Envestnet's (ENV) CEO Jud Bergman on Q2 2014 Results - Earnings Call Transcript

Aug. 6.14 | About: Envestnet, Inc. (ENV)

Envestnet Inc. (NYSE:ENV)

Q2 2014 Earnings Conference Call

August 6, 2014 5:00 PM ET

Executives

Chris Curtis – SVP and Treasurer

Jud Bergman – Chairman and CEO

Pete D’Arrigo – CFO

Analysts

Alex Kramm – UBS

Peter Heckmann – Avondale Partners

Hugh Miller – Sidoti & Company

Chris Shutler – William Blair

Chris Donat – Sandler O’Neill

David Grossman – Stifel Financial

Operator

Please stand by. Good day everyone and welcome to the Envestnet Second Quarter 2014 Earnings Conference. As a reminder, today’s presentation is being recorded.

At this time I would like to turn the conference over to Mr. Chris Curtis, Vice President and Treasurer. Please go ahead, sir.

Chris Curtis

Thank you. Good afternoon everyone. With me on today’s call are Jud Bergman, Chairman and Chief Executive Officer; and Pete D’Arrigo, Chief Financial Officer. Our second quarter earnings press release and associated Form 8-K can be found at envestnet.com under the Investor Relations section.

During this conference call, we will be discussing certain non-GAAP information, including adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share. This information is not calculated in accordance with GAAP and may be calculated differently than other companies’ similarly titled non-GAAP information. Quantitative reconciliations of our non-GAAP financial information to the most directly comparable GAAP information appear in today’s press release.

During the call we will also be discussing certain forward-looking information. These discussions are not guarantees of future performance and therefore you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that could cause them to differ materially from what we expect. Please refer to our most recent SEC filings as well as our earnings press release, which are available on our website for more information on factors that could affect these matters.

This call is being webcast live and will be available for replay for one month on our website. All remarks made during the call are current at the time of the call. They will not be updated to reflect subsequent material developments. We will take questions after our prepared remarks.

With that, I will turn the call over to Jud.

Jud Bergman

Thank you, Chris. Hello, everyone. I add my own welcome to you this afternoon.

Envestnet’s unified wealth management platform continues to enable and even accelerate the transformation in the financial advisory profession towards a more transparent, more objective and a fee-based fiduciary practice model. Affluent and high net worth investors increasingly are using financial advisors. The movement to fee-based compensation and away from commission-based compensation continues and is the primary driver of our growth.

Also, advisors continue to move into independent practice centers. And the firms housing these advisors – registered investment advisors, broker dealers, banks and insurers are increasingly pursuing outsource technology solutions to help them leverage their business.

These trends propel our growth and drive our developmental efforts as we empower advisors to achieve better portfolio outcomes for their clients and to reach higher standards in the management of their practices.

During the second quarter, we continued to drive growth on several fronts. We added more than 1,000 advisors to our platform, bringing the total number of advisors to more than 33,000. Nearly 25,000 of these advisors have assets under management or administration, now totaling $210 billion as a result of advisors continuing to do more business with Envestnet.

Conversion activity was high in the quarter as we onboarded more than $21 billion in new client assets. Most of the conversions this past quarter were under licensing agreements. Of those, some $17 billion were with high end RIA firms choosing our Envestnet Tamarac product offering.

Tamarac continues to attract larger firms for our rebalancing, reporting and CRM solutions. In fact, seven of the firms converting in the quarter were RIAs managing more than $1 billion each. Envestnet Tamarac is a primary growth engine for licensing revenue.

We are pleased with our performance during the past two years since acquiring the company and are enthusiastic about the growth opportunities we have going forward, attracting mid-sized and large registered investment advisory firms as well as larger enterprises like William Blair.

Our $2 billion of conversion and assets under management or administration are an example of the lumpiness of the conversion part of our organic growth. Our implementation teams are at full capacity. They’ve never been busier and are working diligently in converting several large enterprises in the broker-dealer, bank and insurance channels. And several of these conversions are larger than we’ve seen recently. As a result, we expect conversions will continue to drive meaningful organic growth in advisors accounting assets in the coming quarters.

Beyond our organic growth, acquisitions remain a means for us to leverage our core competence of completing large sale conversions and thereby accelerate our growth. With respect to WMS, several clients have converted from the legacy platform to Envestnet’s unified web-based platform and the remaining are in process.

We expect most firms will convert this calendar year and expect a few to convert during 2015. WMS should deliver approximately $12 million of annual adjusted EBITDA once fully integrated. Meanwhile, we are effectively managing WMS costs and are achieving more efficiencies in the near term than originally planned.

