Hi, good afternoon. My name is Michael Cho. I'm the equity analyst here at JP Morgan, covering Envestnet. We're pleased to have Josh Warren, the CFO of Envestnet, here with us today at this session. We have about 30 minutes together. I will leave the last five or so minutes for audience Q&A, as well as webcast Q&A. But we'll just jump right in. Yeah, let's do it. Okay. All right, Josh. So, just for some of the newer folks in the room, Envestnet's been on a bit of a journey over the last couple of years, strategic reinvestments, a lot of different moving pieces. You joined the team here maybe about nine months ago now? Mm-hmm. So maybe just talk us through, again, just for some of the newer folks in the room, about Envestnet's strategic journey over the last few years. Plus, you know, what do you, what do you expect, so in terms of your priorities of focus for the next, call it, three to five years? Yeah. Well, so, first, Mike, thanks. Good to see you. Great to see you last week as well at our client conference, the Advisor Summit, in Phoenix. We can talk about that as well. So Envestnet, founded about 25 years ago with a focus on serving financial advisors in the United States, outside of the wirehouses, so they could deliver the best advice to their clients. So in the United States today, there are approximately 290,000 financial advisors. These include about 40,000 at the various wirehouses, you know, Morgan Stanley, Smith Barney, UBS, Bank of America, Merrill Lynch, and about 250,000 independent financial advisors. Today, over 109,000 of those financial advisors are Envestnet clients. The industry itself, the financial advice industry, has been on a journey of evolution. It's kind of been moving away from, like, the Wolf of Wall Street to more of a financial wellness coaching. I'm gonna try and get, like, you know, the name of the company, Aerotyne International, in here, but I don't know if we can, we can do that. But, the journey at Envestnet specifically, it's undergone a few chapters. So first, the first chapter, you know, under Judd Bergman, co-founder of the company, call it the first 20 years, the focus was on growth, largely through acquisition of the key real estate on the advisor desktop. And so it built up an industry-leading position there, but it was effectively a holding company with a series of vertical businesses underneath. That meant for a confusing and maybe somewhat muddled client proposition that also made it, in some respects, impossible to scale. Bill Crager became the CEO in 2020 and relatively quickly announced an investment cycle, a replatforming cycle. So think of this as, you know, chapter two. That was fusing together the component parts, you know, bringing together the teams, the technology to do all the integration and operate as, you know, one Envestnet. The company, you know, had several different user experiences. It had several different support teams, and as advisor needs shifted to more of, you know, coaching, more of, you know, holistic advice, you know, to be better, to be faster, to be cheaper, to be more tailored, you know, Envestnet had all the parts but struggled with delivery. We're now entering chapter three, which is really focused on scale, really focused on operational excellence, and that is possible because of the platform infrastructure investments made over the last couple of years. With regard to the next few years, so, you know, Bill announced his intent to step down earlier this year. You know, what I, what I think it will... What, you know, what I would expect this to mean will be, you know, maybe it's a bit of a, you know, watering or gardening period before a harvesting period, but, you know, client feedback has been extremely positive. The early indicators of scale are starting to show through. So a lot of our strategic priorities, a lot of my strategic priorities, are really execution-oriented. It's around delivering Envestnet products to Envestnet products. We'll, of course, you know, compete for a new logo, but our strategy is really to go deeper with the clients that we have. Our top 25 clients, the average client duration is 15 years, and if the company's been, you know, in existence for 25 years, that gives you some sense of the persistence, the stickiness, the essential nature of the clients we have and the essential nature of the service that we deliver to them. I want to touch on execution here. Mm-hmm. You talked about it, but I guess I want to approach it a little bit differently from maybe... but I also want to touch on competitive landscape as well, right? Sure. So, you know, we, you and I, in our discussions, frequently talk about kind of, hey, you know, this should be a simple story, but the financial advisor and the wealth ecosystem can be a complex place for newer folks looking at the space. So maybe can you just talk through, you know, where does Envestnet sit in that ecosystem? Sure. And then how has that competitive landscape evolved over, you know, chapter one, two, and what you might expect for chapter three? Yeah. So think of Envestnet as the technology layer that delivers services, that delivers solutions, that delivers the operating system for our financial advisor clients, whether they're in at a broker-dealer, whether they're at an RIA, effectively everything