UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2013
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 001-34835
Envestnet, Inc.
(Exact name of registrant as specified in its charter)
Delaware |
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20-1409613 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S Employer Identification No.) |
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35 East Wacker Drive, Suite 2400, Chicago, IL |
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60601 |
(Address of principal executive offices) |
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(Zip Code) |
Registrants telephone number, including area code:
(312) 827-2800
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |
o |
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Accelerated filer |
x |
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Non-accelerated filer |
o |
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Smaller reporting company |
o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
As of November 1, 2013, 33,799,964 shares of the common stock with a par value of $0.005 per share were outstanding.
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Page |
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PART I - FINANCIAL INFORMATION |
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Item 1. Financial Statements (Unaudited) |
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Condensed Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012 |
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3 |
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4 | |
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5 | |
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6 | |
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7 | |
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
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19 |
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19 | |
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20 | |
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23 | |
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30 | |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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31 |
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32 | |
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35 | |
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35 | |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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35 |
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35 |
Envestnet, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share information)
(Unaudited)
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September 30, |
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December 31, |
| ||
|
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2013 |
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2012 |
| ||
Assets |
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| ||
Current assets: |
|
|
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|
| ||
Cash and cash equivalents |
|
$ |
36,683 |
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$ |
29,983 |
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Fees receivable, net |
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18,634 |
|
9,188 |
| ||
Deferred tax assets, net |
|
2,716 |
|
2,089 |
| ||
Prepaid expenses and other current assets |
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8,198 |
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2,501 |
| ||
Total current assets |
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66,231 |
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43,761 |
| ||
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|
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|
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| ||
Property and equipment, net |
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12,493 |
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11,791 |
| ||
Internally developed software, net |
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5,352 |
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4,324 |
| ||
Intangible assets, net |
|
38,348 |
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27,150 |
| ||
Goodwill |
|
74,335 |
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65,644 |
| ||
Deferred tax assets, net |
|
6,942 |
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6,194 |
| ||
Other non-current assets |
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4,800 |
|
3,535 |
| ||
Total assets |
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$ |
208,501 |
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$ |
162,399 |
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Liabilities and Stockholders Equity |
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Current liabilities: |
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Accrued expenses |
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$ |
30,405 |
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$ |
20,201 |
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Accounts payable |
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4,505 |
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2,614 |
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Contingent consideration liability |
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5,591 |
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Deferred revenue |
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6,522 |
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5,768 |
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Total current liabilities |
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47,023 |
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28,583 |
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Contingent consideration liability |
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10,539 |
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Deferred rent liability |
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1,916 |
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2,195 |
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Lease incentive liability |
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3,381 |
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3,886 |
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Other non-current liabilities |
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2,683 |
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1,739 |
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Total liabilities |
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65,542 |
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36,403 |
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Commitments and contingencies |
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Stockholders equity |
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Common stock, par value $0.005, 500,000,000 shares authorized; 45,510,657 and 44,071,564 shares issued as of September 30, 2013 and December 31, 2012, respectively; 33,758,951 and 32,355,675 shares outstanding as of September 30, 2013 and December 31, 2012, respectively |
|
228 |
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220 |
| ||
Additional paid-in capital |
|
188,187 |
|
173,611 |
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Accumulated deficit |
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(34,312 |
) |
(37,277 |
) | ||
Treasury stock at cost, 11,751,706 and 11,715,889 shares as of September 30, 2013 and December 31, 2012, respectively |
|
(11,144 |
) |
(10,558 |
) | ||
Total stockholders equity |
|
142,959 |
|
125,996 |
| ||
Total liabilities and stockholders equity |
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$ |
208,501 |
|
$ |
162,399 |
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See accompanying notes to unaudited Condensed Consolidated Financial Statements.
Envestnet, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except share and per share information)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2013 |
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2012 |
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2013 |
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2012 |
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Revenues: |
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Assets under management or administration |
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$ |
59,580 |
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$ |
33,223 |
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$ |
137,150 |
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$ |
92,498 |
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Licensing and professional services |
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10,300 |
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9,060 |
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30,987 |
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20,389 |
| ||||
Total revenues |
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69,880 |
|
42,283 |
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168,137 |
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112,887 |
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Operating expenses: |
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Cost of revenues |
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30,154 |
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15,088 |
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66,600 |
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40,163 |
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Compensation and benefits |
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21,063 |
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15,261 |
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55,475 |
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40,031 |
| ||||
General and administration |
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11,985 |
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7,621 |
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30,840 |
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22,542 |
| ||||
Depreciation and amortization |
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4,467 |
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3,393 |
|
10,666 |
|
9,016 |
| ||||
Restructuring charges |
|
474 |
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|
474 |
|
115 |
| ||||
Total operating expenses |
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68,143 |
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41,363 |
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164,055 |
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111,867 |
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Income from operations |
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1,737 |
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920 |
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4,082 |
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1,020 |
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Other income (expense): |
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Interest income |
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4 |
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3 |
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13 |
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26 |
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Interest expense |
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(3 |
) | ||||
Other income |
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182 |
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Total other income |
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4 |
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3 |
|
195 |
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23 |
| ||||
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Income before income tax provision |
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1,741 |
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923 |
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4,277 |
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1,043 |
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Income tax provision |
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435 |
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372 |
|
1,312 |
|
420 |
| ||||
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Net income |
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$ |
1,306 |
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$ |
551 |
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$ |
2,965 |
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$ |
623 |
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Net income per share: |
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Basic |
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$ |
0.04 |
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$ |
0.02 |
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$ |
0.09 |
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$ |
0.02 |
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Diluted |
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$ |
0.04 |
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$ |
0.02 |
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$ |
0.08 |
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$ |
0.02 |
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Weighted average common shares outstanding: |
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Basic |
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33,686,112 |
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32,296,636 |
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32,912,084 |
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32,102,386 |
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Diluted |
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35,871,975 |
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33,358,706 |
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35,260,044 |
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33,179,044 |
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See accompanying notes to unaudited Condensed Consolidated Financial Statements.
Envestnet, Inc.
Condensed Consolidated Statement of Stockholders Equity
(In thousands, except share information)
(Unaudited)
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Common Stock |
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Treasury Stock |
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Additional |
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Total |
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Shares |
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Amount |
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Common |
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Amount |
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Paid-in |
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Accumulated |
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Stockholders |
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Balance, December 31, 2012 |
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44,071,564 |
|
$ |
220 |
|
(11,715,889 |
) |
$ |
(10,558 |
) |
$ |
173,611 |
|
$ |
(37,277 |
) |
$ |
125,996 |
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Exercise of stock options |
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606,227 |
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3 |
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5,575 |
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5,578 |
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Issuance of common stock - vesting of restricted stock |
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70,964 |
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1 |
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1 |
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Exercise of warrants |
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761,902 |
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4 |
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4 |
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Stock-based compensation |
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6,281 |
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6,281 |
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Tax benefit attributable to exercise of stock options |
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|
2,704 |
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2,704 |
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Reversal of state uncertain tax position |
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16 |
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16 |
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Purchase of treasury stock (at cost) |
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(35,817 |
) |
(586 |
) |
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(586 |
) | |||||
Net income |
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|
2,965 |
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2,965 |
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Balance, September 30, 2013 |
|
45,510,657 |
|
$ |
228 |
|
(11,751,706 |
) |
$ |
(11,144 |
) |
$ |
188,187 |
|
$ |
(34,312 |
) |
$ |
142,959 |
|
See accompanying notes to unaudited Condensed Consolidated Financial Statements.
