Table of Contents

 

 

 

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 June 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

 

20-1409613

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S Employer

Identification No.)

 

 

 

35 East Wacker Drive, Suite 2400, Chicago, IL

 

60601

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s 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 x  No o

 

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

Accelerated filer                  x

 

 

Non-accelerated filer    o

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 August 2, 2013, 33,407,311 shares of the common stock with a par value of $0.005 per share were outstanding.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

Page

 

 

PART I - FINANCIAL INFORMATION

 

 

Item 1. Financial Statements (Unaudited)

 

Condensed Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012

3

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2012

4

Condensed Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2013

5

Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2013 and 2012

6

Notes to Condensed Consolidated Financial Statements

7

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

Forward-Looking Statements

17

Overview

18

Results of Operations

21

Liquidity and Capital Resources

28

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

30

 

 

Item 4. Controls and Procedures

30

 

 

PART II - OTHER INFORMATION

 

 

Item 1. Legal Proceedings

33

 

 

Item 1A. Risk Factors

33

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

33

 

 

Item 6. Exhibits

33

 

2



Table of Contents

 

Envestnet, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share information)

(Unaudited)

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

39,679

 

$

29,983

 

Fees receivable

 

12,800

 

9,188

 

Deferred tax assets, net

 

2,833

 

2,089

 

Prepaid expenses and other current assets

 

4,220

 

2,501

 

Total current assets

 

59,532

 

43,761

 

 

 

 

 

 

 

Property and equipment, net

 

11,211

 

11,791

 

Internally developed software, net

 

4,998

 

4,324

 

Intangible assets, net

 

23,998

 

27,150

 

Goodwill

 

65,644

 

65,644

 

Deferred tax assets, net

 

6,544

 

6,194

 

Other non-current assets

 

4,103

 

3,535

 

Total assets

 

$

176,030

 

$

162,399

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accrued expenses

 

$

23,691

 

$

20,201

 

Accounts payable

 

4,103

 

2,614

 

Deferred revenue

 

5,848

 

5,768

 

Total current liabilities

 

33,642

 

28,583

 

 

 

 

 

 

 

Deferred rent liability

 

2,414

 

2,195

 

Lease incentive liability

 

3,619

 

3,886

 

Other non-current liabilities

 

1,748

 

1,739

 

Total liabilities

 

41,423

 

36,403

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Preferred stock

 

 

 

Common stock, par value $0.005, 500,000,000 shares authorized; 45,147,083 and 44,071,564 shares issued as of June 30, 2013 and December 31, 2012, respectively; 33,395,377 and 32,355,675 shares outstanding as of June 30, 2013 and December 31, 2012, respectively

 

226

 

220

 

Additional paid-in capital

 

181,143

 

173,611

 

Accumulated deficit

 

(35,618

)

(37,277

)

Treasury stock at cost, 11,751,706 and 11,715,889 shares as of June 30, 2013 and December 31, 2012, respectively

 

(11,144

)

(10,558

)

Total stockholders’ equity

 

134,607

 

125,996

 

Total liabilities and stockholders’ equity

 

$

176,030

 

$

162,399

 

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

Envestnet, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share information)

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Assets under management or administration

 

$

41,234

 

$

31,012

 

$

77,570

 

$

59,275

 

Licensing and professional services

 

10,398

 

6,950

 

20,687

 

11,329

 

Total revenues

 

51,632

 

37,962

 

98,257

 

70,604

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of revenues

 

19,638

 

13,549

 

36,446

 

25,075

 

Compensation and benefits

 

17,194

 

14,085

 

34,412

 

24,770

 

General and administration

 

9,962

 

8,148

 

18,855

 

14,921

 

Depreciation and amortization

 

3,081

 

3,224

 

6,199

 

5,623

 

Restructuring charges

 

 

88

 

 

115

 

Total operating expenses

 

49,875

 

39,094

 

95,912

 

70,504

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

1,757

 

(1,132

)

2,345

 

100

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

4

 

14

 

9

 

23

 

Interest expense

 

 

 

 

(3

)

Other income

 

182

 

 

182

 

 

Total other income (expense)

 

186

 

14

 

191

 

20

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income tax provision (benefit)

 

1,943

 

(1,118

)

2,536

 

120

 

 

 

 

 

 

 

 

 

 

 

Income tax provision (benefit)

 

825

 

(450

)

877

 

48

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

1,118

 

$

(668

)

$

1,659

 

$

72

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.03

 

$

(0.02

)

$

0.05

 

$

0.00

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

0.03

 

$

(0.02

)

$

0.05

 

$

0.00

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

32,661,196

 

32,149,957

 

32,518,943

 

32,004,386

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

35,164,106

 

32,149,957

 

34,760,568

 

33,054,632

 

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

Envestnet, Inc.

