Envestnet(ENV) - 2023 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents Envestnet, Inc.'s unaudited condensed consolidated financial statements and management's discussion and analysis for the periods ended June 30, 2023 Item 1. Financial Statements (unaudited) This section presents Envestnet, Inc.'s unaudited condensed consolidated financial statements and related notes for the periods ended June 30, 2023, and December 31, 2022 Condensed Consolidated Balance Sheets The Condensed Consolidated Balance Sheets show a decrease in total assets and total equity from December 31, 2022, to June 30, 2023, while total liabilities also slightly decreased Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2023 | December 31, 2022 | | :--------------------------------- | :-------------- | :------------------ | | Total assets | $2,053,905 | $2,112,165 | | Total liabilities | $1,321,447 | $1,344,561 | | Total equity | $732,458 | $767,604 | Condensed Consolidated Statements of Operations The Condensed Consolidated Statements of Operations show a decrease in total revenue for both the three and six months ended June 30, 2023, compared to the prior year, resulting in a net loss for both periods, with a higher net loss for the six-month period in 2023 Condensed Consolidated Statements of Operations Highlights (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total revenue | $312,434 | $318,852 | $611,141 | $640,215 | | Loss from operations | $(15,312) | $(31,723) | $(26,369) | $(38,444) | | Net loss | $(23,132) | $(24,268) | $(65,893) | $(38,976) | | Net loss attributable to Envestnet, Inc. | $(21,416) | $(23,285) | $(62,644) | $(37,144) | | Basic and diluted EPS | $(0.39) | $(0.42) | $(1.15) | $(0.67) | Condensed Consolidated Statements of Comprehensive Loss The Condensed Consolidated Statements of Comprehensive Loss show a comprehensive loss attributable to Envestnet, Inc. of $(21,512) thousand for the three months ended June 30, 2023, and $(58,463) thousand for the six months ended June 30, 2023, which includes foreign currency translation adjustments Condensed Consolidated Statements of Comprehensive Loss Highlights (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss attributable to Envestnet, Inc. | $(21,416) | $(23,285) | $(62,644) | $(37,144) | | Foreign currency translation adjustments | $(96) | $(3,093) | $4,181 | $(4,571) | | Comprehensive loss attributable to Envestnet, Inc. | $(21,512) | $(26,378) | $(58,463) | $(41,715) | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity decreased from $767,604 thousand as of December 31, 2022, to $732,458 thousand as of June 30, 2023, primarily due to net losses and treasury stock purchases, partially offset by stock-based compensation expense and additional paid-in capital Condensed Consolidated Statements of Stockholders' Equity Highlights (in thousands) | Metric | December 31, 2022 | June 30, 2023 | | :--------------------------------------- | :---------------- | :------------ | | Total stockholders' equity, attributable to Envestnet, Inc. | $754,567 | $722,513 | | Net loss (six months ended) | $(41,228) | $(21,416) | | Stock-based compensation expense (six months ended) | $19,345 | $21,347 | | Treasury stock at cost (June 30, 2023) | $(253,551) | $(267,325) | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities decreased to $39.3 million for the six months ended June 30, 2023, from $52.6 million in the prior year. Net cash used in investing activities remained substantial at $(96.7) million, and net cash used in financing activities increased to $(49.4) million, primarily due to debt settlements Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $39,268 | $52,642 | | Net cash used in investing activities | $(96,667) | $(98,008) | | Net cash used in financing activities | $(49,388) | $(43,741) | | Net change in cash, cash equivalents and restricted cash | $(103,154) | $(91,164) | | Cash, cash equivalents and restricted cash, end of period | $59,019 | $338,264 | Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures for the unaudited condensed consolidated financial statements, covering key accounting policies, acquisitions, debt, revenue, and segment information 1. Organization and Description of Business Envestnet, Inc. aims to transform financial advice by empowering advisors and service providers with technology and intelligence, expanding a holistic financial wellness ecosystem. The company operates through two primary