million during Q2, representing 13% growth over Q2 2023.
Turning to our data and analytics business, which generates subscription-based revenues across open banking and alternative data offerings. During Q2, our DNA revenue was $36.2 million, representing a 1% decline from Q2 2023. Q2 revenue represented a 3% revenue increase from Q1 with professional services as the primary driver.
Our recurring subscription revenue of $33 million has been approximately flat during the last four quarters, consistent with our stabilization efforts. In connection with business conditions, we recorded a noncash impairment charge of $96 million during Q2 writing off the remaining goodwill related to the DNA business created by Envestnet's 2015 acquisition of [yodlee].
Now moving on to expenses. As previously detailed Envestnet's costs consist of a combination of non-controllable and manageable expenses. Our non-controllable expenses include asset base payments to third parties common in the wealth industry that move in tandem with revenue growth. Our Q2 direct expenses of $144 million included $130 million of these asset base costs. Our manageable costs fall into three general categories, compensation related, non-compensation expenses and capital expenditures.
Regarding compensation expenses. As a reminder, during 2023, investment reduced its headcount by 10%, consistent with the conclusion of a period of elevated platform infrastructure investments. We expect our headcount to be roughly flat during 2024. As discussed on previous calls, despite increased variable compensation in connection with improved results, we expect a decline in total compensation related costs, which include all salary, benefits, stock-based compensation and severance, regardless of accounting treatment regarding software development.
The second major area of total costs is non-compensation expenses, which encompasses all other operating expenses, including capitalizable software development consistent with our focus on free cash flow. As discussed on prior calls, despite inflationary headwinds, we continue to anticipate our non-compensation costs will be modestly lower versus 2023 given our scale.
Finally, CapEx was $3 million for Q2, consistent with our annual planning cycle. Our free cash flow during Q2 2024 was $67 million, a sequential improvement from negative $20 million during Q1 and up from $37 million during Q2 2023. During the first half of 2024, investment generated approximately $47 million of free cash flow, more than it generated in all of 2023.
Cash on our balance sheet increased to $122 million, driven by our improved free cash flow generation efficiency and conversion. As of the end of Q2, our leverage ratio, defined as total debt less cash over trailing adjusted EBITDA was approximately 2.7 times, representing more than a full turn of leverage reduction relative to a year ago.
In addition to our previously described impairment charge during Q2, our financial results were impacted by non-cash items in connection with our continued efforts to enhance our operations. These include accounting gains from our minority investments of $20 million, primarily related to the FedEx deconsolidation. These gains are partially offset by losses of $13 million from writing off previously capitalized software development. In connection with streamlining our platform accounting efforts. There is no cash or cash flow impact from these items.
Before closing, I'd like to convey a sincere thank you to all our stakeholders, particularly our clients, our employees, and our shareholders. Investment has been on an incredible journey during the last 25 years. We're pleased to have announced this transaction with Bain, and we look forward to embarking on this new chapter. We are confident that our firm's best days are ahead as we continue to grow and evolve the company and capitalize on the substantial opportunities for our industry. Thank you for your interest in Envestnet.

Operator

Thank you. And with that, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.