outside of those which operate at a wirehouse, where they have their homebrew systems. In terms of how Envestnet kind of does it and how Envestnet delivers it, we believe, you know, in between connecting to, and today we connect to over 800 different asset managers in our Model Marketplace, connecting to every, maybe not every, but many of the custodians that exist in the United States, being that open architecture, both in terms of asset manager, open architecture, in terms of custody provider, but providing that chassis, providing that system in the middle, that is essential in terms of delivering the solution. So that's really where Envestnet sits. It's the system that's used by financial advisors to go from financial planning to portfolio construction, to portfolio implementation, to trading and balancing. It is the system that is used. With regard to kind of what that means, and as far as where the competitive landscape kind of has evolved, look, I mean, we believe we benefit from and maybe drive some of the, you know, secular tailwinds that are underpinning that, you know, large and relatively established client base. You know, some of those secular tailwinds in the industry are things like the shift to just a planning-led business model, the growth of fee-based assets, advisors moving, you know, toward more packaged products, advisors moving away from the wirehouses to more independence. Advisory firms need to spend more on technology, spend more on data, need to use things like, need to shift toward more higher value-added services, direct indexing, overlays, and the like. Envestnet provides all of that, and that is consistent with the strategy of going deeper with the customers we have. And today, with over 109,000 advisors, approaching 20 million accounts, over $6 trillion in assets, it's a great base to expand from, and, and I view that as foundational to our ability to go deeper. Most advisors just don't want to be a CTO. Most advisors want, want an all-in-one platform to, to grow from, and that's how we intend to go to market. Makes sense. So it's not lost on me that this is a TMT or TMC conference, right? So before we keep digging here deeper- Mm-hmm ... within the ecosystem advice, maybe just a quick point on... So you laid out the backdrop and where Envestnet sits in that kind of this ecosystem. We talk about revenue generation and revenue algorithm. Like, how does Envestnet actually generate revenue- Generate revenue? Sure, yeah. ... from where it sits in the ecosystem? So, we have two pricing models. Think of it as two sort of pricing flavors. One is an asset-based model. Think of fees on flows, basis points on AUM, you know, similar to what an asset manager would, would collect. And we have more of a subscription-based business model. The breadth of or having those, those different flavors, having that, that breadth of solutions, given, to your point, Mike, the industry is very complex. There's a lot of micro channels within it because the needs of individuals in the United States are really complicated, and so having a broad breadth of financial advisors is a good thing. Having those two pricing constructs to deliver to that broad set of advisors, we believe, helps meet the needs of the industry, and powering that next level of advice is what we're all about. And so if I just take that conversation a step forward- Mm-hmm ... you know, again, you laid out the backdrop and the look ahead here, and the revenue model as well. So it seems like there are secular tailwinds or tailwinds in the industry- Sure ... that, that's maybe supporting a lot of what Envestnet or where Envestnet's headed. But in terms of that revenue model, like, what, what's the organic growth level that, that we should expect from Envestnet on an... or whether it's on an ongoing basis or, or a framework that, that we should approach that with? Yeah, I mean, so I'd say just a couple things to that. So first of all, as measured in, like, we talked about the N number of advisors. As measured by N number of advisors, the advisor count growth is approximately 0%, right? We are not dependent on advisor count to grow. As I mentioned before, our strategy is just to go deeper with the clients that we have. You know, to put a number on it, the wealth industry is growing in the mid, you know, mid-single digits. Our Wealth Solutions revenue outlook for 2024 is to do better than that. It's to grow in the mid to high single digits. And then with regard to, you know, we talk about our growth algorithm and the simplicity of the business against a kind of complex and evolving landscape that is the industry. You know, at a baseline, like you said, the wealth business will benefit from a combination of, you know, market appreciation, secular flows into the independent space, and on top of that, we have our growth, which is built on industry leadership. And we're gonna capitalize on that through those two pricing models that I mentioned, our asset-based model, our subscription-based pricing model. The strategy's effectively, clients should be our compass, you know, and, and our, our goal is to serve their needs comprehensively, serve their needs completely, and to really take advantage of, you know, what we believe are the two key trends in the industry, right? So first, the