We recently announced another consolidating acquisition during the past quarter, Placemark Investments. Placemark delivers unified managed account or UMA programs and portfolio management solutions, including a patented overlay and tax optimization solution. And they deliver this for banks, full service brokers and RIA firms.

This acquisition solidifies Envestnet’s leadership in UMA technology, strengthens our AUM and overlay portfolio management capabilities and expands our presence in the full service broker-dealer channel, giving us added resources to serve a broader spectrum of wealth management needs. Upon closing, Envestnet will support over $24 billion in UMA assets, the leading independent platform provider.

Included in the $66 million purchase price are certain financial assets, primarily cash and deferred tax assets which we value at approximately $16 million. As a result, the net purchase price net of these financial assets is approximately $50 million. We expect that Placemark, which is modestly profitable today, will generate free cash returns at or above our target for consolidating acquisitions of 25% once the integration is complete.

Placemark’s platform will initially operate in tandem with Envestnet’s platform and a full integration and full consolidation is expected to occur and be completed sometime during 2016. We expect closing the transaction during the fourth quarter of this year.

We also invested further in our retirement solutions effort through the acquisition of a small provider of personal participant advice solutions to retirement plans. This helps Envestnet retirement solutions round out our product offering to advisors who support the small and mid-sized retirement plan market.

To fund the purchase of Placemark and to provide access to capital for future strategic activity, we established a credit facility and filed a shelf registration. These actions provide us with balance sheet flexibility and ready access to capital as we selectively pursue further opportunities to accelerate our growth to disciplined strategic activity.

I will conclude with a few remarks in a moment, but first, I would like to turn it over to Pete D’Arrigo, our Chief Financial Officer, to discuss our financial performance in greater details. Pete?

Pete D’Arrigo

Thank you, Jud. Good afternoon, everyone, and thank you for joining our call today. In the second quarter of 2014, revenue from assets under management or administration grew 72% to $70.7 million compared to $41.2 million in the second quarter of 2013.

Licensing and professional services revenue in the second quarter was $14.1 million, up 36% from $10.4 million a year ago. In total, adjusted revenue increased 64% to $84.8 million in the second quarter from $51.7 million last year.

During the second quarter of this year, we established an investment institute to provide educational content to financial advisors as well as information on trending topics within the industry. This ongoing activity necessitates a change in the way our annual Advisor Summit which takes place in May is shown in the income statement.

Instead of revenue and expense being included in other income net basis, there’s $1.6 million of revenue related to the Advisor Summit included in licensing and professional services. Excluding the Advisor Summit licensing and professional services revenue would have increased 20% year-over-year and adjusted revenue would have shown a 61% increase over last year.

Our cost of revenue increased to $38 million for the quarter from $19.6 million last year. This includes $1.6 million of cost related to the Advisor Summit. Excluding those costs as a percentage of revenue from assets under management or administration, our cost of revenue was 51% consistent with the first quarter.

Adjusted EBITDA was $12.8 million for the first quarter, 38% higher than the 2013 second quarter. Adjusted earnings per share increased to $0.18 in the second quarter, up 38% from $0.12 last year. During the second quarter, we recognize a pretax gain of $1.8 million which is included in other income reflecting a recovery from a vendor of certain expenses we incurred during 2013. This is a onetime benefit which we have adjusted out to our non-GAAP financial measures for the quarter.

Our diluted share count during the quarter was 36.8 million shares, up 1.6 million shares from the second quarter of 2013 due primarily to the impact of a higher stock price on the calculation of diluted shares.

Look forward to the third quarter of 2014, relative to last year, we expect our revenue from assets under management or administration to be up 22% to 24%. This reflects an effective fee rate of approximately 13.9 to 14.1 basis points on our beginning AUMA asset base of approximately $210 billion.

Licensing and professional services revenue should be up approximately 27% to 31%. We expect adjusted revenues to increase between 23% and 25%. And we expect cost of revenue to be between 51% and 52% of AUMA revenue.

Our adjusted EBITDA is expected to increase 33% to 36%. Regarding income taxes, we expect our effective tax rate for the third quarter to be approximately 40%. Diluted shares outstanding should be approximately 37 million shares based on the current stock price. These expectations translate to adjusted earnings per share of $0.19.

Expectations specific to Placemark are not included in our guidance for the third quarter as we expect t close that transaction during the fourth quarter.