Condensed Consolidated Statement of Stockholders’ Equity

(In thousands, except share information)

(Unaudited)

 

 

 

Common Stock

 

Treasury Stock

 

Additional

 

 

 

Total

 

 

 

Shares

 

Amount

 

Common
Shares

 

Amount

 

Paid-in
Capital

 

Accumulated
deficit

 

Stockholders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2012

 

44,071,564

 

$

220

 

(11,715,889

)

$

(10,558

)

$

173,611

 

$

(37,277

)

$

125,996

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of stock options

 

242,653

 

1

 

 

 

2,203

 

 

2,204

 

Issuance of common stock - Vesting of restricted stock

 

70,964

 

1

 

 

 

 

 

1

 

Exercise of warrants

 

761,902

 

4

 

 

 

 

 

 

 

 

4

 

Stock-based compensation

 

 

 

 

 

4,266

 

 

4,266

 

Tax benefit attributable to exercise of stock options

 

 

 

 

 

1,047

 

 

1,047

 

Reversal of state uncertain tax position

 

 

 

 

 

16

 

 

16

 

Purchase of treasury stock (at cost)

 

 

 

(35,817

)

(586

)

 

 

(586

)

Net income

 

 

 

 

 

 

1,659

 

1,659

 

Balance, June 30, 2013

 

45,147,083

 

$

226

 

(11,751,706

)

$

(11,144

)

$

181,143

 

$

(35,618

)

$

134,607

 

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

5



Table of Contents

 

Envestnet, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

1,659

 

$

72

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

6,199

 

5,623

 

Deferred rent and lease incentive

 

(48

)

1,362

 

Provision for doubtful accounts

 

60

 

 

Deferred income taxes

 

(1,094

)

(432

)

Stock-based compensation

 

4,266

 

1,930

 

Excess tax benefits from stock-based compensation

 

(1,047

)

 

Interest expense

 

 

3

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

Fees receivable

 

(3,672

)

1,574

 

Prepaid expenses and other current assets

 

(672

)

(1,016

)

Other non-current assets

 

(568

)

70

 

Accrued expenses

 

3,490

 

(616

)

Accounts payable

 

1,489

 

709

 

Deferred revenue

 

80

 

474

 

Other non-current liabilities

 

25

 

116

 

Net cash provided by operating activities

 

10,167

 

9,869

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

Purchase of property and equipment

 

(1,638

)

(2,999

)

Capitalization of internally developed software

 

(1,503

)

(988

)

Repayment of notes payable assumed in acquisition

 

 

(174

)

Acquisition of businesses, net of cash acquired

 

 

(61,463

)

Net cash used in investing activities

 

(3,141

)

(65,624

)

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from exercise of warrants

 

4

 

 

Proceeds from exercise of stock options

 

2,204

 

1,565

 

Issuance of restricted stock

 

1

 

2,759

 

Excess tax benefits from stock-based compensation

 

1,047

 

 

Purchase of treasury stock

 

(586

)

(78

)

Net cash provided by financing activities

 

2,670

 

4,246

 

 

 

 

 

 

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

9,696

 

(51,509

)

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

29,983

 

64,909

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

39,679

 

$

13,400

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during the period for income taxes, net of refunds

 

$

2,955

 

$

325

 

 

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

 

6



Table of Contents

 

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

 

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 Company’s 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 with the Securities and Exchange Commission (“SEC”). The broker-dealer is registered 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 June 30, 2013 and for the three and six months ended June 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 Company’s financial position as of June 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 Company’s 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 six months ended June 30, 2013 is 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 Company’s 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.

 

7



Table of Contents

 

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

 

3.                       Business Acquisitions

 

Pro forma results for Envestnet, Inc. giving effect to the Prima Capital Holding, Inc. and Tamarac, Inc. acquisitions

 

The following pro forma financial information presents the combined results of operations of Envestnet, Prima Capital Holding, Inc. (“Prima”), which was acquired on April 1, 2012, and Tamarac, Inc. (“Tamarac”), which was acquired on May 1, 2012, for the three and six months ended June 30, 2012. The pro forma financial information presents the results as if the acquisitions had occurred as of the beginning of 2012.