segments: Envestnet Wealth Solutions and Envestnet Data & Analytics - Envestnet's mission is to empower financial advisors and service providers with innovative technology, solutions, and intelligence to deliver an intelligent financial life to their clients[25] - The Company is organized into two primary business segments: Envestnet Wealth Solutions and Envestnet Data & Analytics[26] 2. Summary of Significant Accounting Policies The financial statements are unaudited and prepared in accordance with GAAP, reflecting normal recurring adjustments. Key policies include the basis of presentation, use of estimates, reclassifications, cash and cash equivalents reconciliation, and related party transactions. The company is analyzing the impact of ASU 2023-01 on leases but does not expect a material effect Cash, Cash Equivalents and Restricted Cash Reconciliation (in thousands) | Metric | June 30, 2023 | June 30, 2022 | | :--------------------------------------- | :-------------- | :-------------- | | Cash and cash equivalents | $59,019 | $338,115 | | Restricted cash included in prepaid expenses and other current assets | — | $149 | | Total cash, cash equivalents and restricted cash | $59,019 | $338,264 | - Revenue from a related private services company decreased from $4.3 million in Q2 2022 to $3.3 million in Q2 2023, and from $9.0 million to $6.9 million for the six months ended June 30, 2023[33] - The Company is analyzing ASU 2023-01, 'Leases (Topic 842): Common Control Arrangements,' effective for fiscal years beginning after December 15, 2023, but does not expect a material impact[34] 3. Acquisitions On July 1, 2022, Envestnet acquired Redi2 Technologies, a provider of revenue management and fee-billing solutions, for an estimated cash consideration of $68.873 million. The acquisition was funded with available cash and integrated into the Envestnet Wealth Solutions segment, contributing $46.467 million in goodwill - Envestnet acquired Redi2 Technologies on July 1, 2022, for an estimated cash consideration of $68.873 million[35][36] - Redi2 provides revenue management and hosted fee-billing solutions and has been integrated into the Envestnet Wealth Solutions segment[35] Estimated Fair Values of Assets Acquired in Redi2 Acquisition (in thousands) | Asset Category | Revised Estimate | | :------------------------- | :--------------- | | Total current assets | $1,985 | | Other non-current assets | $3,321 | | Identifiable intangible assets | $26,500 | | Goodwill | $46,467 | | Total assets acquired | $78,273 | 4. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets totaled $41.9 million as of June 30, 2023, a slight increase from $41.4 million at December 31, 2022, primarily driven by prepaid technology and insurance Prepaid Expenses and Other Current Assets (in thousands) | Category | June 30, 2023 | December 31, 2022 | | :--------------------------------- | :-------------- | :------------------ | | Prepaid technology | $15,387 | $16,649 | | Prepaid insurance | $5,473 | $2,881 | | Non-income tax receivable | $5,383 | $5,488 | | Other | $15,663 | $16,345 | | Total prepaid expenses and other current assets | $41,906 | $41,363 | 5. Internally Developed Software, Net The net value of internally developed software increased to $207.2 million as of June 30, 2023, from $184.6 million at December 31, 2022, with an estimated useful life of 5 years Internally Developed Software, Net (in thousands) | Metric | June 30, 2023 | December 31, 2022 | | :-------------------------- | :-------------- | :------------------ | | Internally developed software | $359,365 | $313,200 | | Less: accumulated amortization | $(152,130) | $(128,642) | | Internally developed software, net | $207,235 | $184,558 | 6. Geographical Information The majority of the Company's long-lived assets are located in the United States, totaling $271.2 million as of June 30, 2023, with a smaller portion in India and other international locations Long-Lived Assets by Geographic Area (in thousands) | Geographic Area | June 30, 2023 | December 31, 2022 | | :---------------- | :-------------- | :------------------ | | United States | $271,230 | $245,817 | | India | $2,665 | $1,093 | | Other | $8 | $91 | | Total long-lived assets, net | $273,903 | $247,001 | 7. Intangible Assets, Net Net intangible assets decreased to $361.3 million as of June 30, 2023, from $380.0 million at December 31, 2022, with additional proprietary technology acquired and