Thank again for listening today and for your support of Envestnet. Now, I will hand it back to Jud for his closing remarks.

Jud Bergman

Thank you, Pete. We believe Envestnet is well-positioned to deliver meaningful organic growth in 2014 and beyond and to accelerate that growth of disciplined strategic activity such as the recently announced Placemark acquisition.

During 2014, we expect to exceed our long-term targets on both the top and bottom line aided by a full year of revenue from WMS acquisition. We expect revenue growth of 38% to 40% compared to 2013. We expect continuing operating leverage in our core business while we integrate WMS and invest additional resources in the areas of onboarding for large enterprise clients as well as investing in new initiatives like retirement solutions. We expect adjusted EBITDA to grow between 37% and 40% compared to 2013, meaningfully above our long-term target of 25%.

These expectations exclude any expected impact from Placemark. I want to thank you again for your time this afternoon. And thank you sincerely for your support of Envestnet. With the conclusion of these prepared remarks, we are happy to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And our first question comes from Alex Kramm with UBS.

Alex Kramm – UBS

Hey, good evening everyone.

Jud Bergman

Hi, Alex.

Alex Kramm – UBS

I guess coming back to the quarter for a second here, when I look at the flows – the net flows and AUM, AUA business I guess, if you can call it that. A little bit slower than what you’ve said in last year quarters, so just curious, is it just the conversions that are lumpy that you saw this quarter or are there other things that you would highlight? I think in the second quarter you’ve got obviously tax season. A lot of money was made last year in stock markets. And maybe there’s some other seasonality you would highlight. So just talk a little bit about what you’re seeing there in terms of the flows that you’re getting.

Jud Bergman

I think just even the way you framed the question, shows a textured understanding of it, Alex. The first quarter was very high activity, above trend, above expectations. The second quarter was very strong from inorganic same store sales basis. But we did not have the organic conversion activity that we did in the first quarter on the AUMA side. And as I mentioned, that’s lumpier. And there’s going to be very strong quarters with respect to our AUMA conversion activity and there’s going to be quarters that aren’t so strong. The second quarter was one that wasn’t so strong.

Alex Kramm – UBS

Okay, fair enough. So then maybe secondly, on Placemark – this is more of an understanding question. But I think you just talked about 2016 as the integration year and also the closing – on of the closing of the transactions obviously end of this year, but also closing of the integrations.

So just curious, why does it take a year between closing transaction to actually starting the integration and then I mean is it – obviously you have a lot of other things going on. But at the same time, does it preclude you from any sort of upselling or anything like that that could also upside with already in ‘15?

Jud Bergman

So that’s a great question. I’d just say several things about that. First of all, we are responsive in the marketplace to opportunities like Placemark. Placemark is a transaction of the company that we believe exceeded all of our hurdle rate requirements. It is a very solid consolidation opportunity, but it brings strategic opportunity as well. It strengthens our overlay capabilities within ultimately the PMC part of our organization.

It also strengthens our foothold, our presence if you will in the full service regional broker dealer marketplace.

Now they have a very stable, web-based platform that we’re not in any urgency to convert their client base off of. Now part of that is we’re trying to balance the business where we believe that would be organic conversions in the organic growth are the most important part of our growth.

And we’re very cognizant that we’ve got the same conversion teams that are doing organic conversions as our doings about the strategic conversions.

So what we’re looking to do is to balance that workload. We don’t want to do anything that would slow down our organic rate of growth. We’re still working through the final stages of the WMS conversion. And so we see that the best approach is to take a little bit longer time to do the full conversion.

Now in the meantime that does not in any way foreclose or slowdown our efforts at doing some cross-sell and upsell opportunities to the Placemark client base. Now we’re not even close on the transaction yet, but we really reasonably expect that we will see some benefits from that much earlier than when the conversion is going to take place.

So we’ve got a high degree of enthusiasm about the revenue opportunities for this transaction. And the longer timeline for a complete conversion I do not believe will eliminate or even slow down our ability to do some of those cross-sells. And there are reasons why, but I think I’ve given you enough of a reason – enough of an answer without going into the details of how we would run the business and do some level of integration before we do the complete conversion.

Alex Kramm – UBS

No, that’s great. That’s a very helpful color. Maybe just lastly and it’s somewhat following up on a comment you just made because you said upselling and cross-selling. I think that’s actually something that you haven’t talked about on these earnings calls in a while because it’s been all about conversions and things like that.