wealth industry is growing, and you need more advisors to serve them. We can talk about, you know, the last kind of credible estimate I saw was $56 trillion from Cerulli, but that was 2022, so let's assume $60 trillion of household assets. You know, that, maybe financial advisor assets, something like $30 trillion. There is a lot of ground to cover just in terms of the amount of assets that advisors serve and need to serve, number one, and advisors are just continuing to need-... to use data, use technology more efficiently, more effectively to service their existing focus of business and grow their practice. So we think of Envestnet as a productivity enabler for our clients, and when you put those two trends together, that is the revenue growth opportunity for us. That's great, great. I'm gonna get to fee rate in a second- Mm-hmm ... 'cause that, that's kind of the next layer I'd like to touch on. But before we jump there, we mentioned just now in our chat here about going deeper with clients, right? I mean, so can you just help us contextualize when you say going deeper with clients? You know, are there certain things or areas that Envestnet is looking to, you know, pursue further into the, you know, with the client base that- Mm-hmm ... that's there, or the installed base? And do they want it? Yeah. So, well, I'd say a couple things. Number one, I think you can look at even last quarter's, you know, flow results, right? So last quarter, Envestnet had a little less than $33 billion in flows. At a headline level, that's the largest flow quarter since 2015. There's some lumpiness in that number, which we tried to be transparent about, but I view the lumpiness as reflections of clients doing more with us. So, for example, a single long-standing client, a top 10 regional banking firm in the U.S., they use Envestnet today for a wide range of solutions. They retired an in-house tool to use our reporting tool. Low fee, but $17 billion of flow, which, to your point on the fee rate, is a drag on the effective fee rate. But reporting only, I mean, that's essential business. That's necessary business in today's advisory marketplace, where the successful advisor-client relationships are really premised on personalized planning, premised on insightful advice. Advisors need, you know, to view all client data under a single pane of glass, and then from there, you can expand with flexibility and choice. Advisors need a complete picture, and having a reporting-only solution is required to do that. So we view that kind of big block as, like, natural for a platform business, and maybe a reflection of, you know, you asked, do they want it, a reflection of a long-standing client looking to do more with us. To me and to us, that's a case study, you know, one example of our strategy resonating. The other, you know, is, you know, we typically look at, in some respects, the reverse, which is using a low-fee, reporting-only tool to try to upsell into more AUM, more fiduciary products. That's clearly, over time, the pattern, you know, we'd like to see with regard to cross-selling, and that's been, you know, a lot of the growth behind direct indexing, a lot of the growth behind tax overlay services, and the like. Or as we assembled these component parts and then fused them together during the last couple of years, we're now able to deliver that, and you should expect to see that pattern play out over the course of the next couple of quarters and even years. Oh, that's great. So yeah, let's just, let's touch on, on just fee rate here. You, you kind of mentioned a little bit about mix and, and the kind of the chunky AUA- Mm-hmm ... flows. I guess, one, just can we just take a step back? Mm-hmm. Can you talk through the different types of, when you say mix, you know, what do you- Yeah ... what do you mean? What's happening underneath the, that the mix is impacting fee rates? And, and kind of talk through what, what takes you to the low end of- Sure ... you know, the 9.5-10.5, or what takes you to the high end? Yeah, so even the 9.5-10.5, you know, which are the fee rate, just for those newer, the name that Mike's asking about. So Envestnet has $6 trillion of assets on our platform. About $900 billion of the $6 trillion are in, you know, we call AUM/A or asset-based accounts. There you'd look at, as I was mentioning before, flows, inflows, you know, minus outflows, plus the market, and it starts to look like an asset manager. Those flows into accounts, there's some. I've seen people try to describe some seasonality to it. Some, there's always some volatility to it. They are what they are is, they're an output of millions of decisions between an advisor and a client about how to best position a portfolio. You know, whether it's typically at either the end of the year or tax season, there tends to be some elevated activity. But even given all of that, you know, since Envestnet became a public company in 2010, there's never been an outflow quarter. So 55 quarters in a row at this point, Envestnet's sort of a structural grower. The fee rates, the puts and takes, to your question, there's a bit of a drag that is created when you have lower-fee AUA versus generally higher-fee AUM. Logical, right? AUA is more of a technology business. AUM is more of a fiduciary offering. But the mix