2023-11-21 12:34:03 ET
Summary
- Envestnet, Inc. has recently reported Q3 2023 financial results, missing revenue but beating earnings estimates.
- Envestnet provides software and services to institutional investment managers and traders.
- The global wealth management software market is projected to reach $12.2 billion by 2030, driving Envestnet's growth potential.
- I remain Neutral [Hold] on Envestnet due to stalling revenue growth.
A Quick Take On Envestnet
Envestnet, Inc. ( ENV ) reported its Q3 2023 financial results on November 8, 2023, missing revenue but beating consensus earnings estimates.
The firm provides a range of software and related services to institutional investment managers and traders.
I previously wrote about ENV with a Hold outlook on a slow revenue growth outlook.
My previous outlook for ENV was Neutral due to questions about the lack of revenue growth, and I see no reason to change that view.
Compared to AssetMarket, which is growing revenue and profits, I remain Neutral [Hold] on ENV.
Envestnet Overview And Market
Illinois-based Envestnet was founded to provide wealth management and data software applications to investment managers and traders.
The company is led by co-founder and Chief Executive Officer Bill Crager, who was previously a Managing Director at Nuveen.
Envestnet’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.
According to a 2023 market research report by Grand View Research, the global wealth management software market was an estimated $4.3 billion in 2022 and is forecasted to reach $12.2 billion by 2030.
If achieved, this would represent a CAGR (Compound Annual Growth Rate) of 13.9% between 2023 and 2030.
The main factors driving market growth are the growing need for digital tools that can automate the wealth management process and improve the delivery of information to clients.
The chart below shows the historical and projected future growth trajectory of the U.S. Wealth Management Software Market through 2030:
Major competitors that provide or are developing wealth management solutions include:
-
AssetMark
-
Fiserv
-
Temenos Headquarters
-
Fidelity National Information Services
-
Profile Software
-
SS&C Technologies
-
SEI Investment
-
Finantix
-
Comarch.
Envestnet’s Recent Financial Trends
Total revenue by quarter (blue columns) has grown slowly YoY; Operating income by quarter (red line) has turned up in the most recent quarter:
Gross profit margin by quarter (green line) has moved up recently; Selling and G&A expenses as a percentage of total revenue by quarter (amber line) have trended slightly lower in recent quarters:
Earnings per share (Diluted) have moved up sharply in recent quarters:
(All data in the above charts is GAAP.)
In the past 12 months, ENV’s stock price has fallen 29.66% vs. that of AssetMark Financial Holdings, Inc.’s ( AMK ) rise of 5.03%:
For balance sheet results, the firm ended the quarter with $43.2 million in cash and equivalents and $875.4 million in total debt, none of which was categorized as the current portion due within 12 months.
Over the trailing twelve months, free cash flow was $88.8 million, during which capital expenditures were $21.3 million. The company paid $75.9 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:
Measure (Trailing Twelve Months) | Amount |
Enterprise Value / Sales | 2.5 |
Enterprise Value / EBITDA | 29.6 |
Price / Sales | 1.7 |
Revenue Growth Rate | -3.6% |
Net Income Margin | -7.5% |
EBITDA % | 8.4% |
Market Capitalization | $2,070,000,000 |
Enterprise Value | $3,020,000,000 |
Operating Cash Flow | $110,080,000 |
Earnings Per Share (Fully Diluted) | -$1.84 |
Forward EPS Estimate | $2.01 |
Free Cash Flow Per Share | -$0.22 |
SA Quant Score | Strong Sell - 1.46 |
(Source - Seeking Alpha.)
As a reference, a relevant partial public comparable would be AssetMark Financial:
Metric (Trailing Twelve Months) | AssetMark | Envestnet | Variance |
Enterprise Value / Sales | 2.5 | 2.5 | 0.0% |
Enterprise Value / EBITDA | 8.7 | 29.6 | 241.2% |
Revenue Growth Rate | 19.5% | -3.6% | --% |
Net Income Margin | 16.0% | -7.5% | --% |
Operating Cash Flow | $204,130,000 | $110,080,000 | -46.1% |
(Source - Seeking Alpha.)
Commentary On Envestnet
In its last earnings call (Source - Seeking Alpha ), covering Q3 2023’s results, management’s prepared remarks highlighted the completion of its two-year investment cycle, suggesting that its R&D spending will decrease in the near term.
With this decrease in upgrade spending, the results are starting to flow through to the bottom line, so the firm should continue to reap the rewards of its system modernization efforts in the form of increasing profits.
The firm is also producing higher gross and operating margins with this new focus on profitability.
In the earnings call, I tracked the frequency of various representative terms and keywords mentioned by management and analysts:
Management said clients are continuing to face macroeconomic pressures, making for a "difficult market environment where industry-wide flows remain challenged."
Analysts asked leadership about progress on expense reductions, Q4 revenue guidance assumptions and pricing trends.
Management said that half of its stated $60 million per year run rate expenses have been based on actions already taken and are to be recognized in 2023, and the other held will be recognized in 2024.
Q4 revenue guidance was driven by around $17 billion in client conversion coming over at a low fee rate temporarily and a mix shift toward more cash assets under administration [AUA] weighing negatively on its blended fee rate.
For pricing, its RIA (Registered Investment Advisors) segment is seeing increases in unit pricing as ENV bundles in additional capabilities to increase value.
Total revenue for Q3 2023 rose by only 3.3% year-over-year, while gross profit margin increased by 3.8%.
Selling and G&A expenses as a percentage of revenue fell by 0.1% YoY, and operating income rose by more than 6x to $14.4 million for the quarter.
The company's financial position is moderate, with some liquidity, a substantial amount of long-term debt but strong free cash flow.
Looking ahead, consensus revenue growth for 2023 is flat compared to 2022.
If achieved, this would represent a decline in revenue growth rate versus 2022’s growth rate of 4.5% over 2021.
Management is clearly seeking to focus on profitability over growth.
In addition, it wants to generate as much free cash flow as possible by reducing its investments in new product features and other R&D efforts, at least for the near term.
My previous outlook for Envestnet, Inc. was neutral due to questions about the lack of revenue growth, and I see no reason to change that view.
Compared to AssetMarket, which is growing revenue and profits, I remain Neutral [Hold] on ENV.
For further details see:
Envestnet Grows Profit But Revenue Stalls Out