But can you give us some updated stats in terms of where you see upsell and cross-sell activity because in the past there’s been opportunities to bring in, let’s say, like reporting for example and then take that as a start and then over time get deeper penetrated with these advisory firms or advisors in and of itself. So any updated numbers or wins you can share on that end? And that’s it for me. Thanks.

Jud Bergman

So, Alex, we monitor that. That’s something that’s important to our business. We do not disclose and we do not track that externally. Part of it is it’s just that we don’t believe that that would be in the long run helpful to monitor that each quarter. But from an internal standpoint, we monitor it, we manage to it and we have strategies in place to try to do that upselling and cross-selling.

The most recent experiences, there’s been anywhere from $200 million to $1 billion per quarter of upsell opportunities. And that’s something that it bounces around. And so it’s something that’s an important part of overall revenue enhancement but it’s not something that we’re going to be reporting on a regular basis.

Alex Kramm – UBS

No, that’s fine, just looking for some color that you’re still very much focused on it and it’s moving in the right direction. So I think that helped. Thanks.

Jud Bergman

Thanks, Alex.

Operator

And we’ll go next to Peter Heckmann with Avondale Partners.

Peter Heckmann – Avondale Partners

Good afternoon, gentlemen. Nice results. I wanted to ask primarily as regards to Placemark, understanding the deal is not done, but in terms of trying to take a first pass at modeling the deal, can you talk a little bit more about how you expect it to fold into the results, maybe what type of fee rate you might expect on the $14 billion of assets? And then as well, maybe some early expectations of how that might fold in on the gross margin line.

Pete D’Arrigo

Well, we’re still going through the due diligence on our contract analysis and how that revenue should be treated. So I’m going to stay away from the basis point impact. But I will say in the near term we would expect around $500,000 or so per quarter incremental to adjusted EBITDA until the 2016 timeframe when we should leave 2016 much closer to hitting that hurdle rate that Jud articulated earlier.

Peter Heckmann – Avondale Partners

I see, okay. And when we talk about final conversion in 2016, I assume we’re talking the second half. Is it too early to put a finer point on it?

Jud Bergman

I think it’s still too early to put a finer point on that, Pete. I understand why you want it, I understand why the model needs it but as we get closer to this, as we complete the acquisition, we’ll give better guidance on that.

Peter Heckmann – Avondale Partners

Sure, sure, fair enough. And then last question, I’ll get back in the queue. On WMS, we’re talking about potentially one or two or three I think is roughly the number of institutions we’re talking about sneaking into 2015 and really trying to avoid a conversion in the fourth quarter. Given the advancement of time, can you put a finer point on final conversion there? Is that something we would expect in maybe the March, April, May timeframe of 2015?

Jud Bergman

So I think that – again, it’s – we’re getting closer to getting a better picture about it. I don’t know if there’s a lot that I would add from last time. I expect that one or two will get across the finish line by the end of the first quarter. And I think that one or two may go later into 2015 but I expect that we’re going to be exiting 2015 with the full benefit of the post-conversion dividend.

Peter Heckmann – Avondale Partners

Got it, got it. I appreciate feedback.

Operator

And from Sidoti, we’ll go next to Hugh Miller.

Hugh Miller – Sidoti & Company

Hi, good afternoon.

Pete D’Arrigo

Hi.

Jud Bergman

Hi, Hugh.

Hugh Miller – Sidoti & Company

So one question just touching back on kind of the upselling, and I completely understand that from quarter to quarter it’s extremely lumpy, you guys track it and aren’t looking to kind of get metrics on it. But as that being a huge long-term driver of additional growth, what’s the feedback that you’re kind of hearing from advisors over time as to if they may be reluctant to kind of move on to using additional services from you guys and how have you kind of adjusted things in order to kind of make it more appealing to them? Is there something that’s kind of getting them to be more open to using more of the platform?

Jud Bergman

So there is a high degree of openness, willingness to try and even acceptance for more services from a trusted partner like Envestnet. But the differences by channel are very important. If we take the independent broker-dealer channel, many of those have their own in-house investment solutions, so upsell opportunities are limited from performance reporting to rebalancing and portfolio management software and to a limited degree third party access to strategists and separate account managers.

But there’s limited opportunity in many cases to PMC portfolio solutions. And so the opportunity and over time, it reveals itself in higher revenue and higher assets per advisor in that channel. Over time, it’s clear that we’re making progress by doing more business at the account and the revenue level from each advisor.

On the RIA side, it’s a bit different. They may start with a need for rebalancing software and then migrate to rebalancing plus performance reporting and ultimately rebalancing plus performance reporting plus CRM. And so what we look at over time is metrics like accounts per advisor, revenue per advisor, contract value per practice.