Envestnet, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
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Nine Months Ended |
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September 30, |
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2013 |
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2012 |
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OPERATING ACTIVITIES: |
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Net income |
|
$ |
2,965 |
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$ |
623 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
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Depreciation and amortization |
|
10,666 |
|
9,016 |
| ||
Deferred rent and lease incentive |
|
(784 |
) |
1,366 |
| ||
Provision for doubtful accounts |
|
153 |
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|
| ||
Deferred income taxes |
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(1,375 |
) |
(562 |
) | ||
Stock-based compensation |
|
6,281 |
|
3,125 |
| ||
Excess tax benefits from stock-based compensation |
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(2,704 |
) |
|
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Interest expense |
|
392 |
|
3 |
| ||
Changes in operating assets and liabilities, net of acquisitions: |
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|
|
|
| ||
Fees receivable |
|
(8,302 |
) |
(487 |
) | ||
Prepaid expenses and other current assets |
|
(2,993 |
) |
3,084 |
| ||
Other non-current assets |
|
(1,265 |
) |
(190 |
) | ||
Accrued expenses |
|
7,946 |
|
1,791 |
| ||
Accounts payable |
|
1,891 |
|
545 |
| ||
Deferred revenue |
|
754 |
|
600 |
| ||
Other non-current liabilities |
|
960 |
|
179 |
| ||
Net cash provided by operating activities |
|
14,585 |
|
19,093 |
| ||
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INVESTING ACTIVITIES: |
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| ||
Purchase of property and equipment |
|
(4,301 |
) |
(4,098 |
) | ||
Capitalization of internally developed software |
|
(2,293 |
) |
(1,698 |
) | ||
Repayment of notes payable assumed in acquisition |
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|
|
(174 |
) | ||
Acquisition of businesses, net of cash acquired |
|
(8,992 |
) |
(61,463 |
) | ||
Net cash used in investing activities |
|
(15,586 |
) |
(67,433 |
) | ||
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|
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FINANCING ACTIVITIES: |
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|
|
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Proceeds from exercise of warrants |
|
4 |
|
|
| ||
Proceeds from exercise of stock options |
|
5,578 |
|
1,927 |
| ||
Issuance of restricted stock |
|
1 |
|
2,759 |
| ||
Excess tax benefits from stock-based compensation |
|
2,704 |
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|
| ||
Purchase of treasury stock |
|
(586 |
) |
(122 |
) | ||
Net cash provided by financing activities |
|
7,701 |
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4,564 |
| ||
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
6,700 |
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(43,776 |
) | ||
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CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
29,983 |
|
64,909 |
| ||
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|
|
|
|
| ||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
36,683 |
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$ |
21,133 |
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|
|
|
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Supplemental disclosure of cash flow information: |
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|
|
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| ||
|
|
|
|
|
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Cash paid during the period for income taxes, net of refunds |
|
$ |
4,389 |
|
$ |
604 |
|
Supplemental disclosure of non-cash investing and financing activities: |
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|
|
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Leasehold improvements funded by lease incentive |
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|
|
1,054 |
| ||
Contigent consideration liability issued in acquisition of business |
|
15,738 |
|
|
|
See accompanying notes to unaudited Condensed Consolidated Financial Statements.
1. Organization and Description of Business
Envestnet, Inc. (Envestnet) and its subsidiaries (collectively, the Company) provides open-architecture wealth management services and technology to independent financial advisors and financial institutions. These services and related technology are provided via the Envestnet Advisor Suite®, Envestnet | PMC®, Envestnet | Vantage®, and Envestnet | TamaracTM.
Advisor Suite is a platform of integrated, internet-based technology applications and related services that provide portfolio diagnostics, proposal generation, investment model management, rebalancing and trading, portfolio performance reporting and monitoring solutions, billing, and back-office and middle-office operations and administration.
The Companys investment consulting group, Envestnet | PMC, provides investment manager due diligence and research, a full spectrum of investment offerings supported by both proprietary and third-party research, and overlay portfolio management services.
Envestnet | Tamarac provides leading portfolio accounting, rebalancing, trading, performance reporting and client relationship management software, principally to high-end Registered Investment Advisors (RIAs).
Through these platform and service offerings, the Company provides open-architecture support for a wide range of investment products (separately managed accounts, multi-manager accounts, mutual funds, exchange-traded funds, stock baskets, alternative investments, and other fee-based investment solutions) from Envestnet | PMC and other leading investment providers via multiple custodians, and also account administration and reporting services.
Envestnet operates four RIAs and a registered broker-dealer. The RIAs are registered as investment advisors with the Securities and Exchange Commission (SEC). The broker-dealer is registered as a broker-dealer with the SEC, all 50 states and the District of Columbia and is a member of the Financial Industry Regulatory Authority (FINRA).
2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company as of September 30, 2013 and for the three and nine months ended September 30, 2013 and 2012 have not been audited by an independent registered public accounting firm. These unaudited condensed consolidated financial statements reflect all normal recurring adjustments which are, in the opinion of management, necessary to present fairly the Companys financial position as of September 30, 2013 and the results of operations, stockholders equity and cash flows for the periods presented herein. The unaudited condensed consolidated balance sheet as of December 31, 2012 was derived from the Companys audited financial statements for the year ended December 31, 2012 but does not include all disclosures, including notes required by accounting principles generally accepted in the United States of America (GAAP). The results of operations for the three and nine months ended September 30, 2013 are not necessarily indicative of the operating results to be expected for other interim periods or for the full fiscal year. Dollar amounts contained in these unaudited condensed consolidated financial statements are in thousands, except share and per share amounts.
The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K filed for the year ended December 31, 2012.
The preparation of these unaudited condensed consolidated financial statements requires management to make estimates and assumptions related to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these condensed consolidated financial statements in conformity with GAAP. Significant areas requiring the use of management estimates relate to estimating uncollectible receivables, revenue recognition, costs capitalized for internally developed software, valuations and assumptions used for impairment testing of goodwill, intangible and other long-lived assets, fair value of stock options issued, realization of deferred tax assets and assumptions used to allocate purchase prices in business combinations. Actual results could differ materially from these estimates under different assumptions or conditions.
Segments The Companys chief operating decision maker is its chief executive officer, who reviews financial information presented on a consolidated basis. Historically, the Company has determined that it has a single reporting segment and operating unit structure. As a result of the acquisition as discussed in Note 3, the Company has re-examined its reporting and operating structure and has determined it continues to maintain a single reporting segment and operating unit structure.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share and per share amounts)
Prepaid expenses and other current assets Federal and state income tax receivables of $5,375 and $186 are included in the prepaid expenses and other current asset amounts reported in the condensed consolidated balance sheets as of September 30, 2013 and December 31, 2012, respectively.
