Envestnet Guides To Slow Revenue Growth In 2023

A Quick Take On Envestnet

Envestnet, Inc. (NYSE:ENV) reported its Q1 2023 financial results on May 4, 2023, missing revenue estimates but beating expected earnings.

The company provides a suite of wealth management and data software and services worldwide.

While Envestnet, Inc. management is continuing to invest in bringing new capabilities to its suite of offerings, until it proves that it can reignite topline revenue growth, I'm Neutral (Hold) on ENV.

Envestnet Overview

Chicago, Illinois-based Envestnet was founded in 1999 to provide a variety of wealth management and data software applications to investment managers and traders.

The firm is headed by Co-founder and Chief Executive Officer, Bill Crager, who was previously a Managing Director at Nuveen.

The company's primary offerings include:

• Wealth Solutions

• Data & Analytics

• Tamarac

• MoneyGuide

• Retirement Solutions

• Portfolio Management Consultants

• Trust Services

• Insurance Exchange

• Advisor Services Exchange

The firm seeks clients among registered investment advisors, broker-dealer representatives, and various types of institutional investors in the U.S. and internationally.

ENV recently announced its plans to expand into the small and mid-size market through offering "data and digital solutions" to business owners by partnering with upSWOT, a platform that connects over 150 SaaS products with SMB clients.

Envestnet's Market & Competition

According to a 2019 market research report by Grand View Research, the global wealth management software market is projected to reach $5.8 billion by 2025, growing at a CAGR of 15.3% between 2019 and 2025.

The main factor driving market growth is the growing need for digital tools that can automate the wealth management process.

The financial advice and management segment is anticipated to grow at the fastest CAGR of 16.0% during the period due to the growing demand for tools to manage finances.

Major competitors that provide or are developing wealth management solutions include:

• Fiserv

• Temenos Headquarters

• Fidelity National Information Services

• Profile Software

• SS&C Technologies

• SEI Investment

• Finantix

• Comarch

• AssetMark Financial

• Dynasty Financial Partners

Envestnet's Recent Financial Trends

• Total revenue by quarter has dropped in recent quarters; operating income by quarter has trended lower more recently.

• Gross profit margin by quarter has rebounded in recent quarters; Selling, G&A expenses as a percentage of total revenue by quarter have trended higher recently, a negative signal indicating lower efficiency in generating incremental revenue.

• Earnings per share (Diluted) have trended materially lower in recent quarters.

(All data in the above charts is GAAP)

In the past 12 months, ENV's stock price has risen only 9.36% vs. that of AssetMark Financial Holdings, Inc.'s (AMK) impressive rise of 56.96%, as the chart indicates below.

For the balance sheet, the firm ended the quarter with $52.7 million in cash and equivalents and $918 million in total debt, of which $45.0 million was categorized as the current portion due within 12 months.

Over the trailing twelve months, free cash flow was $63.6 million, during which capital expenditures were $16.7 million. The company paid $78.0 million in stock-based compensation in the last four quarters.

Valuation And Other Metrics For Envestnet

Below is a table of relevant capitalization and valuation figures for the company.

(Source - Seeking Alpha)

As a reference, a relevant partial public comparable would be AssetMark Financial Holdings; shown below is a comparison of their primary valuation metrics.

(Source - Seeking Alpha)

Commentary On Envestnet

In its last earnings call (Source - Seeking Alpha), covering Q1 2023's results, management highlighted the firm's current focus on creating operating efficiencies and maximizing expense reduction efforts in the near term.

Q1 revenue was "essentially in line" despite headwinds from its banking customer vertical.

Despite these near-term challenges, management continues to be positive about the long-term growth prospects in the U.S., whether through its asset management platform or wealth data solutions, as its communication below shows:

Management did not disclose any company or customer retention rate metrics.

Total revenue for Q1 2023 fell by 7.1% year-over-year, while gross profit margin increased by 4.9%.

Selling, G&A expenses as a percentage of revenue increased 3.5 percentage points YoY, a negative signal indicating reduced selling efficiency while operating losses were pared by 46% YoY.

Looking ahead, for the full year, management guided revenue to $1.265 billion, or approximately 2% topline growth. EPS is expected to be $2.15 for 2023.

The company's financial position is moderate, with some liquidity, significant long-term debt, and reasonably strong free cash flow for its size. ENV's net leverage ratio was 4x EBITDA, and management expects this ratio to be "below 3.5x" by year-end.

From management's most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below.

I'm most interested in the frequency of potentially negative terms, so management or analyst questions cited "Uncertain" once, "Challeng(es)(ing)" seven times, "Macro" three times, "Drop" once and "Volatil(e)(ity)" once.

The negative terms refer in part to the volatile environment its banking customer base has experienced in the past several months and may continue to experience in terms of deposit flight.

Analysts questioned company leadership about its use of AI technologies. Leadership responded with its lengthy history in surfacing insights for advisors; also, the company seeks to integrate automation processes to reduce regulation compliance costs for its customers.

Regarding valuation, the market is valuing ENV at a much higher EV/EBITDA than competitor AssetMark Financial, despite AMK's revenue growth and positive earnings.

While management is continuing to invest in bringing new capabilities to its suite of offerings, until it proves that it can reignite topline revenue growth, I'm Neutral (Hold) on Envestnet, Inc. stock.

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