And all of those things are trending very favorably for us. And we’re looking at that and finding, okay, there’s a tremendous opportunity to do more business with our core advisor base. Now, while that’s happening, we are also benefiting from huge growth from organic conversions that are coming in in chunks, generally speaking, or one of two different product or service offerings.

One is that base advisors portfolio manager, that APM rebalancing offering and the other one is the performance reporting offering. And so those come in and it kind of – because they come in in chunks, it sometimes crowds out or drowns out some of the very meaningful progress we’re making with existing clients, existing advisors to migrate them.

But we’re finding a key element of our message is resonating very well. And that key element was supported by the IPA study that we had conducted last year. And I cited it many times and that’s that advisor practices that use a fully integrated or a fully unified wealth management technology solution spend 40% less time with back office and technology problems. That translates into 90% more face time with clients. And that translates into an astonishing 110% faster growth in their practices on a per account level than practices that don’t use a fully integrated suite.

That core message is resonating. Now it doesn’t resonate overnight, it resonates over time, over quarters and over years. And that’s our fundamental value proposition that when you use a unified solution, you’re practice gets lift. And that’s resonating and I expect that it will continue to be a core driver of our growth over the long-term.

Hugh Miller – Sidoti & Company

It’s very helpful insight. Thank you. And I guess in some of the prepared remarks, you talked about kind of the conversion pipeline and kind of the candidate conversion that you’re looking at in trying to get in the pipeline seems to be from what you’re saying, larger in average size than what you’ve seen in the past, is that correct? And if so, is there a particular reason why these potential conversions are kind of growing in size aside from market appreciation and those types of things?

Jud Bergman

Yes, so that is true. You heard me correctly. It’s an encouraging aspect of our business if you look down – if you look into the pipeline of enterprise conversion opportunities. And you asked the question of why is that. And I think that there’s several factors. One is that as Envestnet proves up its solutions, firms that might not have considered us three, four, five, six years ago are now taking a second and even in some cases, a third look at us. And while they may have passed on the first or in some cases the second try, they are now signing up with us.

Now why is that part of that REIT, is that we’ve grown, we’ve proved up the solution, that opens up new doors of opportunity for us.

But I also think that’s a positive sort of Envestnet-centric element. But I think that there is a very powerful element that is beyond Envestnet that I think is accelerating some of this. And it’s the development of mobile technology that enables advisors to run their business away from a desktop.

And I believe that this is driving primary demand from advisors who want more flexibility in how they render their wealth management. And advisors that are with captive, legacy, mainframe systems are having a tough time getting those systems into a web-based or a tablet-based environment.

And so I believe that that’s a powerful external motivating factor at the home offices at the very highest level, the CEO level. The presidents that run the distribution arms of these firms need to be, want to be responsive to their best advisors who want that mobile solution now.

And I think increasingly large firms are concluding that they’re going to get a better solution faster and ultimately more cheaply by partnering with Envestnet than in developing it in house.

Hugh Miller – Sidoti & Company

Great color there. I do appreciate that. And another question just with regards to as we take a look at the WMS acquisition and the time period between purchase and integration and now Placemark and that kind of time period, given how busy you are at integrating those deals and also the organic conversion pipeline, does that make you guys more selective when you consider other consolidating or strategic transactions or is there the mindset that you just do more hiring in order to kind of get something else to be a part of the system if it makes sense to do so?

Jud Bergman

So that’s a great question. And I was not prepared to answer that, so I’m going to answer that but it may not be a fully thought through answer with respect to how we exactly approach that.

I would like to first of all talk about consolidating transactions. And then I may have a little different approach on the strategic transaction. On the consolidating transactions, we’ve been very selective and very disciplined in making sure that they need or exceed our required hurdle rates.

I don’t see those required hurdle rates either being lowered nor do I see them being increased. I think that we’ve got a core operating competence of doing large scale and complex conversions and we want to leverage that through disciplined strategy activity.

Now having said that, we’re trying to balance doing that activity in a way that it does not impede, slow down or mitigate in any way our very strong organic growth, our organic conversion growth.

And so from there, it would not be a bad conclusion to draw that over the next six months, there may be a decline of consolidating acquisition activity. That would not be a crazy conclusion to make.

Strategically, we continue to look for and are evaluating how best to round our offering for advisors who depend on investment. So I would say that there is a continued high level of discipline around strategic merger and acquisition activity and as we’ve said from when we first went public, we would expect to do more consolidating transactions than strategic transactions.