 

The unaudited pro forma results presented include amortization charges for acquired intangible assets and stock-based compensation expense, the elimination of intercompany transactions, transaction-related expenses and the related tax effect of 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 at the beginning of the period presented.

 

 

 

Three Months ended

 

Six Months ended

 

 

 

June 30,

 

June 30,

 

 

 

2012

 

2012

 

 

 

 

 

 

 

Revenue

 

$

39,082

 

$

76,197

 

Net income (loss)

 

(957

)

(1,980

)

Net income (loss) per share:

 

 

 

 

 

Basic

 

(0.03

)

(0.06

)

Diluted

 

(0.03

)

(0.06

)

 

4.                       Property and Equipment

 

Property and equipment consist of the following:

 

 

 

 

 

June 30,

 

December 31,

 

 

 

Estimated Useful Life

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Cost:

 

 

 

 

 

 

 

Office furniture and fixtures

 

5-7 years

 

$

3,763

 

$

3,613

 

Computer equipment and software

 

3 years

 

23,530

 

22,098

 

Other office equipment

 

5 years

 

598

 

598

 

Leasehold improvements

 

Shorter of the term of the lease or useful life of the asset

 

7,694

 

7,638

 

 

 

 

 

35,585

 

33,947

 

Less accumulated depreciation and amortization

 

 

 

(24,374

)

(22,156

)

Property and equipment, net

 

 

 

$

11,211

 

$

11,791

 

 

Depreciation and amortization expense was as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

$

1,095

 

$

1,223

 

$

2,218

 

$

2,260

 

 

8



Table of Contents

 

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

 

5.                       Internally Developed Software

 

Internally developed software consists of the following:

 

 

 

 

 

June 30,

 

December 31,

 

 

 

Estimated Useful Life

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Internally developed software

 

5 years

 

$

14,734

 

$

13,232

 

Less accumulated amortization

 

 

 

(9,736

)

(8,908

)

Internally developed software, net

 

 

 

$

4,998

 

$

4,324

 

 

Amortization expense was as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Amortization expense

 

$

418

 

$

377

 

$

829

 

$

760

 

 

6.                       Intangible Assets

 

Intangible assets consist of the following:

 

 

 

 

 

June 30, 2013

 

December 31, 2012

 

 

 

 

 

Gross

 

 

 

Net

 

Gross

 

 

 

Net

 

 

 

 

 

Carrying

 

Accumulated

 

Carrying

 

Carrying

 

Accumulated

 

Carrying

 

 

 

Useful Life

 

Amount

 

Amortization

 

Amount

 

Amount

 

Amortization

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer list

 

4 - 12 years

 

$

28,103

 

$

(11,125

)

16,978

 

$

28,103

 

$

(8,720

)

$

19,383

 

Proprietary technology

 

5 - 8 years

 

6,580

 

(1,182

)

5,398

 

6,580

 

(657

)

5,923

 

Trade names

 

5 years

 

2,090

 

(468

)

1,622

 

2,090

 

(246

)

1,844

 

Total intangible assets

 

 

 

$

36,773

 

$

(12,775

)

$

23,998

 

$

36,773

 

$

(9,623

)

$

27,150

 

 

Amortization expense was as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Amortization expense

 

$

1,568

 

$

1,624

 

$

3,152

 

$

2,603

 

 

9



Table of Contents

 

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

 

7.                       Other Non-Current Assets

 

Other non-current assets consist of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Investment in private company

 

$

1,250

 

$

1,250

 

Deposits

 

 

 

 

 

Lease

 

1,647

 

1,655

 

Other

 

268

 

264

 

Other

 

938

 

366

 

Total other non-current assets

 

$

4,103

 

$

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 management’s 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 Company’s 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 $28,751 and $20,682 as of June 30, 2013 and December 31, 2012, respectively, and are included in cash and cash equivalents in the condensed consolidated balance sheets.