3. Business Acquisitions
Acquisition of Wealth Management Solutions
On July 1, 2013, the Company completed the acquisition of the Wealth Management Solutions (WMS) division of Prudential Investments. In accordance with the purchase agreement, the Company acquired substantially all of the assets and assumed certain liabilities of WMS for total consideration of $24,730. WMS is a provider of technology solutions that enables financial services firms to develop and enhance their wealth management offerings. The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction and the knowledge and experience of the workforce in place. The goodwill recognized is deductible for income tax purposes.
The consideration in the acquisition was as follows:
Cash consideration |
|
$ |
8,992 |
|
Contingent consideration |
|
15,738 |
| |
Total estimated fair value of consideration |
|
$ |
24,730 |
|
In connection with the acquisition of WMS, the Company is required to pay Prudential Investments, contingent consideration of up to a total of $23,000 in cash, based upon meeting certain performance targets. The Company has recorded a liability as of the date of acquisition of $15,738, which represents the estimated fair value of contingent consideration on the date of acquisition and is considered a Level 3 fair value measurement as described in Note 8. This amount is the present value of an undiscounted liability of $19,043, applying a discount rate of 10%. Payments will be made at the end of three twelve month closing periods. The future undiscounted payments are anticipated to be $6,000 on July 31, 2014, $6,434 on July 31, 2015 and $6,609 on July 31, 2016. The final future payments may be greater or lower than these amounts, based upon the attainment of performance targets. Changes to the estimated fair value of the contingent consideration will be recognized in earnings of the Company.
During the three months ended September 30, 2013, the Company recognized imputed interest expense on contingent consideration of $392, which is included in general and administration expense in the condensed consolidated statement of operations.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
Total tangible assets acquired |
|
$ |
1,296 |
|
Total liabilities assumed |
|
(2,257 |
) | |
|
|
|
| |
Identifiable intangible assets: |
|
|
| |
Customer list |
|
14,000 |
| |
Proprietary technology |
|
3,000 |
| |
Goodwill |
|
8,691 |
| |
Total net assets acquired |
|
$ |
24,730 |
|
The estimated fair value of the intangible assets is provisional and is based on the information that was available as of the acquisition date to estimate the fair value of these amounts. The Company believes the information provides a reasonable basis for estimating the fair values of these amounts, but is waiting for additional information necessary to finalize those fair values. Therefore, provisional measurements of fair value reflected are subject to change and such changes could be significant. The Company expects to finalize the valuation of intangible assets, and complete the acquisition accounting as soon as practicable but no later than December 31, 2013.
A summary of intangible assets acquired, estimated useful lives and amortization method is as follows:
|
|
|
|
Weighted Average |
|
|
| |
|
|
|
|
Useful Life |
|
Amortization |
| |
|
|
Amount |
|
in Years |
|
Method |
| |
Customer list |
|
$ |
14,000 |
|
12 |
|
Accelerated |
|
Proprietary technology |
|
3,000 |
|
1.5 |
|
Accelerated |
| |
Total |
|
$ |
17,000 |
|
|
|
|
|
The results of WMS operations are included in the condensed consolidated statement of operations beginning July 1, 2013. WMSs revenues and net loss for the three and nine month periods ended September 30, 2013 totaled $16,130 and $392, respectively. The net loss includes acquired intangible asset amortization of $1,082 and imputed interest expense on contingent consideration of $392.
For the three and nine months ended September 30, 2013, acquisition related costs for WMS totaled $197 and $844, respectively, and are included in general and administration expenses. The Company may incur additional WMS acquisition related costs during the fourth quarter of 2013.
Pro forma results for Envestnet, Inc. giving effect to the Prima Capital Holding, Inc., Tamarac, Inc. and WMS acquisitions
The following pro forma financial information presents the combined results of operations of Envestnet, Prima Capital Holding, Inc. (Prima), acquired on April 1, 2012, Tamarac, Inc. (Tamarac), acquired on May 1, 2012, and WMS, acquired on July 1, 2013, for the three and nine months ended September 30, 2012 and the nine months ended September 30, 2013. The pro forma financial information presents the results as if the acquisitions had occurred as of the beginning of 2012.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share and per share amounts)
The unaudited pro forma results presented include amortization charges for acquired intangible assets, the elimination of intercompany transactions, restructuring charges, unrealized gain or loss on warrant and imputed interest expense, stock-based compensation expense and the related tax effect on the aforementioned items.
Pro forma financial information is presented for informational purposes and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place as of the beginning of 2012.
|
|
Three Months Ended |
|
Nine Months Ended |
|
Nine Months Ended |
| |||
|
|
September 30, |
|
September 30, |
|
September 30, |
| |||
|
|
2012 |
|
2013 |
|
2012 |
| |||
|
|
|
|
|
|
|
| |||
Revenue |
|
$ |
57,342 |
|
$ |
200,585 |
|
$ |
164,024 |
|
Net loss |
|
(3,005 |
) |
(9,593 |
) |
(13,700 |
) | |||
Net loss per share: |
|
|
|
|
|
|
| |||
Basic |
|
(0.09 |
) |
(0.29 |
) |
(0.43 |
) | |||
Diluted |
|
(0.09 |
) |
(0.29 |
) |
(0.43 |
) | |||
4. Property and Equipment
|
|
|
|
September 30, |
|
December 31, |
| ||
|
|
Estimated Useful Life |
|
2013 |
|
2012 |
| ||
|
|
|
|
|
|
|
| ||
Cost: |
|
|
|
|
|
|
| ||
Office furniture and fixtures |
|
5-7 years |
|
$ |
3,884 |
|
$ |
3,613 |
|
Computer equipment and software |
|
3 years |
|
26,000 |
|
22,098 |
| ||
Other office equipment |
|
5 years |
|
598 |
|
598 |
| ||
Leasehold improvements |
|
Shorter of the term of the lease or useful life of the asset |
|
7,766 |
|
7,638 |
| ||
|
|
|
|
38,248 |
|
33,947 |
| ||
Less accumulated depreciation and amortization |
|
|
|
(25,755 |
) |
(22,156 |
) | ||
Property and equipment, net |
|
|
|
$ |
12,493 |
|
$ |
11,791 |
|
Depreciation and amortization expense was as follows:
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
September 30, |
|
September 30, |
| ||||||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Depreciation and amortization expense |
|
$ |
1,381 |
|
$ |
1,182 |
|
$ |
3,599 |
|
$ |
3,442 |
|
5. Internally Developed Software
Internally developed software consists of the following:
|
|
|
|
September 30, |
|
December 31, |
| ||
|
|
Estimated Useful Life |
|
2013 |
|
2012 |
| ||
|
|
|
|
|
|
|
| ||
Internally developed software |
|
5 years |
|
$ |
15,525 |
|
$ |
13,232 |
|
Less accumulated amortization |
|
|
|
(10,173 |
) |
(8,908 |
) | ||
Internally developed software, net |
|
|
|
$ |
5,352 |
|
$ |
4,324 |
|
Amortization expense was as follows:
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
September 30, |
|
September 30, |
| ||||||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Amortization expense |
|
$ |
436 |
|
$ |
409 |
|
$ |
1,265 |
|
$ |
1,169 |
|
6. Goodwill and Intangible Assets