And I expect that that’s still the case, but would not rule out a strategic acquisition. And we’re certainly not out of the market for doing a strategic acquisition.

Hugh Miller – Sidoti & Company

Okay, great color there. And just a quick follow up on that, so that then as you think about kind of the timeframe and doing these consolidations and integrating them, is there a challenge to hiring some more staff in order to kind of accelerate that process.

Given that it seems like you’ll continue to have strong conversions and consolidating opportunities, is there any reason why you wouldn’t just add some headcount? Is there a reason you need from a financial standpoint or finding the right people?

Jud Bergman

We have it. And I go back to that first outlook call back in February of 2011 and when I say the first outlook, it was our second or our third quarterly call, but it was the first call that we gave forward outlook and dimensionalize the opportunity in the coming four quarters.

I think we’ve close to quadrupled our onboarding resources since that time when we signaled we were going to invest in it.

I also signaled at that time that I did not think – while I thought that our core platform was highly scalable, I was not certain that we would be able to scale the onboarding effort. I expressed I think a couple of times that I thought that a twofold increase in the headcount for onboarding would not in the short run necessarily lead to a two or threefold increase in onboarding capabilities because you have to bring them on and train them.

I think what we have found and I’m pleasantly surprised is that while we nearly quadrupled the headcount, I believe we’ve very nearly and perhaps increased our onboarding capability by at least that and maybe more.

So we’re continuing to invest in that area. I see it now as more of a gradual investment. I do not believe it’s a step function investment in that area is warranted. But you’re right, we don’t see any near-term let up in these large scale conversions. And we certainly don’t want to be shorthanded in that core capability.

Hugh Miller – Sidoti & Company

Great, I appreciate your insight into that. Thank you so much.

Operator

And we’ll go next to Chris Shutler with William Blair.

Chris Shutler – William Blair

Hey guys, good afternoon.

Pete D’Arrigo

Hey, Chris.

Chris Shutler – William Blair

So first question just on the guidance, Pete. I don’t know if I have my math right here, just according to the numbers. But it looks like if you – the implied guidance for Q4 in EBITDA margins, it looks like they would be ramping fairly significantly from Q3 and Q4. So I just want to make sure that that’s correct.

Pete D’Arrigo

Well, I think where we are in Q3 is certainly what we’ve guided on. There are implied outcomes which are consistent with what you’re saying, but again I’m staying away from being specific about Q4 at this point.

Chris Shutler – William Blair

Okay. But you did give the full year guidance, so it would imply an acceleration, correct?

Pete D’Arrigo

Yes.

Chris Shutler – William Blair

Okay.

Pete D’Arrigo

As long as things remain as they are right now, that’s correct.

Chris Shutler – William Blair

Okay.

Pete D’Arrigo

Again, when we do these forecasts, it’s in a market neutral environment.

Chris Shutler – William Blair

Right. Okay. And then, Jud, just a question to kind of follow up on from these questions around upselling. And I guess a question specific to PMC. So I guess it’s how do you see the PMC business evolving over the longer-term? And I guess what I’m wondering is do you see a much bigger opportunity on the asset management side of the business longer term both with BDs? It sounds like maybe a little bit less with BDs, but with BDs and RIAs. Thanks.

Jud Bergman

We do. And we see that our technology supports different practice patterns in different firms that are looking to outsource mission critical elements of their business. Some firms just want the outsourced trading and performance reporting technology.

And for those kinds of firms that tend to see themselves as their own chief investment officer, we’re going to continue to invest in our solutions.

Other firms want not only that – that’s the rebalancing in the performance reporting technology but also some frontend analytics, maybe some CRM. They also may want help on the back office side, account openings, reconciliation trade administration. And for those firms, we’re an outsource technology provider but we also do some back office administration services and we’re going to continue to invest them at.

And the area that is growing very rapidly for us now which is the PMC area is for those firms that see themselves more as a wealth advisor, more as the quarterback, more as the CEO of their practice, and they want to outsource not only the wealth management technology and certain back office services, but they also want to partner in picking funds, picking managers, doing overlay on those portfolios to generate tax alpha which in this environment has been an important source of value for a number of advisors.

And for that type of advisor, they’re going to be looking to a more complete, more holistic solution. We see that that’s a growth area as well. And it’s a certain kind of practice pattern. Now we’re not trying to force that solution to the advisor that was in practice pattern A, the one that I started with.