 

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Table of Contents

 

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

 

9.                       Accrued Expenses

 

Accrued expenses consist of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Accrued investment manager fees

 

$

16,358

 

$

12,937

 

Accrued compensation and related taxes

 

5,333

 

5,726

 

Accrued professional services

 

329

 

408

 

Other accrued expenses

 

1,671

 

1,130

 

Total accrued expenses

 

$

23,691

 

$

20,201

 

 

10.                Income Taxes

 

The following table includes income tax provision (benefit) and the effective tax rate for the Company’s income from operations:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

$

1,943

 

$

(1,118

)

$

2,536

 

$

120

 

Income tax provision (benefit)

 

825

 

(450

)

877

 

48

 

Effective tax rate

 

42.5

%

40.3

%

34.6

%

40.0

%

 

The Company’s effective tax rate in the three months ended June 30, 2013, was higher than the effective tax rate in the three months ended June 30, 2012, primarily due to non-deductible transaction costs. The Company’s effective tax rate in the six months ended June 30, 2013, was lower than the effective tax rate in the six months ended June 30, 2012, primarily due to a change in the tax rate expected to apply to taxable income when deferred income taxes are realized.

 

The liability for unrecognized tax benefits reported in other non-current liabilities was $1,688 and $1,739 at June 30, 2013 and December 31, 2012, respectively. At June 30, 2013, the amount of unrecognized tax benefits that would benefit the Company’s effective tax rate, if recognized, was $522. At this time, the Company estimates it is reasonably possible that the liability for unrecognized tax benefits will decrease by as much as $400 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 $645 and $642 as of June 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 Company’s tax returns for the calendar years ended December 31, 2011, 2010 and 2009 remain open to examination by the Internal Revenue Service in their entirety. With respect to state taxing jurisdictions, the Company’s tax returns for the fiscal year ended March 31, 2009, as well as calendar years ended December 31, 2011, 2010 and 2009 remain open to examination by various state revenue services.

 

The Company’s 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 Company’s 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 Company’s subsidiary’s 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.

 

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Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

 

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 Company’s 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 Company’s 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 June 30, 2013, the maximum number of stock options and restricted stock available for future issuance under the Company’s plans is 1,309,379.

 

Employee stock-based compensation expense under the Company’s plans was as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Employee stock-based compensation expense

 

$

1,960

 

$

1,135

 

$

4,266

 

$

1,930

 

Tax effect on employee stock-based compensation expense

 

(832

)

(456

)

(1,475

)

(777

)

Net effect on income

 

$

1,128

 

$

679

 

$

2,791

 

$

1,153

 

 

Stock Options

 

The following weighted average assumptions were used to value options granted during the periods indicated:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Grant date fair value of options

 

$

 

$

4.97

 

$

6.11

 

$

4.91

 

Volatility

 

 

39.7

%

40.4

%

39.7

%

Risk-free interest rate

 

 

1.2

%

1.0

%

1.2

%

Dividend yield

 

 

0.0

%

0.0

%

0.0

%

Expected term (in years)

 

 

6.0

 

6.0

 

6.0

 

 

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Table of Contents

 

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

 

The following table summarizes option activity under the Company’s plans:

 

 

 

Shares

 

Weighted-
Average
Exercise Price

 

Weighted-Average
Remaining
Contractual Life
(Years)

 

Aggregate
Intrinsic Value

 

 

 

 

 

 

 

 

 

 

 

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

 

Options exercisable

 

3,440,826

 

8.04

 

4.9

 

$

56,991

 

 

Exercise prices of stock options outstanding as of June 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 Company’s plans:

 

 

 

Number of
Shares

 

Weighted-Average
Grant Date Fair
Value per Share

 

 

 

 

 

 

 

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

 

 

At June 30, 2013, there was $4,823 of unrecognized compensation expense related to unvested stock options, which the Company expects to recognize over a weighted-average period of 1.4 years. At June 30, 2013, there was $3,356 of unrecognized compensation expense related to unvested restricted stock awards, which the Company expects to recognize over a weighted-average period of 2.4 years. At June 30, 2013, there was an additional $4,832 of potential unrecognized stock compensation expense related to unvested restricted stock granted under the 2012 Plan that vest based upon Tamarac meeting certain performance conditions and then a subsequent two-year service condition, which the Company expects to recognize over the remaining estimated vesting period of 1.75 to 3.75 years.