between the two kind of toggles a bit from quarter to quarter, depending upon what strategies are being deployed and the like. But in general, the flows behind the pricing rate, and maybe, you know, we were talking a bit before, I mean, and maybe it's something I'm a bit sensitive to, given several years working for an investment management firm. Like, I see people think about them and compare Envestnet's flows into AUM/A accounts to those of an asset manager, right? Because you sort of model them the same way. But they are structurally different in many respects. Maybe to just give you three reasons why they're structurally different. So the first is you have the structural difference, where the wealth industry is growing in size, and maybe the institutional business is more static. So number one, you have a growing part of the pie. The second is, you know, unlike an asset manager, whose products or their funds, they can turn over daily, in the case of a mutual fund or whenever the market's open, in the case of an ETF, flows on the Envestnet platform are underpinned by multi-year contracts, and you can shift among products, but there's no flow created on the Envestnet platform, so it's a platform business. And then lastly, maybe as a platform, you're not impacted by investment performance like an asset management company. So you have structural growth kind of embedded in the flows at Envestnet, and then the mix, the fee rate unassociated with that, you know, and if you look to maybe the midpoint of our guidance range for this quarter, you see a number that's going a little lower than it had been previously, but it's going a little lower than it had been previously, in my opinion, for the right reasons. It's the lumpiness in a large block of AUA, which can drag down the overall mix. So mix, activity, those are the biggest variables, but the structural growth underneath is quite clear. Is there... I, I, I guess in terms of that, that mix, right? I mean, is there, I guess it makes sense if you have lower-fee AUA versus higher-fee AUM, that there's a natural tendency to want to convert the AUA- Mm-hmm ... to AUM. And so, you know, can you talk to us about, you know, maybe historical efforts to, you know, effect that conversion? And- Sure. When you say, "We're going deeper with clients," is that part of the- Absolutely ... conversation, and kind of where do we stand today? We stand today in the early innings of a you know long-term journey toward that end. The growth in even some of our most high-fee accounts, direct indexing is up 38%. However, on a relative basis, it's off of a relatively smaller base than a $17 trillion block of assets at a low fee. So you should start to see more higher-fee you know products and services getting introduced. For example, just on we talked a lot about AUA, this low-fee stuff. On AUM, in Q1, we did $12.5 billion of net flows. In all of 2023, we did about $30 billion. So think of that as, like, 40% in 25% of the year. We view that as evidence that we're continuing to deliver more higher-value-added solutions and services to the clients that we already have. Yeah, that makes sense. I guess just related to that topic, and you know, without just looking at the headline AUM flows, right? I mean, is there a way to better appreciate or better understand adoption of some of these higher priced tiers of product that Envestnet has invested in, right? Mm-hmm ... over the last few years and have rolled out? Again, just apart from the quarter-to-quarter flows, is there a way to better appreciate the adoption or the success of some of these newer initiatives? I think it's best told... Well, it's best seen in the wild, and seen through case studies, and seen through sort of real evidence. But, you know, unlike-- I mean, it's a tech conference, unlike people who will have a PowerPoint presentation with, with a roadmap, right? Envestnet's technology is, it's live, it's in the wild, it's doing stuff right now as we're having this conversation, right? It's, it's constantly monitoring and surveilling and doing all the activities required over the, you know, $6 trillion-ish accounts that or $6 trillion-ish of assets across whatever, 19.6 million of accounts that are on the platform. The rate of adoption, in many respects, as I mentioned before, it's advisor-led. We need to make sure that it is available for the advisor to use, for the advisor to understand, for the advisor to use in a fiduciary capacity and construct. That rate of adoption will take some time, has taken some time, will continue to take some time. But part of our strategy and part of our kind of consistent offering with a client base that we know, that we understand, that we work with, is to continue to invest in those relationships over time and start to see that ramp grow over time. Okay, great. I'll just touch on flows- Mm-hmm ... and organic growth. I mean, you talked about the first quarter. Like you said, very solid set of numbers, organic growth for the quarter. You know, just talk through us—I realize there are some puts and takes in terms of what came in and how it came in during the quarter, but just kind of your roadmap or outlook in terms of the confidence that you have in terms of that organic momentum continuing- Uh ... from here. Well, I think in some