fully amortized assets retired Intangible Assets, Net (in thousands) | Category | June 30, 2023 Net Carrying Amount | December 31, 2022 Net Carrying Amount | | :---------------------- | :-------------------------------- | :---------------------------------- | | Customer lists | $297,623 | $318,792 | | Proprietary technologies | $57,508 | $53,823 | | Trade names | $6,204 | $7,380 | | Total intangible assets | $361,335 | $379,995 | - The Company acquired additional technology solutions for $7.0 million in May 2023, integrated into the Envestnet Data & Analytics segment, and amortized over five years[49] - During the six months ended June 30, 2023, the Company retired fully amortized proprietary technologies with a historical cost of $17.5 million[50] 8. Depreciation and Amortization Expense Total depreciation and amortization expense increased by 5% for both the three and six months ended June 30, 2023, compared to the prior year, primarily driven by higher amortization of internally developed software Depreciation and Amortization Expense (in thousands) | Category | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Intangible asset amortization | $15,720 | $17,645 | $32,660 | $35,165 | | Internally developed software amortization | $12,398 | $9,087 | $23,488 | $17,581 | | Property and equipment depreciation | $5,688 | $5,450 | $10,599 | $11,054 | | Total depreciation and amortization | $33,806 | $32,182 | $66,747 | $63,800 | 9. Goodwill Goodwill remained relatively stable at $998.4 million as of June 30, 2023, with a minor increase due to foreign currency translation, primarily allocated to the Envestnet Wealth Solutions segment Goodwill by Reportable Segment (in thousands) | Segment | December 31, 2022 | June 30, 2023 | | :------------------------ | :---------------- | :------------ | | Envestnet Wealth Solutions | $679,739 | $679,739 | | Envestnet Data & Analytics | $318,675 | $318,697 | | Total | $998,414 | $998,436 | 10. Other Assets On January 31, 2023, the Company issued a $20.0 million Convertible Promissory Note to a private company, bearing 8.0% interest and maturing in January 2026 - On January 31, 2023, the Company issued a $20.0 million Convertible Promissory Note to a private company, with an 8.0% annual interest rate and a maturity date of January 31, 2026[55] - A call option to acquire the privately held company, entered into concurrently with the note, was not exercised after financial metrics were met subsequent to June 30, 2023[56] 11. Accounts Payable, Accrued Expenses and Other Current Liabilities Total current liabilities increased to $239.8 million as of June 30, 2023, primarily due to higher accrued investment manager fees and accounts payable Accounts Payable, Accrued Expenses and Other Current Liabilities (in thousands) | Category | June 30, 2023 | December 31, 2022 | | :--------------------------------------- | :-------------- | :------------------ | | Accrued investment manager fees | $105,913 | $99,851 | | Accrued compensation and related taxes | $57,771 | $77,939 | | Accounts payable | $27,853 | $11,271 | | Income tax payable | $13,102 | $260 | | Total accounts payable, accrued expenses and other current liabilities | $239,836 | $233,866 | - The Company incurred $8.2 million and $14.4 million in severance expense for the three and six months ended June 30, 2023, respectively, due to a reduction in force and organizational realignment[58] 12. Debt Total debt decreased to $894.2 million as of June 30, 2023, from $916.7 million at December 31, 2022, primarily due to the settlement of $45.0 million in Convertible Notes due 2023 Debt Obligations (in thousands) | Debt Type | June 30, 2023 Carrying Value | December 31, 2022 Carrying Value | | :------------------------ | :----------------------------- | :------------------------------- | | Revolving Credit Facility | $20,000 | $— | | Convertible Notes due 2025 | $313,630 | $312,735 | | Convertible Notes due 2027 | $560,545 | $559,034 | | Total debt | $894,175 | $916,655 | - The Convertible Notes due 2023, with an aggregate principal amount of $45.0 million, matured and were settled on June 1, 2023, using cash on hand and Revolving Credit Facility borrowings[64] Total Interest Expense (in thousands) | Period | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total interest expense | $6,531 | $4,212 | $12,851 | $9,065 | 13. Fair Value Measurements The Company measures certain financial assets and liabilities at