But it’s all about market segmentation and understanding which advisors are open and actually welcoming of the ability to partner as either a technology platform provider or as a provider of that technology platform plus some value added services. So we see it as core to our ongoing strategy.

Chris Shutler – William Blair

All right. Thanks a lot. And just one last one. With the independent advisor networks or an increase in the important source of assets for you guys, just any trends that you’d call out there or any anecdotal evidence that you’re taking share particularly within the IANs [ph] that don’t use you exclusively like a high tower of focus? Thanks.

Jud Bergman

So we continue to get a strong regular source of organic conversion from these independent advisory networks. I believe that in all the relevant cases, our share is increasing at this point, not decreasing.

But just as we are a big believer in open architecture, many of our best clients and best partners are also believers in open architecture. And we like those environments and we do well in them because we believe that we’ve got a better solution. And advisors that have choice will over time gravitate to the better solution that is the most cost-effective.

Chris Shutler – William Blair

All right, thank you.

Operator

(Operator instructions) And we’ll go next to Chris Donat with Sandler O’Neill.

Chris Donat – Sandler O’Neill

Hi, good afternoon everyone.

Jud Bergman

Hey, Chris.

Pete D’Arrigo

Hi, Chris.

Chris Donat – Sandler O’Neill

I just wanted a little more color on the conversions. Jud, you had mentioned that this quarter it was more conversions from larger RIAs and then you just made a comment too about the independent advisor networks being a decent source of conversions. As you look back over the last year or two, is there any trends you’d generalize about the conversions or are there really a lot of different trends at play here driving your organic conversion activity?

Jud Bergman

We’re seeing strength in all of our channels. And that’s independent broker-dealer, RIA, bank, insurance. And the dynamics are different driving each. Some are fairly mature markets with respect to the commission-based, the fee-based movement; that is they are almost all fee-based already. Some still are being driven by that fundamental dynamic of moving from commission-based to fee-based. Some are being driven by trying to consolidate multiple platforms onto a single primary platform, in which case we’re benefiting from that in a number of cases.

So we’re seeing opportunity in all of our core channels. We’re seeing growth at near, at or above our long-term targets in all of our channels. And then that’s the real story. The timing on any one quarter in some of those channels is going to be lumpy. And sometimes it’s going to be strong in one, other times it’s going to be strong in another. But I don’t believe there is meaningful insight that I can give you that one channel or several – these channels are growing faster than others.

Chris Donat – Sandler O’Neill

Okay. And then I thought you said – just give me a minute here [ph] – that you didn’t feel any need for a step function – that was it, yes – no need for a step function in your capacity for onboarding. Can you give us some color on how long of a look you have into future organic conversions and I guess I’m wondering if – it seems like if you got a pipeline that stretches as far as the eye can see, maybe you should. Anyway, I could play my role as Monday morning quarterback as an analyst, just want to get your thoughts just as now –

Jud Bergman

Isn’t that one of the things you do best, Chris? All analysts?

Chris Donat – Sandler O’Neill

If – well, yes that’s just – stock picking, I think there’s some doubts but, yes, Monday morning quarterbacking, yes.

Jud Bergman

No, I’m not saying you personally. I’m just saying analysts in general, right?

Chris Donat – Sandler O’Neill

Yes. Well, that’s what we’re here for, right? I mean just like newspaper columnists and people like that, we don’t do anything except pontificate.

Jud Bergman

No, that’s not true.

Chris Donat – Sandler O’Neill

Right.

Jud Bergman

So we look at conversions this way. We have to keep dry powder for the breakaway broker that leaves on a Thursday and shows up at the new office at XYZ investment advisory firm on Monday. Because if we don’t have that capacity built in, we’re going to lose a $300 million or a $700 million or a $150 million advisory that’s leaving the wire house and showing up at one of our partner firms. So that’s one set that we have to keep capacity ready to go and jump in at really a moments’ notice.

On the licensing, on the RIA side, we’ve worked hard to get to a point by adding capacity so that really for the last two plus years, every quarter has ended with a pipeline that’s larger than how it began. And what that resulted in is a lengthening of the backlog.

So the backlog which had been at six months, five months, then six, then eight, then nine, I think that we had signaled a couple of quarters ago that some backlog is healthy, too much of a backlog would have us loose business. So we’ve been investing on the on-boarding capabilities. And we’ve seen that backlog now is not getting any longer, and that’s a good fit. So the backlog period of time has for the standard RIA licensing implementation is not getting longer, and that’s a positive thing.