respects, I mean, to be honest, it depends a bit on the market, right? And I think the macro, I mean, if you have a perspective on it, I would love to hear. I think the macro is very tough to call, particularly in an election year. But look, we had very strong Q1 equity markets, despite some challenges in the debt markets. I think it's a little bit too early to see what Q2 would bring. But I think as our business has become increasingly scaled and increasingly resilient, you know, we'll just have to see what the economic picture looks like with regard to maintaining the momentum. I mean, look, I look at the same data that's public, and I see things like account growth outpacing advisor growth.... As a sign, advisors are doing more with us. That's a good place to be. May fluctuate from quarter to quarter. But if you were to compare Q1 2024 to Q1 2020, accounts per advisor at Envestnet has grown by more than 50%, 50%. So as I mentioned, like, we believe we're a structural grower. The rate of the ramp may depend a bit quarter to quarter, depending upon the market, depending upon the economy. I think the biggest factor that may not necessarily be appreciated beyond just market appreciation is the inverted yield curve, right? I mean, it's steepening, sure, but it's still inverted, at least as of this morning. And what that means is people are being effectively paid to wait. So you have this phenomenon, and it's sort of an industry phenomenon, not just an Envestnet phenomenon, but you have this industry phenomenon where there's cash on the sidelines, that's impacting the overall market, that's impacting the overall industry. We have not historically participated in custody economics that would be a beneficiary of this. Other firms like, you know, LPL, like AssetMark in our industry have. They've been absolutely in the right place during the last few years to take advantage of that. I would argue, as that yield curve normalizes and more money returns into the more traditional investments, Envestnet is extremely well-positioned to be a net winner in that transformation. As advisors deploy more cash, and you talked about kind of that backdrop or that sentiment, does that—should that impact kind of your fee rate mix as well- It should ... to the positive? It should. I mean, we'll have to see how it plays in. I think the cash sorting phenomenon. I don't know what inning it's in, but you should expect to see as more money gets put to work and there's more of a need for the more higher fee strategies, you should start to see that flow through. Okay, great. I have a bunch more questions. I'm just going to pause here for a second. Yeah, do you wanna wait for the mic? Is there a mic? Sure. There's a mic. I can repeat the question, too, if you... I'll just- No, you're coming right. The company struggled for, you know, well over a decade with, in fits and starts under different administrations- Mm-hmm ... and different activist activities, with an inability to improve margins. Mm-hmm. So there have been fits and starts and... But the whole conversation today has been about top line. You haven't really talked about the tangible benchmarks we can look forward to in terms of seeing how we get from here to there, in terms of cost control and actually delivering growth throughout the income statement, rather than just, you've really focused on top-line initiatives. Yeah. Should we go down the income statement then? Mm. Well, however you think it's most realistic to create shareholder value. I mean, it's been- Sure ... very problematic, so that's- Of course. Yeah. No, I mean, look, I think, let me just state a couple of things to that. You know, part of what we have been doing recently is. You know, look, over the last couple of years, because of this, you know, there have been different fits and starts, as you say, but I think of it in sort of the long chunks, right? So I mentioned chapter two, if you will, that period of platform infrastructure investments. We now have operating leverage in a way that maybe wasn't credibly there five years ago, you know, several quarters ago. So what that means, you have the marginal dollar of revenue should flow all the way down as the cost base is more on solid footing. I'd argue the cost that we've been taking out has been the natural conclusion of that period of elevated platform investments. So that happened. You saw it. It was visible. But as those products naturally reach their conclusions, you should start to see it. We're gonna keep investing in our product. We're gonna keep investing in customer experience, of course. But from here, I don't think we expect to impact our... We don't view cost reduction as impacting the growth rate. With regard to where we're focused, I mean, we've changed our focus in terms of, you know, careful readers of our proxy and earnings supplement will see things like free cash flow are now listed. That is a key, you know, number for us. This quarter, Q1 is always a seasonal outflow quarter with regard to cash for Envestnet. So Q1 2024, we were negative $20 million of free cash flow. That compares to -$62 million in Q1 2023. So I view the I view it as two things. The first is, given the, you know, refreshed cost base and that we now have scale and operating leverage, the best thing we could do for our