fair value, primarily money market funds and assets funding deferred compensation liability Fair Value of Financial Assets (in thousands) | Asset Category | June 30, 2023 Fair Value | December 31, 2022 Fair Value | | :--------------------------------------- | :------------------------- | :--------------------------- | | Money market funds | $23,764 | $2,628 | | Assets to fund deferred compensation liability | $10,635 | $10,074 | | Total assets | $34,399 | $12,702 | - The fair value of assets used to fund deferred compensation liability (Level III) increased to $10.6 million as of June 30, 2023, from $10.1 million at December 31, 2022, due to net gains on underlying investments[69] - Convertible Notes are classified as Level II liabilities, with fair values estimated based on market bids and offers[70] 14. Revenue and Direct Expense Total revenue decreased for both the three and six months ended June 30, 2023, primarily due to a decline in asset-based revenue, with direct expenses also decreasing Total Revenue by Segment (in thousands) | Segment | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Envestnet Wealth Solutions | $271,581 | $272,000 | $528,241 | $545,568 | | Envestnet Data & Analytics | $40,853 | $46,852 | $82,900 | $94,647 | | Total revenue | $312,434 | $318,852 | $611,141 | $640,215 | Total Direct Expense by Revenue Category (in thousands) | Category | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Asset-based | $108,532 | $112,301 | $211,155 | $229,729 | | Subscription-based | $6,933 | $7,241 | $13,295 | $15,052 | | Professional services and other | $8,032 | $6,940 | $8,036 | $6,983 | | Total direct expense | $123,497 | $126,482 | $232,486 | $251,764 | - Approximately $531.0 million in estimated future revenue is related to remaining performance obligations, with 24% expected in the remainder of 2023 and 55% in 2024-2025[74] 15. Stock-Based Compensation Stock-based compensation expense decreased slightly for both periods, with $108.6 million in unrecognized RSU expense remaining as of June 30, 2023 Stock-Based Compensation Expense (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Stock-based compensation expense | $21,390 | $22,876 | $40,843 | $44,566 | - As of June 30, 2023, there was $108.6 million of unrecognized stock-based compensation expense related to RSUs, expected to be recognized over a weighted-average period of 2.0 years[82] - As of June 30, 2023, there was $6.2 million of unrecognized stock-based compensation expense related to PSUs, expected to be recognized over a weighted-average period of 1.2 years[82] 16. Income Taxes The Company reported an income tax provision for both periods despite a pre-tax loss, primarily due to an increase in the valuation allowance on U.S. deferred tax assets Income Tax Provision (Benefit) and Effective Tax Rate (in thousands, except for effective tax rate) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Loss before income tax provision (benefit) | $(22,714) | $(30,101) | $(41,706) | $(42,789) | | Income tax provision (benefit) | $418 | $(5,833) | $24,187 | $(3,813) | | Effective tax rate | (1.8)% | 19.4% | (58.0)% | 8.9% | - The effective tax rate for the three and six months ended June 30, 2023, differed from the statutory rate primarily due to an increase in the valuation allowance on U.S. deferred tax assets, including the impact of IRC Section 174[86] - The Inflation Reduction Act of 2022, effective in 2023, is not anticipated to have a material impact on the consolidated financial statements[88] 17. Net Loss Per Share Various securities, including Convertible Notes, non-vested RSUs and PSUs, and stock options, were anti-dilutive for both periods Anti-Dilutive Securities Excluded from EPS Calculation | Security Type | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | | :-------------------------- | :------------------------------- | :----------------------------- | | Convertible Notes | 11,253,471 | 11,361,458 | | Non-vested RSUs and PSUs | 2,206,000 | 2,206,000 | | Options to purchase common stock | 237,556 | 237,556 | | Total anti-dilutive securities | 13,697,027 | 13,805,014 | 18. Segment Information Envestnet Wealth Solutions generated income from operations, while Envestnet Data & Analytics reported a loss for both periods - Envestnet Wealth Solutions provides unified wealth management software and services to financial advisors and institutions[92] - Envestnet Data & Analytics offers a data