Changes in the carrying amount of the Companys goodwill were as follows:
Balance at December 31, 2012 |
|
$ |
65,644 |
|
WMS acquisition |
|
8,691 |
| |
Balance at September 30, 2013 |
|
$ |
74,335 |
|
Intangible assets consist of the following:
|
|
|
|
September 30, 2013 |
|
December 31, 2012 |
| ||||||||||||||
|
|
|
|
Gross |
|
|
|
Net |
|
Gross |
|
|
|
Net |
| ||||||
|
|
|
|
Carrying |
|
Accumulated |
|
Carrying |
|
Carrying |
|
Accumulated |
|
Carrying |
| ||||||
|
|
Useful Life |
|
Amount |
|
Amortization |
|
Amount |
|
Amount |
|
Amortization |
|
Amount |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Customer lists |
|
4 - 12 years |
|
$ |
42,103 |
|
$ |
(12,858 |
) |
29,245 |
|
$ |
28,103 |
|
$ |
(8,720 |
) |
$ |
19,383 |
| |
Proprietary technology |
|
1.5 - 8 years |
|
9,580 |
|
(1,987 |
) |
7,593 |
|
6,580 |
|
(657 |
) |
5,923 |
| ||||||
Trade names |
|
5 years |
|
2,090 |
|
(580 |
) |
1,510 |
|
2,090 |
|
(246 |
) |
1,844 |
| ||||||
Total intangible assets |
|
|
|
$ |
53,773 |
|
$ |
(15,425 |
) |
$ |
38,348 |
|
$ |
36,773 |
|
$ |
(9,623 |
) |
$ |
27,150 |
|
Amortization expense was as follows:
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
September 30, |
|
September 30, |
| ||||||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Amortization expense |
|
$ |
2,650 |
|
$ |
1,802 |
|
$ |
5,802 |
|
$ |
4,405 |
|
7. Other Non-Current Assets
Other non-current assets consist of the following:
|
|
September 30, |
|
December 31, |
| ||
|
|
2013 |
|
2012 |
| ||
|
|
|
|
|
| ||
Investment in private company |
|
$ |
1,250 |
|
$ |
1,250 |
|
Deposits |
|
|
|
|
| ||
Lease |
|
1,647 |
|
1,655 |
| ||
Other |
|
286 |
|
264 |
| ||
Other |
|
1,617 |
|
366 |
| ||
Total other non-current assets |
|
$ |
4,800 |
|
$ |
3,535 |
|
8. Fair Value Measurements
Financial assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon a fair value hierarchy established by GAAP, which prioritizes the inputs used to measure fair value into the following levels:
Level 1: |
|
Inputs based on quoted market prices in active markets for identical assets or liabilities at the measurement date. |
|
|
|
Level 2: |
|
Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or inputs that are observable and can be corroborated by observable market data. |
|
|
|
Level 3: |
|
Inputs reflect managements best estimates and assumptions of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the valuation of the instruments. |
Fair Value on a Recurring Basis:
The Company periodically invests excess cash in money-market funds not insured by the Federal Deposit Insurance Corporation. The Company believes that the investments in money market funds are on deposit with creditworthy financial institutions and that the funds are highly liquid. The fair values of the Companys investments in money market funds are based on the daily quoted market prices of the net asset value of the various money market funds. These money market funds are considered Level 1 assets, totaled approximately $25,639 and $20,682 as of September 30, 2013 and December 31, 2012, respectively, and are included in cash and cash equivalents in the condensed consolidated balance sheets.
The fair value of the contingent consideration liability described in Note 3 was estimated using a discounted cash flow method with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in the FASBs Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures. The significant inputs in the Level 3 measurement not supported by market activity included our assessments of expected future cash flows related to our acquisition of WMS during the subsequent three years from the date of acquisition, appropriately discounted considering the uncertainties associated with the obligation, and calculated in accordance with the terms of the agreement.
The Company utilized a discounted cash flow method with expected future performance of WMS, and its ability to meet the target performance objectives as the main driver of the valuation, to arrive at the fair value of the contingent consideration. The Company will continue to reassess the fair value of the contingent consideration at each reporting date until settlement. Changes to the estimated fair value of the contingent consideration will be recognized in earnings of the Company.
The table below sets forth a summary of changes in the fair value of the Companys Level 3 liability for the nine months ended September 30, 2013:
|
|
Fair Value of |
| |
|
|
Contingent |
| |
|
|
Consideration |
| |
|
|
Liability |
| |
|
|
|
| |
Balance at December 31, 2012 |
|
$ |
|
|
|
|
|
| |
Fair value on WMS acquisition date of July 1, 2013 |
|
15,738 |
| |
Imputed interest for the period July 1, 2013 - September 30, 2013 |
|
392 |
| |
|
|
|
| |
Balance at September 30, 2013 |
|
$ |
16,130 |
|
9. Accrued Expenses
Accrued expenses consist of the following:
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(In thousands, except share and per share amounts)
|
|
September 30, |
|
December 31, |
| ||
|
|
2013 |
|
2012 |
| ||
|
|
|
|
|
| ||
Accrued investment manager fees |
|
$ |
17,659 |
|
$ |
12,937 |
|
Accrued compensation and related taxes |
|
9,629 |
|
5,726 |
| ||
Accrued professional services |
|
626 |
|
408 |
| ||
Other accrued expenses |
|
2,491 |
|
1,130 |
| ||
Total accrued expenses |
|
$ |
30,405 |
|
$ |
20,201 |
|
10. Income Taxes
The following table includes income tax provision and the effective tax rate for the Companys income from operations:
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
September 30, |
|
September 30, |
| ||||||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Income before income taxes |
|
$ |
1,741 |
|
$ |
923 |
|
$ |
4,277 |
|
$ |
1,043 |
|
Income tax provision |
|
435 |
|
372 |
|
1,312 |
|
420 |
| ||||
Effective tax rate |
|
25.0 |
% |
40.3 |
% |
30.7 |
% |
40.3 |
% | ||||
The Companys effective tax rate in the three and nine months ended September 30, 2013, was lower than the effective tax rate in the three and nine months ended September 30, 2012, primarily due to the effect of research and development tax credits.
The liability for unrecognized tax benefits reported in other non-current liabilities was $2,625 and $1,739 at September 30, 2013 and December 31, 2012, respectively. At September 30, 2013, the amount of unrecognized tax benefits that would benefit the Companys effective tax rate, if recognized, was $1,785. At this time, the Company estimates it is reasonably possible that the liability for unrecognized tax benefits will decrease by as much as $261 in the next twelve months due to the completion of reviews by tax authorities, the voluntary filing of certain state income tax returns and the expiration of certain statutes of limitations.
The Company recognizes potential interest and penalties related to unrecognized tax benefits in income tax expense. The Company had accrued interest and penalties of $661 and $642 as of September 30, 2013 and December 31, 2012, respectively.
The Company files a consolidated federal income tax return and separate tax returns with various states. Additionally, a subsidiary of the Company files a tax return in a foreign jurisdiction. The Companys tax returns for the calendar years ended December 31, 2012, 2011 and 2010 remain open to examination by the Internal Revenue Service in their entirety. With respect to state taxing jurisdictions, the Companys tax returns for calendar years ended December 31, 2012, 2011 and 2010 remain open to examination by various state revenue services.