 

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Table of Contents

 

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

 

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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

1,118

 

$

(668

)

$

1,659

 

$

72

 

 

 

 

 

 

 

 

 

 

 

Basic number of weighted-average shares outstanding

 

32,661,196

 

32,149,957

 

32,518,943

 

32,004,386

 

Effect of dilutive shares:

 

 

 

 

 

 

 

 

 

Options to purchase common stock

 

1,805,969

 

 

1,605,065

 

900,085

 

Common warrants

 

609,489

 

 

523,020

 

144,076

 

Unvested restricted stock

 

87,452

 

 

113,540

 

6,085

 

Diluted number of weighted-average shares outstanding

 

35,164,106

 

32,149,957

 

34,760,568

 

33,054,632

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.03

 

$

(0.02

)

$

0.05

 

$

0.00

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

0.03

 

$

(0.02

)

$

0.05

 

$

0.00

 

 

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Table of Contents

 

Envestnet, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share amounts)

 

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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Options to purchase common stock

 

 

5,374,040

 

 

1,227,248

 

Common warrants

 

 

1,388,888

 

 

 

Unvested restricted stock

 

348,139

 

765,970

 

348,139

 

755,970

 

 

14.                Major Customers

 

One customer accounted for more than 10% of the Company’s fees receivable:

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Fidelity

 

10

%

11

%

 

One customer accounted for more than 10% of the Company’s total revenues:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Fidelity

 

23

%

22

%

22

%

23

%

 

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 Company’s 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.

 

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Table of Contents

 

The Company rents office space under leases that expire at various dates through 2024.  Future minimum lease commitments under these operating leases, as of June 30, 2013, was as follows:

 

Years ending December 31:

 

 

 

Remainder of 2013

 

$

2,381

 

2014

 

4,885

 

2015

 

4,761

 

2016

 

4,972

 

2017

 

4,582

 

Thereafter

 

21,826

 

 

 

$

43,407

 

 

16.                Subsequent Events

 

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 of WMS for approximately $9,500 in cash, subject to certain post-closing adjustments of which the Company is still in the process of completing, plus contingent consideration of up to a total of $23,000 in cash, based upon meeting certain performance targets, to be paid over three years. WMS is a provider of technology solutions that enables financial services firms to develop and enhance their wealth management offerings.

 

The Company is currently in the initial phase of gathering financial information and has not determined the estimated fair values of the assets acquired and liabilities assumed.

 

For the three and six months ended June 30, 2013, acquisition costs for WMS totaled $552 and $647, respectively, and are included in general and administration expenses. The Company will incur additional WMS related acquisition costs during the second half of 2013.

 

Lease Termination

 

On July 26, 2013, the Company exercised its right to early terminate the Denver, Colorado office lease in accordance with the provisions of the lease.  The total estimated termination fee is $1,100, of which approximately 50% of this termination fee was paid on July 26, 2013.  The remainder of the fee is due in July 2014. The impact of this early termination has been reflected in the lease commitment table in note 15.

 

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Table of Contents

 

Item 2.                                  Management’s 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.

 

Forward-Looking Statements

 

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 “Management’s 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 Company’s administrative, operational and financial resources,

 

·                  fluctuations in the Company’s revenue,

 

·                  the concentration of nearly all of the Company’s revenues from the delivery of investment solutions and services to clients in the financial advisory industry,

 

·                  the Company’s reliance on a limited number of clients for a material portion of its revenue,

 

·                  the renegotiation of fee percentages or termination of the Company’s services by its clients,

 

·                  the Company’s ability to identify potential acquisition candidates, complete acquisitions and successfully integrate acquired companies,

 

·                  the impact of market and economic conditions on the Company’s revenues,

 

·                  compliance failures,

 

·                  regulatory actions against the Company,

 

·                  the failure to protect the Company’s intellectual property rights,

 

·                  the Company’s inability to successfully execute the conversion of its clients’ assets from their technology platform to the Company’s technology platform in a timely and accurate manner,

 

·                  general economic conditions, and

 

·                  political and regulatory conditions, as well as management’s 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.

 

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Table of Contents

 

Overview

 

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 June 30, 2013, approximately 25,000 advisors used our technology platform, supporting approximately $427 billion of assets in approximately 1.9 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:

 

·                  Envestnet’s 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 | PMC’s 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 33% from $31,012 in the three months ended June 30, 2012 to $41,234 in the three months ended June 30, 2013. Total revenues, which include licensing and professional service fees, increased 36% from $37,962 in the three months ended June 30, 2012 to $51,632 in the three months ended June 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 acquisitions. Net income for the three months ended June 30, 2013 was $1,118, or $0.03 per diluted share, compared to a net loss of ($668), or ($0.02) per diluted share for the three months ended June 30, 2012.

