Financial Engines (FNGN) Larry Raffone on Q2 2016 Results - Earnings Call Transcript

| About: Financial Engines, (FNGN)

Financial Engines, Inc. (NASDAQ:FNGN)

Q2 2016 Earnings Conference Call

August 2, 2016 5:00 PM ET

Executives

Ray Sims – Chief Financial Officer

Larry Raffone – President and Chief Executive Officer

Analysts

Bob Napoli – William Blair

Peter Heckmann – Avondale Partners

Surinder Thind – Jefferies

Mike Pei – Northland Securities

Operator

Good afternoon and welcome to the Financial Engines’ Second Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Ray Sims, Chief Financial Officer. Please go ahead.

Ray Sims

Good afternoon and thank you all for being on today’s call. Before we get started, I need to remind everyone that part of today’s discussion will include forward-looking statements, such as statements regarding the integration and impact of the acquisition of Mutual Fund Store, our operating metrics, our business model, business investments and their potential impact, anticipated costs and expenses and tax rate, growth and growth opportunities, strategy, regulatory matters, business and industry trends and other factors impacting our business, changes in the financial markets, our competitive position, enrollment, retention and cancellations, success and impact of our products and services, including enhancements regarding the same, long-term objectives and financial outlook for 2016.

These statements are based on what we expect as of this conference call as well as current market and industry conditions, financial and otherwise, and we undertake no obligation to update these statements to reflect events, circumstances or changes that might arise after this call. These forward-looking statements are not guarantees of future performance or plans, and, therefore, investors should not place undue reliance on them. We refer all of you to our SEC filings for more detailed discussions of the risks that could impact our future operating results and financial conditions, which could cause actual results to differ materially from those discussed in these forward-looking statements.

I also want to inform our listeners that we will make some reference to non-GAAP financial measures during today’s call. You will find supplemental data in our press release, which reconciles our non-GAAP measures to our GAAP results, which we will remind you of often during today’s call.

Now, I would like to turn the call over to Larry Raffone, our President and Chief Executive Officer.

Larry Raffone

Thanks, Ray. Good afternoon, everyone. We are pleased you can join us. On today’s call, I’m going to provide updates on our Q2 performance and the integration of The Mutual Fund Store; and Ray Sims, our CFO, will review our Q2 2016 financial results and our outlook for the remainder the year.

But first, let’s take a look at our consolidated numbers for Q2 2016, which includes The Mutual Fund Store for the full quarter. I am pleased to report that Financial Engines had solid financial and operating results for the second quarter 2016. The integration of The Mutual Fund Store continues to go well. Revenue increased 36% to $206.2 million in Q2, compared to $78.2 million a year ago. Net income increased 6% to $9 million in Q2, compared to $8.5 million a year ago.

Diluted earnings per share decreased 13% to $0.14 in Q2, compared to $0.16 a year ago. Non-GAAP adjusted earnings per share increased 22% to $0.28 in Q2, compared to $0.23 a year ago. And non-GAAP adjusted EBITDA increased 48% to $33.4 million in Q2, compared to $22.7 million a year ago.

Our earnings release has tables that reconcile our GAAP net income to non-GAAP adjusted EBITDA, non-GAAP adjusted net income and non-GAAP adjusted earnings per share. In addition to our financial performance, we report quarterly on some important operating metrics, including assets under management, assets under contract, total clients, and enrollment rates. Please refer to our SEC filings for definitions of these operating metrics as we’ve updated these definitions slightly due to the consolidation of the two businesses.

We’ll be providing a little more clarity our AUM, including detail on our AUM flows from existing and new clients, which you can find in a table in our press release and 10-Q filings with the inclusion of The Mutual Fund Store as of June 30th, total assets under management reached to $125.3 billion, a 9% increase from the $114.5 billion in the second quarter of 2015. This includes defined contribution AUM of $115.3 billion and IRA and taxable AUM of $10 billion.

Of note, year-over-year, our AUM declined 1.7% due to the market impact on our aggregate investment exposure for all the portfolios under management, considerably different from what we considered typical for overall market performance. With the surprising outcome of the British vote to leave European Union, our AUM declined approximately 3.3% on Friday, June 24th, which was also the last Friday of the month and the day we typically mark our AUM to calculate revenue. The market levels used to determine the majority of our AUM were approximately 5% below the equivalent market levels a year ago.

Assets under contract decreased by 2% to $992 billion from $1.014 trillion a year ago. Total clients utilizing professional management services grew to more than 977,000 clients, and the average asset enrollment rate across all employers’ plans was 11.6%. Now, let’s have a closer look at the quarter. Since becoming the CEO, my focus has been on strengthening our infrastructure, our distribution, and our offering to position Financial Engines for long-term growth.

In the first six months of 2016, and in the phase of some challenging markets, we’ve been performing well against our internal execution plan and goals. We continue to expand the number of retirement plan sponsors we serve. At the end of the second quarter, we had 693 plan sponsors where professional management was available, representing over 9.3 million plan participants. As of June 30, 2016, Financial Engines been hired by 144 of the Fortune 500 companies to help their employees.

A highlight for me during the quarter was a great progress we made in establishing our provider connection with Wells Fargo. The connection, which was live in June, has been a seamless initiative from building the data feeds, to training client services teams, and now engaging with a book of plan sponsored clients. In July, the first plan sponsor to go live on the Wells Fargo platform was an existing client converting record keepers. Had we not had this new provider connection, we would have lost this client and a related AUM.