The Companys India subsidiary is currently under examination by the India Taxing Authority for the fiscal years ended March 31, 2009 and March 31, 2010. Based on the outcome of examinations of the Companys subsidiary or the result of the expiration of statutes of limitations, it is reasonably possible that the related unrecognized tax benefits could change from those recorded in the condensed consolidated balance sheets. It is possible that one or more of these audits may be finalized within the next twelve months. The Companys subsidiarys tax returns for the fiscal years ended March 31, 2007 through March 31, 2012 remain open to examination by the India Taxing Authority in their entirety.
11. Stockholders Equity
In February 2010, in connection with a Platform Services Agreement between the Company and FundQuest Incorporated (FundQuest), a subsidiary of BNP Paribas Investment Partners USA Holdings, Inc., the Company issued to FundQuest a warrant to purchase 1,388,888 shares of the Companys common stock, with an exercise price of $10.80 per share. During 2011, the warrant was sold by FundQuest to a third party. On June 24, 2013, the third party exercised the warrant via a cashless exercise, and as a result, the Company issued 761,902 shares of the Companys common stock to the third party.
12. Stock-Based Compensation
The Company has stock options and restricted stock outstanding under the 2004 Stock Incentive Plan (the 2004 Plan), the 2010 Long-Term Incentive Plan (the 2010 Plan) and the Envestnet, Inc. Management Incentive Plan for Envestnet | Tamarac Management Employees (the 2012 Plan). As of September 30, 2013, the maximum number of stock options and restricted stock available for future issuance under the Companys plans is 1,263,640.
Employee stock-based compensation expense under the Companys plans was as follows:
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
September 30, |
|
September 30, |
| ||||||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Employee stock-based compensation expense |
|
$ |
2,015 |
|
$ |
1,195 |
|
$ |
6,281 |
|
$ |
3,125 |
|
Tax effect on employee stock-based compensation expense |
|
(503 |
) |
(482 |
) |
(1,927 |
) |
(1,256 |
) | ||||
Net effect on income |
|
$ |
1,512 |
|
$ |
713 |
|
$ |
4,354 |
|
$ |
1,869 |
|
Stock Options
The following weighted average assumptions were used to value options granted during the periods indicated:
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
September 30, |
|
September 30, |
| ||||||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Grant date fair value of options |
|
$ |
|
|
$ |
|
|
$ |
6.11 |
|
$ |
4.96 |
|
Volatility |
|
|
|
|
|
40.4 |
% |
39.6 |
% | ||||
Risk-free interest rate |
|
|
|
|
|
1.0 |
% |
1.2 |
% | ||||
Dividend yield |
|
|
|
|
|
0.0 |
% |
0.0 |
% | ||||
Expected term (in years) |
|
|
|
|
|
6.0 |
|
6.0 |
| ||||
The following table summarizes option activity under the Companys plans:
|
|
Options |
|
Weighted- |
|
Weighted-Average |
|
Aggregate |
| ||
|
|
|
|
|
|
|
|
|
| ||
Outstanding as of December 31, 2012 |
|
5,277,412 |
|
$ |
8.86 |
|
|
|
|
| |
Granted |
|
190,413 |
|
15.34 |
|
|
|
|
| ||
Exercised |
|
(9,050 |
) |
6.24 |
|
|
|
|
| ||
Forfeited |
|
(8,050 |
) |
11.91 |
|
|
|
|
| ||
Outstanding as of March 31, 2013 |
|
5,450,725 |
|
9.08 |
|
6.2 |
|
$ |
45,939 |
| |
Granted |
|
|
|
|
|
|
|
|
| ||
Exercised |
|
(233,603 |
) |
9.13 |
|
|
|
|
| ||
Forfeited |
|
(31,815 |
) |
12.41 |
|
|
|
|
| ||
Outstanding as of June 30, 2013 |
|
5,185,307 |
|
9.06 |
|
6.0 |
|
$ |
80,583 |
| |
Granted |
|
|
|
|
|
|
|
|
| ||
Exercised |
|
(363,574 |
) |
9.28 |
|
|
|
|
| ||
Forfeited |
|
(31,275 |
) |
11.38 |
|
|
|
|
| ||
Outstanding as of September 30, 2013 |
|
4,790,458 |
|
9.03 |
|
5.6 |
|
$ |
105,267 |
| |
Options exercisable |
|
3,515,090 |
|
8.03 |
|
4.8 |
|
$ |
80,727 |
| |
Exercise prices of stock options outstanding as of September 30, 2013 range from $0.11 to $15.34.
Restricted Stock
Periodically, the Company grants restricted stock awards to employees that vest one-third on each of the first three anniversaries of the grant date. The following is a summary of the activity for unvested restricted stock awards granted under the Companys plans:
|
|
Number of |
|
Weighted-Average |
| |
|
|
|
|
|
| |
Balance at December 31, 2012 |
|
758,990 |
|
$ |
12.49 |
|
Granted |
|
172,212 |
|
15.34 |
| |
Vested |
|
(70,964 |
) |
|
| |
Forfeited |
|
(3,197 |
) |
13.78 |
| |
Balance at March 31, 2013 |
|
857,041 |
|
13.07 |
| |
Granted |
|
105,858 |
|
18.29 |
| |
Forfeited |
|
(152,653 |
) |
12.54 |
| |
Balance at June 30, 2013 |
|
810,246 |
|
14.51 |
| |
Granted |
|
101,908 |
|
26.74 |
| |
Forfeited |
|
(12,981 |
) |
14.10 |
| |
Balance at September 30, 2013 |
|
899,173 |
|
18.93 |
| |
At September 30, 2013, there was $3,779 of unrecognized compensation expense related to unvested stock options, which the Company expects to recognize over a weighted-average period of 1.2 years. At September 30, 2013, there was $5,554 of unrecognized compensation expense related to unvested restricted stock awards, which the Company expects to recognize over a weighted-average period of 1.9 years. At September 30, 2013, there was an additional $3,819 of potential unrecognized stock compensation expense related to unvested restricted stock granted under the 2012 Plan that vests based upon Tamarac meeting certain performance conditions and then a subsequent two-year service condition, which the Company expects to recognize, if earned, over the remaining estimated vesting period of 1.5 to 3.5 years.
On March 31, 2013, 181,625 shares of restricted stock became performance vested under the first year performance condition. These shares will become fully vested upon employees meeting the subsequent two-year service condition.
On April 11, 2013, the Company amended the 2012 Plan. The purpose of the amendment was to amend the methodology for determining the vesting requirements of performance awards granted under the 2012 Plan, as well as to grant awards to additional Envestnet | Tamarac employees eligible to participate in the 2012 Plan. The amendment to the 2012 Plan was treated as a modification. As a result, 113,249 performance awards were valued as of the date of the modification. Concurrent with the amendment, 103,521 performance awards were voluntarily forfeited by certain participants in the 2012 Plan and immediately reallocated to other participants in the 2012 Plan.
13. Earnings Per Share
Basic net income per common share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding for the period. For the calculation of diluted earnings per share, the basic weighted average number of shares is increased by the dilutive effect of stock options, common warrants and restricted stock using the treasury stock method.