 

Revenues from assets under management (“AUM”) or assets under administration (“AUA”) increased 31% from $59,275 in the six months ended June 30, 2012 to $77,570 in the six months ended June 30, 2013. Total revenues, which include licensing and professional service fees, increased 39% from $70,604 in the six months ended June 30, 2012 to $98,257 in the six months ended June 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 acquisitions. Net income for the six months ended June 30, 2013 was $1,659, or $0.05 per diluted share, compared to $72, or $0.00 per diluted share for the six months ended June 30, 2012.

 

Adjusted revenues for the three months ended June 30, 2013 was $51,655, an increase of 34% from $38,579 in the prior year period. Adjusted EBITDA for the three months ended June 30, 2013 was $9,305, an increase of 75% from $5,314 in the prior year period. Adjusted net income for the three months ended June 30, 2013 was $4,513, or $0.13 per diluted share, compared to adjusted net income of $2,230, or $0.07 per diluted share in the prior year period.

 

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Table of Contents

 

Adjusted revenues for the six months ended June 30, 2013 was $98,417, an increase of 38% from $71,221 in the prior year period. Adjusted EBITDA for the six months ended June 30, 2013 was $17,513, an increase of 68% from $10,408 in the prior year period. Adjusted net income for the six months ended June 30, 2013 was $8,584, or $0.25 per diluted share, compared to adjusted net income of $4,431, or $0.13 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

 

Wealth Management Solutions 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, the Company acquired substantially all of the assets of WMS for approximately $9,500 in cash, subject to certain post-closing adjustments, plus contingent consideration of up to a total of $23,000 in cash, based upon meeting certain performance targets, to be paid over three years. WMS is a provider of technology solutions that enables financial services firms to develop and enhance their wealth management offerings.

 

Lease Termination

 

On July 26, 2013, we exercised our right to early terminate our Denver, Colorado office lease in accordance with the provisions of the lease.  The total estimated termination fee is $1,100, of which approximately 50% of this termination fee was paid on July 26, 2013.  The remainder of the fee is due in July 2014.

 

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.

 

 

 

As of

 

 

 

June 30,

 

September 30,

 

December 31,

 

March 31,

 

June 30,

 

 

 

2012

 

2012

 

2012

 

2013

 

2013

 

 

 

(in millions, except accounts and advisor data)

 

Platform Assets

 

 

 

 

 

 

 

 

 

 

 

Assets Under Management (AUM)

 

$

26,758

 

$

29,232

 

$

30,970

 

$

34,870

 

$

38,705

 

Assets Under Administration (AUA)

 

60,511

 

64,229

 

67,368

 

74,839

 

85,601

 

Subtotal AUM/A

 

87,269

 

93,461

 

98,338

 

109,709

 

124,306

 

Licensing

 

229,268

 

254,256

 

269,729

 

295,330

 

302,604

 

Total Platform Assets

 

$

316,537

 

$

347,717

 

$

368,067

 

$

405,039

 

$

426,910

 

 

 

 

 

 

 

 

 

 

 

 

 

Platform Accounts

 

 

 

 

 

 

 

 

 

 

 

AUM

 

141,695

 

148,920

 

156,327

 

167,167

 

190,883

 

AUA

 

274,322

 

278,192

 

293,151

 

311,884

 

357,283

 

Subtotal AUM/A

 

416,017

 

427,112

 

449,478

 

479,051

 

548,166

 

Licensing

 

1,138,223

 

1,170,978

 

1,228,016

 

1,289,491

 

1,365,773

 

Total Platform Accounts

 

1,554,240

 

1,598,090

 

1,677,494

 

1,768,542

 

1,913,939

 

 

 

 

 

 

 

 

 

 

 

 

 

Advisors

 

 

 

 

 

 

 

 

 

 

 

AUM/A

 

15,045

 

15,735

 

16,085

 

16,419

 

18,154

 

Licensing

 

6,758

 

6,878

 

6,941

 

6,970

 

7,261

 

Total Advisors

 

21,803

 

22,613

 

23,026

 

23,389

 

25,415

 

 

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.

 

19



Table of Contents

 

 

 

Asset Rollforward - Three Months Ended June 30, 2013

 

 

 

As of
3/31/13

 

Gross
Sales

 

Redemptions

 

Net
Flows

 

Market
Impact

 

As of
6/30/13

 

 

 

(in millions, except account data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets under Management (AUM)

 

$

34,870

 

$

6,647

 

$

(2,343

)

$

4,304

 

$

(469

)

$

38,705

 

Assets under Administration (AUA)

 

74,839

 

16,521

 

(5,082

)

11,439

 

(677

)

85,601

 

Subtotal AUM/A

 

$

109,709

 

$

23,168

 

$

(7,425

)

$

15,743

 

$

(1,146

)

$

124,306

 

Fee-Based Accounts

 

479,051

 

101,152

 

(32,037

)

69,115

 

 

 

548,166

 

 

Gross sales for the three months ended June 30, 2013 included $12.4 billion in new client conversions included in the above AUM/A gross sales figures, and an additional $12.1 billion of conversions in Licensing.