aggregation, intelligence, and experiences platform for digital financial services[92] Income (Loss) from Operations by Segment (in thousands) | Segment | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Envestnet Wealth Solutions | $23,399 | $3,968 | $46,862 | $29,237 | | Envestnet Data & Analytics | $(10,993) | $(3,705) | $(18,773) | $(9,292) | | Nonsegment operating expenses | $(27,718) | $(31,986) | $(54,458) | $(58,389) | | Loss from operations | $(15,312) | $(31,723) | $(26,369) | $(38,444) | 19. Commitments and Contingencies The Company is involved in legal proceedings, including lawsuits by FinancialApps and Deborah Wesch et al., but does not anticipate a material adverse effect - The Company is a defendant in a lawsuit filed by FinancialApps, LLC, alleging breach of contract, misappropriation of trade secrets, and other claims, seeking significant monetary damages[96] - A putative class action lawsuit by Deborah Wesch et al. alleges unlawful collection and sale of financial transaction data by Yodlee, Inc., a subsidiary of Envestnet[100] - The Company believes the allegations in both lawsuits are without merit and does not expect the outcome to have a material adverse effect on its financial condition or business[98][100][101] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a detailed analysis of Envestnet's financial performance, condition, and liquidity for the periods ended June 30, 2023, highlighting macroeconomic impacts and strategic initiatives Forward-Looking Statements This section contains forward-looking statements regarding future events and results, based on current expectations and projections, subject to inherent risks - The report contains forward-looking statements identified by terms such as 'anticipate,' 'believe,' 'expect,' and 'will,' which involve risks and uncertainties[104] - Investors should not place undue reliance on forward-looking statements, as actual results may differ materially due to factors outlined in the company's annual report on Form 10-K[104][105] Overview Envestnet empowers financial advisors and service providers with technology and intelligence, serving approximately 107,000 advisors and 6,900 companies with recurring revenue - Envestnet's mission is to empower financial advisors and service providers with innovative technology, solutions, and intelligence to deliver an intelligent financial life to their clients[107] - The company serves approximately 107,000 advisors and 6,900 companies, including 16 of the 20 largest U.S. banks and 47 of the 50 largest wealth management and brokerage firms[108] - Envestnet's business model is characterized by a high degree of recurring and predictable financial results[108] Recent Developments Recent developments include macroeconomic impacts, a $20.0 million Convertible Promissory Note, settlement of $45.0 million in Convertible Notes, and a reduction in force - Macroeconomic conditions, including geopolitical uncertainty and rising inflation, continue to cause volatility in global financial markets, potentially impacting Envestnet's financial performance[111] - The Company issued a $20.0 million Convertible Promissory Note to a private company on January 31, 2023, with an 8.0% interest rate[112] - The Convertible Notes due 2023, totaling $45.0 million, matured and were settled on June 1, 2023, using cash on hand and Revolving Credit Facility borrowings[114] - A reduction in force initiative and organizational realignment resulted in $8.2 million and $14.4 million in total severance expense for the three and six months ended June 30, 2023, respectively[115] Segments Envestnet operates two primary business segments: Envestnet Wealth Solutions, which provides unified wealth management software and services, and Envestnet Data & Analytics, which offers a data aggregation and intelligence platform - Envestnet Wealth Solutions is a leading provider of unified wealth management software and services[116] - Envestnet Data & Analytics is a leading data aggregation, intelligence, and experiences platform[116] Key Metrics Envestnet Wealth Solutions saw an increase in total platform assets to $5.42 trillion and total platform accounts to 18.67 million as of June 30, 2023. Total advisors also grew to 107,248. The segment experienced positive net flows in AUM/AUA, offset by reclassifications to subscription-based billing Envestnet Wealth Solutions Segment Key Metrics | Metric | June 30, 2022 | June 30, 2023 | | :------------------------ | :------------ | :------------ | | Total Platform Assets (in millions) | $4,990,163 | $5,422,164 | | Total Platform Accounts | 17,865,489 | 18,671,007 | | Total Advisors | 105,232 | 107,248 | Asset Rollforward - Six Months Ended June 30, 2023 (in millions) | Metric | As of Dec 31, 2022 | Gross Sales | Redemptions | Net Flows | Market Impact | Reclass to Subscription | As of June 30, 2023 | | :---------------- | :----------------- | :---------- | :---------- | :-------- | :------------ | :---------------------- | :------------------ | | Total AUM/A | $708,556 | $107,879 | $(77,867) | $30,012 | $55,294 | $(15,011) | $778,851 | Envestnet Data & Analytics Segment Key Metrics | Metric | June 30, 2022 | June 30, 2023 | | :---------------- | :------------ | :------------ | | Number of paying users (in millions) | 37.2 | 38.0 | | Number of firms | 1,731 | 1,873 | Operational Highlights Consolidated revenue decreased by 2% for the three months ended June 30, 2023, to $312.4 million, primarily due to declines in asset-based and subscription-based revenue in the Data & Analytics segment. Despite this, adjusted EBITDA saw a slight increase of 1% to $57.8 million, while net loss attributable to Envestnet, Inc. improved by 8% Consolidated Operational Highlights (in thousands, except percentages) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | $ Change | % Change | | :--------------------------------------- | :------------------------------- | :------------------------------- | :------- | :------- | | Total consolidated revenue | $312,434 | $318,852 | $(6,418) | (2)% | | Consolidated net loss attributable to Envestnet, Inc. | $(21,416) | $(23,285) | $1,869 | 8% | | Adjusted EBITDA* | $57,785 | $57,126 | $659 | 1% | | Adjusted net income* | $30,391 | $32,024 | $(1,633) | (5)% | | Adjusted net income per diluted share* | $0.46 | $0.49 | $(0.03) | (6)% | - Envestnet Wealth Solutions' asset-based revenue decreased by 3%, while subscription-based revenue increased by 3% for the three months ended June 30, 2023[122] - Envestnet Data & Analytics' subscription-based revenue decreased by 11% for the three months ended June 30, 2023, primarily due to competitive pricing pressures[122] Results of Operations Consolidated revenue decreased by 2% for the three months and 5% for the six months ended June 30, 2023, leading to a smaller operating loss but higher net loss due to tax provision Consolidated Results of Operations (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total revenue | $312,434 | $318,852 | $611,141 | $640,215 | | Total operating expenses | $327,746 | $350,575 | $637,510 | $678,659 | | Loss from operations | $(15,312) | $(31,723) | $(26,369) | $(38,444) | | Net loss attributable to Envestnet, Inc. | $(21,416) | $(23,285) | $(62,644) | $(37,144) | - Asset-based recurring revenue decreased by 3% for the three months and 8% for the six months ended June 30, 2023, primarily due to a decrease in asset values[125][139] - Employee compensation decreased by 7% for the three months and 8% for the six months ended June 30, 2023, largely due to outsourcing arrangements, reduction in force, and organizational realignment[130][144] - General and administrative expenses decreased by 19% for the three months and 3% for the six months ended June 30, 2023, driven by lower lease restructuring costs and litigation expenses, partially offset by increased software and maintenance charges from outsourcing[131][145] Segment Results Envestnet Wealth Solutions reported increased income from operations, while Envestnet Data & Analytics experienced increased losses for both periods Income (Loss) from Operations by Segment (in thousands) | Segment | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Envestnet Wealth Solutions | $23,399 | $3,968 | $46,862 | $29,237 | | Envestnet Data & Analytics | $(10,993) | $(3,705) | $(18,773) | $(9,292) | | Nonsegment operating expenses | $(27,718) | $(31,986) | $(54,458) | $(58,389) | Envestnet Wealth Solutions Envestnet Wealth Solutions' income from operations significantly increased for both periods, driven by growth in subscription-based and professional services revenue Envestnet Wealth Solutions Revenue (in thousands) | Revenue Type | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Asset-based | $185,762 | $191,972 | $362,694 | $394,689 | | Subscription-based | $75,509 | $73,568 | $151,994 | $142,105 | | Professional services and other | $10,310 | $6,460 | $13,553 | $8,774 | | Total revenue | $271,581 | $272,000 | $528,241 | $545,568 | - General and administrative expenses for Envestnet Wealth Solutions decreased by 34% for the three months and 20% for the six months ended June 30, 2023, primarily due to lower lease restructuring and asset retirement costs[160][173] - The number of financial advisors with asset-based recurring revenue increased from approximately 38,000 to 39,000, and AUM/AUA client accounts increased from 2.6 million to 2.8 million from June 30, 2022, to June 30, 2023[154][167] Envestnet Data & Analytics Envestnet Data & Analytics reported increased losses from operations for both periods, primarily due to declining subscription-based revenue and higher G&A expenses Envestnet Data & Analytics Revenue (in thousands) | Revenue Type | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Subscription-based | $39,450 | $44,552 | $80,044 | $90,749 | | Professional services and other | $1,403 | $2,300 | $2,856 | $3,898 | | Total revenue | $40,853 | $46,852 | $82,900 | $94,647 | - Subscription-based recurring revenue decreased by 11% for the three months and 12% for the six months ended June 30, 2023, primarily due to competitive pricing pressures in the research business[176][186] - General and administrative expenses increased by 26% for the three months and 44% for the six months ended June 30, 2023, largely due to increased software and maintenance charges from the outsourcing arrangement with TCS[180][191] Nonsegment Nonsegment operating expenses decreased by 13% for the three months and 7% for the six months ended June 30, 2023, driven by lower non-cash compensation and severance Nonsegment Operating Expenses (in thousands) | Operating Expenses | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Employee compensation | $19,360 | $23,014 | $35,286 | $41,053 | | General and administrative | $8,358 | $8,972 | $19,172 | $17,336 | | Total nonsegment operating expenses | $27,718 | $31,986 | $54,458 | $58,389 | - Employee compensation decreased by $3.7 million (16%) for the three months and $5.8 million (14%) for the six months ended June 30, 2023, due to lower non-cash compensation, severance, and salaries[196][199] - General and administrative expenses increased by $1.8 million (11%) for the six months ended June 30, 2023, primarily due to governance-related expenses from activist shareholder activity[200] Non-GAAP Financial Measures This section defines and reconciles non-GAAP financial measures, including adjusted revenue, adjusted EBITDA, and adjusted net income, used to assess operating performance - Adjusted revenue excludes the effect of purchase accounting on the fair value of acquired deferred revenue[202] - Adjusted EBITDA excludes items such as deferred revenue fair value adjustment, interest, taxes, depreciation, amortization, non-cash compensation, restructuring, severance, litigation, and foreign currency impacts[203] - Adjusted net income applies a normalized tax rate (25.5%) to net income after adjusting for various non-cash and non-recurring items[204][216] Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(23,132) | $(24,268) | $(65,893) | $(38,976) | | Add (deduct) adjustments | $80,917 | $81,394 | $179,092 | $151,799 | | Adjusted EBITDA | $57,785 | $57,126 | $113,209 | $112,823 | Reconciliation of Net Loss to Adjusted Net Income and Adjusted Net Income Per Diluted Share | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(23,132) | $(24,268) | $(65,893) | $(38,976) | | Adjusted net income | $30,391 | $32,024 | $60,540 | $63,020 | | Adjusted net income per diluted share | $0.46 | $0.49 | $0.91 | $0.96 | Liquidity and Capital Resources Cash and cash equivalents decreased to $59.0 million as of June 30, 2023, with decreased operating cash flow and increased cash used in financing activities - Cash and cash equivalents decreased to $59.0 million as of June 30, 2023, from $162.2 million at December 31, 2022[220] Summary of Cash Flows (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $39,268 | $52,642 | | Net cash used in investing activities | $(96,667) | $(98,008) | | Net cash used in financing activities | $(49,388) | $(43,741) | | Net change in cash, cash equivalents and restricted cash | $(103,154) | $(91,164) | - Net cash used in financing activities increased by $5.6 million, primarily due to settling $45.0 million of Convertible Notes due 2023, partially offset by $20.0 million in