The following table provides a reconciliation of the numerators and denominators used in computing basic and diluted net income per share:
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
September 30, |
|
September 30, |
| ||||||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income |
|
$ |
1,306 |
|
$ |
551 |
|
$ |
2,965 |
|
$ |
623 |
|
|
|
|
|
|
|
|
|
|
| ||||
Basic number of weighted-average shares outstanding |
|
33,686,112 |
|
32,296,636 |
|
32,912,084 |
|
32,102,386 |
| ||||
Effect of dilutive shares: |
|
|
|
|
|
|
|
|
| ||||
Options to purchase common stock |
|
2,057,245 |
|
889,373 |
|
1,812,114 |
|
897,644 |
| ||||
Common warrants |
|
|
|
127,324 |
|
434,392 |
|
138,889 |
| ||||
Unvested restricted stock |
|
128,618 |
|
45,373 |
|
101,454 |
|
40,125 |
| ||||
Diluted number of weighted-average shares outstanding |
|
35,871,975 |
|
33,358,706 |
|
35,260,044 |
|
33,179,044 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income per share: |
|
|
|
|
|
|
|
|
| ||||
Basic |
|
$ |
0.04 |
|
$ |
0.02 |
|
$ |
0.09 |
|
$ |
0.02 |
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted |
|
$ |
0.04 |
|
$ |
0.02 |
|
$ |
0.08 |
|
$ |
0.02 |
|
Common share equivalents for securities that were anti-dilutive and therefore excluded from the computation of diluted net income per share were as follows:
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||
|
|
September 30, |
|
September 30, |
| ||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock |
|
|
|
1,224,748 |
|
|
|
1,224,748 |
|
Unvested restricted stock |
|
377,926 |
|
559,551 |
|
434,609 |
|
559,551 |
|
14. Major Customers
One customer accounted for more than 10% of the Companys fees receivable:
|
|
September 30, |
|
December 31, |
|
|
|
2013 |
|
2012 |
|
|
|
|
|
|
|
Fidelity |
|
* |
|
11 |
% |
* There were no fees receivable from a single customer greater than 10%.
One customer accounted for more than 10% of the Companys total revenues:
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||
|
|
September 30, |
|
September 30, |
| ||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
Fidelity |
|
19 |
% |
21 |
% |
21 |
% |
22 |
% |
15. Commitments and Contingencies
The Company is involved in litigation arising in the ordinary course of its business. The Company does not believe that the outcome of any of the current litigation, individually or in the aggregate, would, if determined adversely to it, have a material adverse effect on the Companys results of operations, financial condition, cash flows or business.
The Company includes various types of indemnification and guarantee clauses in certain arrangements. These indemnifications and guarantees may include, but are not limited to, infringement claims related to intellectual property, direct or consequential
damages and guarantees to certain service providers. The type and amount of any potential indemnification or guarantee varies substantially based on the nature of each arrangement. The Company has experienced no previous claims and cannot determine the maximum amount of potential future payments, if any, related to such indemnification and guarantee provisions. The Company believes that it is unlikely it will have to make material payments under these arrangements and therefore has not recorded a contingent liability in the consolidated balance sheets.
In the third quarter of 2013, the Company exercised its right to early terminate the Denver and Raleigh office leases in accordance with the provisions of the leases. The total termination fees were $1,142, of which approximately $551 was paid during the third quarter. The remainder of the fee is due in July 2014. The impact of this early termination has been reflected in the lease commitment table below. During the three and nine months ended September 30, 2013, the Company recorded $474 of restructuring charges, net of deferred rent adjustment, in the condensed consolidated statement of operations related to these lease termination fees.
Subsequent to the third quarter, the Company has negotiated to sign replacement and/or expansion amendments for the office leases in Denver, Raleigh, New York and Seattle. The impact of these leases is included in the lease commitment table below.
The Company rents office space under leases that expire at various dates through 2026. Future minimum lease commitments under these operating leases, as of September 30, 2013, was as follows:
Years ending December 31: |
|
|
| |
Remainder of 2013 |
|
$ |
1,588 |
|
2014 |
|
5,987 |
| |
2015 |
|
5,592 |
| |
2016 |
|
6,540 |
| |
2017 |
|
6,125 |
| |
Thereafter |
|
34,489 |
| |
|
|
$ |
60,321 |
|
16. Subsequent Events
On October 11, 2013, the Company completed a public offering of common shares on behalf of selling stockholders. A total of 5,801,997 shares were sold, including an overallotment option exercised by the underwriters, at a public offering price of $29.25 per share. The Company did not receive any proceeds from the sale of shares by the selling stockholders. The Company incurred costs of $280 during the three and nine months ended September 30, 2013 in relation to the public offering and this amount is included in general and administration expenses in the condensed consolidated statements of operations. During the fourth quarter of 2013, the Company expects to incur approximately $700 of additional costs related to the public offering.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Unless otherwise indicated, the terms Envestnet, the Company, we, us and our refer to Envestnet, Inc. and its subsidiaries.
Unless otherwise indicated, all amounts are in thousands, except share and per share information, financial advisors and client accounts.
This quarterly report on Form 10-Q contains forward-looking statements regarding future events and our future results within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, in particular, statements about our plans, strategies and prospects under the heading Managements Discussion and Analysis of Financial Condition and Results of Operations. These statements are based on our current expectations and projections about future events and are identified by terminology such as anticipate, believe, continue, could, estimate, expect, expected, intend, will, may, or should or the negative of those terms or variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business and other characteristics of future events or circumstances are forward-looking statements. Forward-looking statements may include, among others, statements relating to:
· difficulty in sustaining rapid revenue growth, which may place significant demands on the Companys administrative, operational and financial resources,
· fluctuations in the Companys revenue,
· the concentration of nearly all of the Companys revenues from the delivery of investment solutions and services to clients in the financial advisory industry,
· the Companys reliance on a limited number of clients for a material portion of its revenue,
· the renegotiation of fee percentages or termination of the Companys services by its clients,
· the Companys ability to identify potential acquisition candidates, complete acquisitions and successfully integrate acquired companies,
· the impact of market and economic conditions on the Companys revenues,
· compliance failures,
· regulatory actions against the Company,
· the failure to protect the Companys intellectual property rights,
· the Companys inability to successfully execute the conversion of its clients assets from their technology platform to the Companys technology platform in a timely and accurate manner,
· general economic conditions, and
· political and regulatory conditions, as well as managements response to these factors.
Although we believe that our plans, intentions and expectations are reasonable, we may not achieve our plans, intentions or expectations.
These forward-looking statements involve risks and uncertainties. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this quarterly report are set forth in our Annual Report on Form 10-K for
the year ended December 31, 2012 (the 2012 Form 10-K) under Risk Factors; accordingly, investors should not place undue reliance upon our forward-looking statements. We undertake no obligation to update any of the forward-looking statements after the date of this report to conform those statements to reflect the occurrence of unanticipated events, except as required by applicable law.
You should read this quarterly report on Form 10-Q and our 2012 Form 10-K completely and with the understanding that our actual future results, levels of activity, performance and achievements may be different from what we expect and that these differences may be material. We qualify all of our forward-looking statements by these cautionary statements.