 

 

 

Asset Rollforward - Six Months Ended June 30, 2013

 

 

 

As of
12/31/12

 

Gross
Sales

 

Redemptions

 

Net
Flows

 

Market
Impact

 

As of
6/30/13

 

 

 

(in millions, except account data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets under Management (AUM)

 

$

30,970

 

$

11,107

 

$

(4,296

)

$

6,811

 

$

924

 

$

38,705

 

Assets under Administration (AUA)

 

67,368

 

24,511

 

(8,435

)

16,076

 

2,157

 

85,601

 

Subtotal AUM/A

 

$

98,338

 

$

35,618

 

$

(12,731

)

$

22,887

 

$

3,081

 

$

124,306

 

Fee-Based Accounts

 

449,478

 

150,936

 

(52,248

)

98,688

 

 

 

548,166

 

 

Gross sales for the six months ended June 30, 2013 included $15.0 billion in new client conversions included in the above AUM/A gross sales figures, and an additional $17.4 billion of conversions in Licensing.

 

The mix of AUM and AUA was as follows for the periods indicated:

 

 

 

June 30,

 

September 30,

 

December 31,

 

March 31,

 

June 30,

 

 

 

2012

 

2012

 

2012

 

2013

 

2013

 

Assets under management (AUM)

 

28

%

27

%

27

%

27

%

29

%

Assets under administration (AUA)

 

72

%

73

%

73

%

73

%

71

%

 

 

100

%

100

%

100

%

100

%

100

%

 

20



Table of Contents

 

Results of Operations

 

Three months ended June 30, 2013 compared to three months ended June 30, 2012

 

 

 

Three Months Ended June 30,

 

Increase (Decrease)

 

 

 

2013

 

2012

 

Amount

 

%

 

 

 

(In thousands)

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Assets under management or administration

 

$

41,234

 

$

31,012

 

$

10,222

 

33

%

Licensing and professional services

 

10,398

 

6,950

 

3,448

 

50

%

Total revenues

 

51,632

 

37,962

 

13,670

 

36

%

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of revenues

 

19,638

 

13,549

 

6,089

 

45

%

Compensation and benefits

 

17,194

 

14,085

 

3,109

 

22

%

General and administration

 

9,962

 

8,148

 

1,814

 

22

%

Depreciation and amortization

 

3,081

 

3,224

 

(143

)

-4

%

Restructuring charges

 

 

88

 

(88

)

*

 

Total operating expenses

 

49,875

 

39,094

 

10,781

 

28

%

Income (loss) from operations

 

1,757

 

(1,132

)

2,889

 

-255

%

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

4

 

14

 

(10

)

-71

%

Other income

 

182

 

 

182

 

*

 

Total other income (expense)

 

186

 

14

 

172

 

*

 

Income (loss) before income tax provision (benefit)

 

1,943

 

(1,118

)

3,061

 

-274

%

Income tax provision (benefit)

 

825

 

(450

)

1,275

 

-283

%

Net income (loss)

 

$

1,118

 

$

(668

)

$

1,786

 

-267

%

 


* Not meaningful.

 

Revenues

 

Total revenues increased 36% from $37,962 in the three months ended June 30, 2012 to $51,632 in the three months ended June 30, 2013. The increase was primarily due to an increase in revenues from assets under management or assets under administration of $10,222. Revenues from assets under management or administration were 80% and 82% of total revenues in the three months ended June 30, 2013 and 2012, respectively.

 

Assets under management or administration

 

Revenues earned from assets under management or assets under administration increased 33% from $31,012 in the three months ended June 30, 2012 to $41,234 in the three months ended June 30, 2013. The increase was primarily due to an increase in asset values applicable to our quarterly billing cycle in 2013, relative to the corresponding period in 2012. In the second quarter of 2013, revenues were positively affected by new account growth and positive net flows of AUM or AUA during 2012 and the first quarter of 2013.