With respect to the third type of conversion, this is the large complex enterprise conversion. We’re seeing a lengthening of the implementation periods. This is – I believe this is less because we’re under resourced, and more because we have on the other side of the transaction, our counterparties are larger, more sophisticated organizations that have more elements of quality control, testing, retesting and they have bigger and knurlier conversions with longer transaction histories and performance histories.

And so, I think that that’s an element that we’re confronting and we’re getting on top of. But that’s a dynamic that I don’t believe that accelerating into a step function higher is going to help us there. I think what we’ve got there is we just go deeper with our best teams, flush it out more and these will take longer. And then when they land, they’re bigger.

So I don’t believe it’s the right thing, the prudent thing to do to accelerate hiring in this area. We signaled that we were going to do that in early ‘11. It was the right thing to do. And I think that we’re benefiting from that investment now. And we’re going to continue to make that investment. But it’s not going to be a step function.

Chris Donat – Sandler O’Neill

Got it. Okay, that’s very helpful Jud, I appreciate the color and I appreciate someone using the word knurlier on a earnings conference call.

Jud Bergman

I got a few ways – eye browser [ph] about that one.

Operator

And we’ll go next to David Grossman with Stifel Financial.

David Grossman – Stifel Financial

Hi, thank you. Good afternoon, I just have a couple of very quick questions and I had to hop off for a minute. So if you hit this already just let me know and I’ll circle back offline. But I have two questions, one is related to the cost of revenue line, Jud, I know it’s been trending down, some of that had to do with the WMS acquisition that started mid-year in 2013. But it continues to go up as a percentage of AUMA revenue, can you help us better understand what dynamic is going on there? And at what point does that stabilized?

Pete D’Arrigo

Well, if you again, I don’t know if you missed the comments earlier about the Advisor Summit. But the costs related to the Advisor Summit are in that cost of revenue line. And if you take that out for the second quarter, then the line is really pretty stable.

David Grossman – Stifel Financial

So flat sequentially, Pete?

Pete D’Arrigo

Yes.

David Grossman – Stifel Financial

Okay. So should we expect it to remain now in, yes, the current range, I guess it would be just around 44% which is where it was in the first quarter?

Pete D’Arrigo

Forty four would be total revenue if you look at it in terms of just AUMA revenue.

David Grossman – Stifel Financial

Oh, I’m sorry, yes, 51, I’m sorry.

Pete D’Arrigo

It will be closer to 51 or 52, yes.

David Grossman – Stifel Financial

Right. I’m sorry, yes.

Pete D’Arrigo

We kind of been there the last couple quarters. So that – again, it looks like it’s stabilizing but if the product flows will impact that [ph].

Jud Bergman

Right. Product flows impact that, we work hard – it rose fairly rapidly over the three or four quarters previous to the last two or last three, last two or three. And a lot of that was we believe just putting that UMA, that Unified Management Account technology in the hands of advisors, they’re picking managers and strategist that weren’t necessarily at scale, had different costs, in many cases higher costs. And we’ve worked hard to get ahead of that. And I think we’ve rather than getting ahead of it, we’ve worked hard to stabilize it. And I think that – I think we’ve had some results.

I don’t see in the near-term that that reversing itself. But I do see it – I do see it as stabilizing and I think we’re going to see it be fairly stable here for the foreseeable future. But yes, but that’s dependent on the product choices that advisors are making that go into the managed programs.

David Grossman – Stifel Financial

Right. And just quick financial cleanup question, Pete, I know you give some information in the third quarter, but could you help us with what the pro forma adjustment should be in the back half of the year for stock comp and other things like that?

Pete D’Arrigo

Excluding anything related to place mark [ph], we had about $3.2 million in this quarter for non-cash comp which is pretty much stock and options. And that level is pretty close and may level off a little bit into the fourth quarter, third and fourth quarter.

David Grossman – Stifel Financial

Okay. So flat for the balance of the year, and how about amortization?

Pete D’Arrigo

Flat or maybe slightly down.

David Grossman – Stifel Financial

Okay. Is that stock base comp?

Pete D’Arrigo

Stock base comp, yes.

David Grossman – Stifel Financial

Okay. Okay.

Operator

And at this time there are no further questions in the queue, Mr. Bergman, I’ll turn the call back to you for any final or closing remarks.

Jud Bergman

Did we – okay. Well, thank you. I do appreciate everyone’s participation. I see we’re on the top of the hour. And we look forward to talking with you in about three month’s time. Thank you.

Operator

And ladies and gentlemen, that does conclude today’s presentation. We thank you for your participation.

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