The following discussion and analysis should also be read along with our consolidated financial statements and the related notes included elsewhere in this quarterly report and the consolidated financial statements and related notes included in our 2012 Form 10-K. Except for the historical information contained herein, this discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed below.
We are a leading provider of unified wealth management software and services to financial advisors and institutions. By integrating a wide range of investment solutions and services, our Web-based platform provides financial advisors with the flexibility to address their clients needs. As of September 30, 2013, approximately 29,000 advisors used our technology platform, supporting approximately $487 billion of assets in approximately 2.1 million investor accounts.
Envestnet empowers financial advisors to deliver fee-based advice to their clients. We work with both independent Registered Investment Advisors (RIAs), as well as advisors associated with financial institutions such as broker dealers and banks. The services we offer and market to financial advisors address advisors ability to grow their practice as well as operate more efficiently the Envestnet platform spans the various elements of the wealth management process, from the initial meeting an advisor has with a prospective client to the ongoing day-to-day operations of managing an advisory practice.
Our centrally-hosted technology platform, which we refer to as having open architecture because of its flexibility, provides financial advisors with access to a series of integrated services to help them better serve their clients. These services include risk assessment and selection of investment strategies and solutions, asset allocation models, research and due diligence, portfolio construction, proposal generation and paperwork preparation, model management and account rebalancing, account monitoring, customized fee billing, overlay services covering asset allocation, tax management and socially responsible investing, aggregated multi-custodian performance reporting and communication tools, as well as access to a wide range of leading third-party asset custodians.
We offer these solutions principally through the following product and services suites:
· Envestnets wealth management software empowers advisors to better manage client outcomes and strengthen their practice. Our software unifies the applications and services advisors use to manage their practice and advise their clients, including financial planning; capital markets assumptions; asset allocation guidance; research and due diligence on investment managers and funds; portfolio management, trading and rebalancing; multi-custodial, aggregated performance reporting; and billing calculation and administration.
· Our Portfolio Management Consultants group (Envestnet | PMC®) primarily engages in consulting services aimed at providing financial advisors with additional support in addressing their clients needs, as well as the creation of proprietary investment solutions and products. Envestnet | PMCs investment solutions and products include managed account and multi-manager portfolios, mutual fund portfolios and ETF portfolios. Envestnet | PMC also offers Prima Premium Research, comprising institutional-quality research and due diligence on investment managers, mutual funds, ETFs and liquid alternatives funds.
· Envestnet | Tamarac provides leading portfolio accounting, rebalancing, trading, performance reporting and client relationship management software, principally to high-end RIAs.
· Envestnet Reporting Solutions software aggregates and manages investment data, provides performance reporting and benchmarking, giving advisors an in-depth view of clients various investments, empowering advisors to give holistic, personalized advice.
Operational Highlights
Revenues from assets under management (AUM) or assets under administration (AUA) increased 79% from $33,223 in the three months ended September 30, 2012 to $59,580 in the three months ended September 30, 2013. Total revenues, which include licensing and professional service fees, increased 65% from $42,283 in the three months ended September 30, 2012 to $69,880 in the three months ended September 30, 2013. The increase in total revenues were a result of the positive effects of new account growth and positive net flows of AUM or AUA, as well as an increase in revenues related to the WMS acquisition. Net income for the three months ended September 30, 2013 was $1,306, or $0.04 per diluted share, compared to net income of $551, or $0.02 per diluted share for the three months ended September 30, 2012.
Revenues from assets under management (AUM) or assets under administration (AUA) increased 48% from $92,498 in the nine months ended September 30, 2012 to $137,150 in the nine months ended September 30, 2013. Total revenues, which include licensing and professional service fees, increased 49% from $112,887 in the nine months ended September 30, 2012 to $168,137 in the nine months ended September 30, 2013. The increase in total revenues were a result of the positive effects of new account growth and positive net flows of AUM or AUA, as well as an increase in revenues related to the Prima and Tamarac and WMS acquisitions. Net income for the nine months ended September 30, 2013 was $2,965, or $0.08 per diluted share, compared to $623, or $0.02 per diluted share for the nine months ended September 30, 2012.
Adjusted revenues for the three months ended September 30, 2013 was $69,880, an increase of 64% from $42,684 in the prior year period. Adjusted EBITDA for the three months ended September 30, 2013 was $10,041, an increase of 58% from $6,362 in the prior year period. Adjusted net income for the three months ended September 30, 2013 was $5,068, or $0.14 per diluted share, compared to adjusted net income of $2,853, or $0.09 per diluted share in the prior year period.
Adjusted revenues for the nine months ended September 30, 2013 was $168,297, an increase of 48% from $113,905 in the prior year period. Adjusted EBITDA for the nine months ended September 30, 2013 was $27,554, an increase of 64% from $16,770 in the prior year period. Adjusted net income for the nine months ended September 30, 2013 was $13,653, or $0.39 per diluted share, compared to adjusted net income of $7,282, or $0.22 per diluted share in the prior year period.
Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share are non-GAAP financial measures. See Non-GAAP Financial Measures for a discussion of non-GAAP measures and a reconciliation of such measures to the most directly comparable GAAP measures.
Recent Events
WMS Acquisition
On July 1, 2013, we completed the acquisition of the Wealth Management Solutions (WMS) division of Prudential Investments. In accordance with the purchase agreement, we acquired substantially all of the assets of WMS for total consideration of $24,730. WMS is a provider of technology solutions that enables financial services firms to develop and enhance their wealth management offerings. The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction and the knowledge and experience of the workforce in place. The goodwill recognized is deductible for income tax purposes.
In connection with the acquisition of WMS, we are required to pay Prudential Investments contingent consideration of up to a total of $23,000 in cash, based upon meeting certain performance targets. We have recorded a liability as of the date of acquisition of $15,738, which represents the estimated fair value of contingent consideration on the date of acquisition. This amount is the present value of an estimated undiscounted liability of $19,043. The fair value of this liability has been estimated using a discount rate of 10% and payments will be made at the end of a twelve month closing period, over three years. The future undiscounted payments are anticipated to be $6,000 on July 31, 2014, $6,434 on July 31, 2015 and $6,609 on July 31, 2016. The final future payments may be greater or lower than these amounts, based upon the attainment of performance targets.
Share offering
On October 11, 2013, the Company completed a public offering of common shares on behalf of selling stockholders. A total of 5,801,997 shares were sold, including an overallotment option exercised by the underwriters, at a public offering price of $29.25 per share. We did not receive any proceeds from the sale of shares by the selling stockholders. We incurred costs of $280 during the three and nine months ended September 30, 2013 in relation to the public offering and this amount is included in general and administration expenses in the condensed consolidated statements of operations. During the fourth quarter of 2013, we expect to incur approximately $700 of additional costs related to the public offering.
Key Operating Metrics
The following table provides information regarding the amount of assets utilizing our platform, financial advisors and investor accounts in the periods indicated.