 

The number of financial advisors with AUM or AUA on our technology platform increased from 15,045 as of June 30, 2012 to 18,154 as of June 30, 2013 and the number of AUM or AUA client accounts increased from approximately 416,000 as of June 30, 2012 to approximately 548,000 as of June 30, 2013.

 

Licensing and professional services

 

Licensing and professional services revenues increased 50% from $6,950 in the three months ended June 30, 2012 to $10,398 in the three months ended June 30, 2013, primarily due to an increase in licensing revenue of $3,284 and an increase in professional services revenue of $171. The increase in licensing revenue was primarily a result of the acquisition of Tamarac that closed in the second quarter of 2012.

 

21



Table of Contents

 

Cost of revenues

 

Cost of revenues increased 45% from $13,549 in the three months ended June 30, 2012 to $19,638 in the three months ended June 30, 2013, primarily due to a corresponding increase in revenues from AUM or AUA. As a percentage of total revenues, cost of revenues increased from 36% in the three months ended June 30, 2012 to 38% in the three months ended June 30, 2013.

 

Compensation and benefits

 

Compensation and benefits increased 22% from $14,085 in the three months ended June 30, 2012 to $17,194 in the three months ended June 30, 2013, primarily due to an increase in salaries, benefits and commission expense of $2,042 related to an increase in headcount, primarily a result of an increase in headcount associated with the Tamarac acquisition in the second quarter of 2012, and an increase in non-cash compensation expense of $825, primarily related to Tamarac meeting certain performance metrics related to the Envestnet | Tamarac Management Incentive Plan (the “2012 Plan”) as well, as the accounting impact of a modification to the 2012 Plan in April of 2013. As a percentage of total revenues, compensation and benefits decreased from 37% in the three months ended June 30, 2012 to 33% in the three months ended June 30, 2013.

 

General and administration

 

General and administration expenses increased 22% from $8,148 in the three months ended June 30, 2012 to $9,962 in the three months ended June 30, 2013, primarily due to one-time re-audit related expenses of $1,554, and year over year increases in website and systems development costs of $258, occupancy costs of $142 and communication, research and data services costs of $409, partially offset by a decrease in transaction related costs of $561. As a percentage of total revenues, general and administration expenses decreased from 21% in the three months ended June 30, 2012 to 19% in the three months ended June 30, 2013. Excluding re-audit related expenses of $1,554, general and administration expenses as a percentage of total revenues would have been 16% in the three months ended June 30, 2013.

 

Depreciation and amortization

 

Depreciation and amortization expense decreased 4% from $3,224 in the three months ended June 30, 2012 to $3,081 in the three months ended June 30, 2013, primarily due to a decrease in intangible asset amortization and property and equipment depreciation, partially offset by an increase in internally developed software amortization. As a percentage of total revenues, depreciation and amortization expense decrease from 8% in the three months ended June 30, 2012 to 6% in the three months ended June 30, 2013.

 

Income tax provision

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2013

 

2012

 

 

 

(in thousands)

 

Income tax provision (benefit)

 

$

825

 

$

(450

)

Effective tax rate

 

42.5

%

40.3

%

 

For the three months ended June 30, 2013, our effective tax rate differs from the statutory rate primarily due to the effect of state taxes, permanent differences, including non-deductible transaction costs. For the three months June 30, 2012, our effective tax rate differs from the statutory rate primarily due to the effect of state taxes and permanent differences.

 

22



Table of Contents

 

Results of Operations

 

Six months ended June 30, 2013 compared to six months ended June 30, 2012

 

 

 

Six Months Ended June 30,

 

Increase (Decrease)

 

 

 

2013

 

2012

 

Amount

 

%

 

 

 

(In thousands)

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Assets under management or administration

 

$

77,570

 

$

59,275

 

$

18,295

 

31

%

Licensing and professional services

 

20,687

 

11,329

 

9,358

 

83

%

Total revenues

 

98,257

 

70,604

 

27,653

 

39

%

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of revenues

 

36,446

 

25,075

 

11,371

 

45

%

Compensation and benefits

 

34,412

 

24,770

 

9,642

 

39

%

General and administration

 

18,855

 

14,921

 

3,934

 

26

%

Depreciation and amortization

 

6,199

 

5,623

 

576

 

10

%

Restructuring charges

 

 

115

 

(115

)

*

 

Total operating expenses

 

95,912

 

70,504

 

25,408

 

36

%

Income from operations

 

2,345

 

100

 

2,245

 

*

 

Other income (expense):

 

 

 

 

 

 </