margin is to grow the top line and have some of all of that come down, and by down, I mean all the way down to free cash flow that we can return, reinvest, you know, do things with, as opposed to, you know, something like Adjusted EBITDA, which is, you know, kind of in the middle of the income statement. Our focus, as we've kind of shifted to this new paradigm, has been really more free cash flow focused in nature, and that's transparent in our how we talk, how we publish, what we were compensated on. Anyone else? I got one here from the web. Let's do it. Some of this you already just answered, but I'm just gonna ask- All right ... a question anyway. So, punt, where you want- I'm psyched that people are listening on the web. Can you help us think about the 25%- Mm ... margin target through 2025, which was announced a number of years ago- Mm-hmm ... prior to your time? And whether you think, one, that's still achievable, and, and you know, how you would think about use, as you just free cash flow conversion in that context, looking ahead? Well, I think, I mean, I think the right answer in some respects, I mean, as you said previously, there's a lot of focus on that Adjusted EBITDA number, which is, you know, an important number. It's defined in our credit agreements, and I think it's a useful number, right? It strips away everything to get to really what's core and what's comparable. So that's, of course, like an indicator. That's, of course, a thing to look at. But as we, you know, move to this new chapter, if you will, as we start to operate with scale, as you operate in a new paradigm where Free Cash Flow is more appropriate, that means, you know, budgeting, that means planning, that means allocating in terms of, in terms of cash. So in some respects, you skip that altogether. You look at, you know, the ultimate destination is how much Free Cash Flow the business can generate. And I would view that target or a 25% kinda Adjusted EBITDA margin, not as a destination. It's more of a way point on a journey to the thing that we are in the process of creating and making progress toward creating, which is a sustainable, enduring, growing, Free Cash Flow-generating franchise, that has scale, that has operating leverage, that's able to benefit from the secular growth trends in the industry, and simply pass more of that through, all the way down the income statement. So I view that as the way to think about it is like, you view it as an indicator along the way. It's a milestone along the way, but the end goal is, are you a, you know, enduring, are you a stable, free cash flow-generating franchise? And that's where we're headed. Oh, that's great. If I could just go back up the income statement here- Mm-hmm. - you went down the free... So, we talked about revenue, we talked about kind of changes in investment and spending and expense controls. Maybe just taking that conversation out a little bit, you know, outside of less spending or more, you know, concentrated spending- Mm-hmm ... and efficiencies, like, how should we think about normalized expense growth in that revenue algorithm framework that you talked through? So I think there's a couple of ways to think about our expenses, right? The first thing, just to sort of put, you know, on the, on the table, is almost a third of our expenses are these asset-based costs, which are common in the wealth industry, which are effectively, payments to third parties for asset management and clearing and brokerage services. So those, those asset-based costs, you know, think of them as they come along with the delivery of the product. Less of a focus in terms of cost control, 'cause you can't control them, right? They're not, in some respects, non-controllable expenses. Compensation and non-compensation-related expenses are the other two. With regard to compensation, you know, we reduced our head count 10% during the course of 2023. That was during the course of 2023, so you haven't seen the full kind of income statement, benefit, from all of that. You'll see that, you know, over time. During 2023, we spent $35 million in severance expense. You know, that's not an appropriate run rate going forward for 2024. In my opinion, that's, again, a cash consumer, between Adjusted EBITDA and Free Cash Flow, to the gentleman's question. What I think is really interesting and exciting on the cost side is some of our non-compensation-related expenses. They had been growing. I think we're now, as we enter, you know, being able to operate as one Envestnet, being able to deliver with scale, being able to deliver with operational excellence, we can bend the curve there. We can do more. The same reason that advisors hire us, vendor rationalization, simplification, we're applying that to our own stack, and there's still some ways to go there. But, you know, you should think of our total expense base for 2024 as coming down in the mid to high single digits from 2023, and that's everything, whether you're gonna capitalize it, whether you're gonna expense it, whether you're gonna stock-based comp, whatever. So our total expense base, we are a structurally more profitable company today than we were a couple of years ago. Okay, great. We got the red light. Let's stop there. Josh, thank you so much. Awesome. Thanks, Mike. Thanks, everybody.