AUM/A metrics in the table below, include WMS, which added approximately $25 billion in assets, 86,000 accounts and 3,100 advisors as of July 1, 2013.
|
|
As of |
| |||||||||||||
|
|
September 30, |
|
December 31, |
|
March 31, |
|
June 30, |
|
September 30, |
| |||||
|
|
2012 |
|
2012 |
|
2013 |
|
2013 |
|
2013 |
| |||||
|
|
(in millions, except accounts and advisor data) |
| |||||||||||||
Platform Assets |
|
|
|
|
|
|
|
|
|
|
| |||||
Assets Under Management (AUM) |
|
$ |
29,232 |
|
$ |
30,970 |
|
$ |
34,870 |
|
$ |
38,705 |
|
$ |
41,932 |
|
Assets Under Administration (AUA) |
|
64,229 |
|
67,368 |
|
74,839 |
|
85,601 |
|
118,228 |
| |||||
Subtotal AUM/A |
|
93,461 |
|
98,338 |
|
109,709 |
|
124,306 |
|
160,160 |
| |||||
Licensing |
|
254,256 |
|
269,729 |
|
295,330 |
|
302,604 |
|
326,567 |
| |||||
Total Platform Assets |
|
$ |
347,717 |
|
$ |
368,067 |
|
$ |
405,039 |
|
$ |
426,910 |
|
$ |
486,727 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Platform Accounts |
|
|
|
|
|
|
|
|
|
|
| |||||
AUM |
|
148,920 |
|
156,327 |
|
167,167 |
|
190,883 |
|
200,648 |
| |||||
AUA |
|
278,192 |
|
293,151 |
|
311,884 |
|
357,283 |
|
456,461 |
| |||||
Subtotal AUM/A |
|
427,112 |
|
449,478 |
|
479,051 |
|
548,166 |
|
657,109 |
| |||||
Licensing |
|
1,170,978 |
|
1,228,016 |
|
1,289,491 |
|
1,365,773 |
|
1,425,102 |
| |||||
Total Platform Accounts |
|
1,598,090 |
|
1,677,494 |
|
1,768,542 |
|
1,913,939 |
|
2,082,211 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Advisors |
|
|
|
|
|
|
|
|
|
|
| |||||
AUM/A |
|
15,735 |
|
16,085 |
|
16,419 |
|
18,154 |
|
21,759 |
| |||||
Licensing |
|
6,878 |
|
6,941 |
|
6,970 |
|
7,261 |
|
7,511 |
| |||||
Total Advisors |
|
22,613 |
|
23,026 |
|
23,389 |
|
25,415 |
|
29,270 |
|
The following table provides information regarding the degree to which gross sales, redemptions, net flows and changes in the market values of assets contributed to changes in AUM or AUA in the periods indicated.
|
|
Asset Rollforward - Three Months Ended September 30, 2013 |
| |||||||||||||||||||
|
|
As of |
|
|
|
Gross |
|
|
|
Net |
|
Market |
|
As of |
| |||||||
|
|
6/30/13 |
|
WMS |
|
Sales |
|
Redemptions |
|
Flows |
|
Impact |
|
9/30/13 |
| |||||||
|
|
(in millions, except account data) |
| |||||||||||||||||||
Assets under Management (AUM) |
|
$ |
38,705 |
|
$ |
|
|
$ |
4,437 |
|
$ |
(2,715 |
) |
$ |
1,722 |
|
$ |
1,505 |
|
$ |
41,932 |
|
Assets under Administration (AUA) |
|
85,601 |
|
24,680 |
|
10,841 |
|
(6,796 |
) |
4,045 |
|
3,902 |
|
118,228 |
| |||||||
Subtotal AUM/A |
|
$ |
124,306 |
|
$ |
24,680 |
|
$ |
15,278 |
|
$ |
(9,511 |
) |
$ |
5,767 |
|
$ |
5,407 |
|
$ |
160,160 |
|
Fee-Based Accounts |
|
548,166 |
|
86,014 |
|
53,804 |
|
(30,875 |
) |
22,929 |
|
|
|
657,109 |
|
Gross sales for the three months ended September 30, 2013 included $3.1 billion in new client conversions included in the above AUM/A gross sales figures, and an additional $4.0 billion of conversions in Licensing.
|
|
Asset Rollforward - Nine Months Ended September 30, 2013 |
| |||||||||||||||||||
|
|
As of |
|
|
|
Gross |
|
|
|
Net |
|
Market |
|
As of |
| |||||||
|
|
12/31/12 |
|
WMS |
|
Sales |
|
Redemptions |
|
Flows |
|
Impact |
|
9/30/13 |
| |||||||
|
|
(in millions, except account data) |
| |||||||||||||||||||
Assets under Management (AUM) |
|
$ |
30,970 |
|
$ |
|
|
$ |
15,545 |
|
$ |
(7,012 |
) |
$ |
8,533 |
|
$ |
2,429 |
|
$ |
41,932 |
|
Assets under Administration (AUA) |
|
67,368 |
|
24,680 |
|
35,352 |
|
(15,231 |
) |
20,121 |
|
6,059 |
|
118,228 |
| |||||||
Subtotal AUM/A |
|
$ |
98,338 |
|
$ |
24,680 |
|
$ |
50,897 |
|
$ |
(22,243 |
) |
$ |
28,654 |
|
$ |
8,488 |
|
$ |
160,160 |
|
Fee-Based Accounts |
|
449,478 |
|
86,014 |
|
204,740 |
|
(83,123 |
) |
121,617 |
|
|
|
657,109 |
|
Gross sales for the nine months ended September 30, 2013 included $18.0 billion in new client conversions included in the above AUM/A gross sales figures, and an additional $21.3 billion of conversions in Licensing.
The mix of AUM and AUA was as follows for the periods indicated:
|
|
September 30, |
|
December 31, |
|
March 31, |
|
June 30, |
|
September 30, |
|
|
|
2012 |
|
2012 |
|
2013 |
|
2013 |
|
2013 |
|
Assets under management (AUM) |
|
31 |
% |
31 |
% |
32 |
% |
31 |
% |
26 |
% |
Assets under administration (AUA) |
|
69 |
% |
69 |
% |
68 |
% |
69 |
% |
74 |
% |
|
|
100 |
% |
100 |
% |
100 |
% |
100 |
% |
100 |
% |
Three months ended September 30, 2013 compared to three months ended September 30, 2012
|
|
Three Months Ended September 30, |
|
Increase (Decrease) |
| |||||||
|
|
2013 |
|
2012 |
|
Amount |
|
% |
| |||
|
|
(In thousands) |
| |||||||||
Revenues: |
|
|
|
|
|
|
|
|
| |||
Assets under management or administration |
|
$ |
59,580 |
|
$ |
33,223 |
|
$ |
26,357 |
|
79 |
% |
Licensing and professional services |
|
10,300 |
|
9,060 |
|
1,240 |
|
14 |
% | |||
Total revenues |
|
69,880 |
|
42,283 |
|
27,597 |
|
65 |
% | |||
Operating expenses: |
|
|
|
|
|
|
|
|
| |||
Cost of revenues |
|
30,154 |
|
15,088 |
|
15,066 |
|
100 |
% | |||
Compensation and benefits |
|
21,063 |
|
15,261 |
|
5,802 |
|
38 |
% | |||
General and administration |
|
11,985 |
|
7,621 |
|