Envestnet(US:ENV)2023-05-04 16:00PART I - FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Envestnet reported a 7% revenue decline to $298.7 million in Q1 2023, driven by asset-based fees, resulting in a $42.8 million net loss and negative operating cash flow Condensed Consolidated Statements of Operations Highlights (Q1 2023 vs Q1 2022, in thousands) | Metric | Q1 2023 | Q1 2022 | YoY Change | | :--- | :--- | :--- | :--- | | Total Revenue | $298,707 | $321,363 | -7.0% | | Asset-based Revenue | $176,932 | $202,717 | -12.7% | | Subscription-based Revenue | $117,079 | $114,734 | +2.0% | | Loss from Operations | ($11,057) | ($6,721) | +64.5% | | Net Loss Attributable to Envestnet, Inc. | ($41,228) | ($13,859) | +197.5% | | Net Loss Per Share (Basic & Diluted) | ($0.76) | ($0.25) | +204.0% | Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | March 31, 2023 | December 31, 2022 | Change | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $52,664 | $162,173 | -67.5% | | Total Assets | $2,056,457 | $2,112,165 | -2.6% | | Total Liabilities | $1,319,277 | $1,344,561 | -1.9% | | Total Equity | $737,180 | $767,604 | -4.0% | Condensed Consolidated Statements of Cash Flows Highlights (Q1 2023 vs Q1 2022, in thousands) | Cash Flow Activity | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($33,521) | $3,261 | | Net cash used in investing activities | ($58,756) | ($46,067) | | Net cash used in financing activities | ($20,812) | ($26,232) | | Net change in cash, cash equivalents and restricted cash | ($109,509) | ($69,665) | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 7% revenue decline to macroeconomic pressures on asset-based fees, with operating loss widening due to increased G&A and severance costs, while Adjusted EBITDA remained flat Overview and Recent Developments Envestnet serves 106,000 advisors and 6,900 companies, with Q1 2023 marked by a $20.0 million convertible note issuance and $6.2 million in severance expenses from a reduction in force - The company serves approximately 106,000 advisors and 6,900 companies, including 16 of the 20 largest U.S. banks and 47 of the 50 largest wealth management firms102 - In Q1 2023, the company initiated a reduction in force, incurring approximately $6.2 million in total severance expenses for the quarter108 - On January 31, 2023, the company entered into a $20.0 million Convertible Promissory Note with a privately held company customer, which includes a call option to acquire the company106107 Results of Operations Q1 2023 total revenue decreased 7% to $298.7 million due to a 13% drop in asset-based revenue, while operating expenses decreased 6% but an operating loss of $11.1 million was recorded - Asset-based recurring revenue fell 13% YoY due to a decrease in asset values impacting quarterly billing cycles115 - Subscription-based recurring revenue increased 2% YoY, driven by growth in the Envestnet Wealth Solutions segment, partially offset by a decline in the Data & Analytics segment118 - Employee compensation decreased by 10% ($12.6 million) due to the TCS outsourcing arrangement, a reduction in force, and organizational realignment123 - General and administrative expenses rose 21% ($9.3 million), primarily from increased software charges related to the TCS outsourcing arrangement and governance expenses from activist shareholder activity124 Segment Results Wealth Solutions revenue decreased 6% to $256.7 million, with Data & Analytics revenue falling 12% to $42.0 million, and its operating loss widening to $7.8 million Segment Performance (Q1 2023 vs Q1 2022, in thousands) | Segment | Metric | Q1 2023 | Q1 2022 | YoY Change | | :--- | :--- | :--- | :--- | :--- | | Envestnet Wealth Solutions | Total Revenue | $256,660 | $273,568 | -6% | | | Income from Operations | $23,463 | $25,269 | -7% | | Envestnet Data & Analytics | Total Revenue | $42,047 | $47,795 | -12% | | | Loss from Operations | ($7,780) | ($5,587) | -39% | - Wealth Solutions' asset-based revenue fell 13% due to market conditions, while subscription-based revenue grew 12% from new and existing customer growth134137 - Data & Analytics' subscription revenue decreased 12% due to lower revenue from existing customers; employee compensation dropped 29%, while G&A expenses rose 70% due to the TCS outsourcing arrangement shifting cost categories144147149 Non-GAAP Financial Measures Q1 2023 Adjusted EBITDA remained flat at $55.4 million, while Adjusted Net Income decreased 3% to $30.1 million, with diluted EPS slightly down to $0.46 Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net loss | ($42,761) | ($14,708) | | Adjustments (Depreciation, Amortization, Non-cash comp, etc.) | $98,185 | $70,405 | | Adjusted EBITDA | $55,424 | $55,697 | Adjusted Net Income and EPS | Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Adjusted net income (in thousands) | $30,149 | $30,996 | | Adjusted net income per share - diluted | $0.46 | $0.47 | Liquidity and Capital Resources Cash and cash equivalents decreased to $52.7 million due to $33.5 million used in operations and $58.8 million in investing activities, with $500.0 million available on the credit facility - Cash and cash equivalents decreased by $109.5 million during the quarter to $52.7 million as of March 31, 2023173174 - Net cash used in operating activities was $33.5 million, compared to $3.3 million provided by operating activities in Q1 2022, mainly due to timing of working capital payments174175 - The company has $500.0 million available to borrow under its revolving credit facility as of March 31, 2023173 Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes to market, foreign currency, or interest rate risks have occurred since the 2022 Form 10-K filing - There have been no material changes to market, foreign currency, or interest rate risks since the 2022 Form 10-K filing182 Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2023184 - No changes were made to internal control over financial reporting during Q1 2023 that have materially affected, or are reasonably likely to materially affect, internal controls185 PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is defending against ongoing legal proceedings, including a trade secret misappropriation lawsuit and a class action related to data collection by its Yodlee subsidiary - The company is a defendant in a lawsuit filed by FinancialApps, LLC, alleging breach of contract and misappropriation of trade secrets; the company believes the allegations are without merit8891 - Subsidiary Yodlee is a defendant in a putative class action lawsuit (Wesch, et al., v. Yodlee, Inc., et al.) alleging unlawful collection and sale of financial transaction data; Envestnet, Inc. was dismissed from this lawsuit on August 5, 2021, and Yodlee continues to defend the remaining claims9294 Item 1A. Risk Factors No material changes to the risk factors previously disclosed in the company's 2022 Form 10-K have occurred - The risk factors disclosed in the 2022 Form 10-K have not materially changed188 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No shares were repurchased under the company's share repurchase program in Q1 2023, with 0.3 million shares remaining authorized for repurchase - No shares were repurchased under the company's share repurchase program in Q1 2023189 - As of March 31, 2023, 0.3 million shares may still be repurchased under the authorized program189