Revolving Credit Facility borrowings[225] Commitments and Off-Balance Sheet Arrangements The Company has various purchase obligations and indemnification clauses, but no material payments are expected, with legal proceedings referenced from Note 19 - The Company includes various indemnification and guarantee clauses in its arrangements but believes it is unlikely to make material payments under these provisions[94] - Details regarding the acquisition of Redi2 Technologies are provided in Note 3, and legal proceedings are discussed in Note 19[226][227] Critical Accounting Policies and Estimates The preparation of financial statements requires significant judgments and estimates, particularly concerning revenue recognition, asset impairment, and income taxes - Critical accounting estimates include revenue recognition, impairment of goodwill and acquired intangible assets, and income taxes[228] - These estimates require significant judgments and assumptions, and actual results may differ materially[228] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes to the Company's market, foreign currency, or interest rate risks have occurred since the 2022 Form 10-K filing - No material changes to market, foreign currency, or interest rate risks have occurred since the 2022 Form 10-K filing[229] Item 4. Controls and Procedures Management concluded that the Company's disclosure controls and procedures were effective as of June 30, 2023, with no material changes in internal control - The Company's disclosure controls and procedures were evaluated and deemed effective as of June 30, 2023[231] - No material changes to internal control over financial reporting occurred during the six months ended June 30, 2023[232] PART II - OTHER INFORMATION This section provides additional information including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings This section incorporates by reference the detailed information on legal proceedings from Note 19—Commitments and Contingencies in Part I - Information on legal proceedings is incorporated by reference from Note 19—Commitments and Contingencies[234] Item 1A. Risk Factors This section advises investors to consider the risks summarized here and in the 2022 Form 10-K, with no material changes to previously disclosed factors - Investors should consider the risks outlined in this section and in Part I, Item 1A of the 2022 Form 10-K[235] - No material changes to the risk factors disclosed in the 2022 Form 10-K have occurred[235] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company did not make any purchases of equity securities under its share repurchase program during the six months ended June 30, 2023 - No equity securities were repurchased under the share repurchase program during the six months ended June 30, 2023[236] - As of June 30, 2023, 0.3 million shares remained available for repurchase under the program, which was authorized on February 25, 2016[236] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the reporting period - No defaults upon senior securities occurred[238] Item 4. Mine Safety Disclosures This item is not applicable to the Company - Mine Safety Disclosures are not applicable to the Company[239] Item 5. Other Information There is no other information to report under this item - No other information is reported under this item[240] Item 6. Exhibits This section refers to the exhibit index for a list of all exhibits filed with this report - A list of exhibits is provided in the exhibit index[241] Index to Exhibits This index lists all exhibits accompanying the Form 10-Q, including certifications and XBRL documents - The index lists various exhibits, including CEO and CFO certifications (31.1, 31.2, 32.1, 32.2) and XBRL documents (101.INS, 101.SCH, 101.CAL, 101.LAB, 101.PRE, 101.DEF, 104)[244] Glossary of Terms This section provides definitions for abbreviations and acronyms used throughout the Form 10-Q, clarifying terminology - The glossary defines abbreviations and acronyms such as AETR, ASC, ASU, Convertible Notes, ETR, GAAP, IRA, PSU, R&D, Redi2, Revolving Credit Facility, RIAs, RSU, SEC, SOFR, TCS, and Yodlee[248] Signatures The report is duly signed on behalf of Envestnet, Inc. by its Chief Executive Officer, Chief Financial Officer, and Senior Vice President, Financial Reporting - The report was signed by William C. Crager (CEO), Peter H. D'Arrigo (CFO), and Matthew J. Majoros (SVP, Financial Reporting) on August 4, 2023[251]