Wells Fargo has an outstanding list of clients, and we are pleased with the sales pipeline momentum. We have already signed contracts with a few plan sponsors. We expect to realize the AUM benefit from new clients as we make our services available to these plans and other new clients in 2017 and beyond. During the quarter, we saw both voluntary and involuntary cancellations normalize after the atypical start to the year. Markets became somewhat less turbulent in Q2 compared to Q1, until the final days of the quarter when the Brexit votes surprised the world markets.

As you know, we have often see increases in voluntary cancellations during periods of volatility. With Brexit, there was an associated spike in call volume and cancellations, but it was very short-lived as a quick market rebound helped to mitigate concerns. The payoff from the investment we made in our business over the last year was visible during the UK Brexit vote reaction. With deeper resources, we’re able to properly communicate the plan sponsors and clients what it all means to them and the importance of a personalized diversified portfolio.

We had all advisory briefed on the reaction to the vote and ready to address client concerns. And Brexit was the main topic of our Investing Sense Radio Show the next morning. Our response to vote was focused and fast. We quickly deployed client communications, prepared advisors for the conversation with clients, and new features like portfolio asset class control were available to give clients a little more flexibility and control over their portfolio in the wake of the news.

Market conditions like we witnessed with Brexit, illustrate how we are rapidly improving the experience we provide to our clients. With our newly expanded program features in advisor network, we believe we help clients avoid costly portfolio mistakes during uncertain markets. In regard to involuntary cancellations, sponsor terminations normalized in Q2 following an atypical Q1. Earlier this year, we were notified by a large plan sponsor client representing more than $6 billion in AUC, they would be converting to a provider without a connection to Financial Engines.

In order to avoid disruption of services for their participants, and retain a plan sponsor, we established a one-off connection with a new provider and we’re expecting to continue to manage over $400 million in AUM. Let’s have a look at our progress with the refresh campaigns. In 2015, we completed development and testing of a refresh campaigns, which strengthens our digital experience and is intended to establish a relationship-based model of engagement. As we’ve noted many times, we believe it’s essential that we innovate beyond the traditional annual campaign and establish lasting relationships with our clients.

Specifically, we’ve taken initial steps to expand our marketing model including sending out our quarterly retirement updates, which give participants a more frequent glimpse of the retirement picture, and a chance to engage with our services and more byte-size interactions such as adjusting their savings rate or modifying their risk preference. Once participants interact with us, our advisors are reaching out by email and phone to offer personalized help and strengthen their participants relationship with Financial Engines. This year we’ve been rolling out these new campaigns with encouraging early results and now the model is available to approximately half of our direct sponsors. Still as you know sponsor support is important. Not all sponsors have yet enabled the model and not all participants are ready to enroll after a single interaction with us. The upshot, it’s a relationship. It will take time for engagement to translate to trust and then to enrollment, but we’re encouraged by the early results.

Now let me talk a bit about the integration of The Mutual Fund Store. It has been about six months as we closed the acquisition and I’m very pleased that we’re executing on the integration plan. We’re receiving a positive reaction to the acquisition from our plan sponsored clients as well as employees from both legacy organizations. Rebranding of The Mutual Fund Store has been underway since the deal closed, advisor locations near our pilot sponsor already are Financial Engines branding. And we have begun to more broadly reveal our new brand identity and tone.

Our newly formed Live Events team has been presenting on the campuses of some of the largest employers in the country since the closing of the acquisition. This has been the first opportunity to hand greet participants as a newly integrated company. We are receiving support from plan sponsors promote the live events, outstanding attendance from plan participants and a strong interest from attendees to have a follow-up conversation with an advisor.

Now let me briefly walk you through the new product offer we are testing to help you understand how we see the strengths of both firms coming together.

The new product offer and testing includes enhancements to existing services plus the addition of a new tier of service, which provides a more comprehensive product offer and access to a dedicated advisor. We believe this additional tier and the enhancements will help attract a new customer demographic as well as retain existing customers looking for more comprehensive help.

As I said before, these new offers are in testing with sponsors and participants now and as we learn more we’ll be making refinements to the offer over time.

First, what is new across all tiers of service is more financial wellness content. Financial wellness is something sponsors have been asking for. So, we are excited to bring them the additional value. The Aon Hewitt 2016 hot topics survey found that 56% of employers are very likely to focus on financial well-being in 2016, up from 30% just two years ago.

Wellness includes leveraging many of the mutual fund towards capabilities like live events at plan sponsors’ offices, to promote education and our brand, blogs, online education and communications. Our financial wellness program is being promoted today existing plan sponsor clients as well as at the point-of-sale with prospective sponsors.

As for the service tier in the integrated product offer, we are testing. The first tier of service is an enhanced version of our online advice offering today which we find speech to individuals who prefer more of a do-it-yourself option. It's about giving participants tools to help them manage their retirement plan on their own and is designed for clients who maybe test driving financial engines or who are more confident and comfortable doing it themselves.

Through online tools, clients can build their own retirement plan, get advice on retirement accounts and call an advisor with questions. We will continue to offer our existing professional management as our second tier of service. The focus for this client is really helping them develop a strong plan for retirement, centered around all the retirement assets, and providing advisory access to our national advisor center.

The newest and third tier of service is based upon what the mutual fund store offers today to our retail clients and is the new level of service we are bringing into the workplace. This tier of services for clients are interested in having a dedicated financial advisor manage all of their pools of assets, their 401(k), IRA and taxable accounts for the households. It is for someone who wants a dedicated advisor; who’ll work with them to build a comprehensive financial plan that is monitored on an ongoing basis.

We have seen that as client assets grow, the needs are more complex and they want dedicated advice. We have found that when larger balance accounts cancel with us, it is to seek a more high touch service. We believe our new four service product offering will be attractive to the individual with more complex needs. The average balance of a client using our high touch dedicated advice offering is double the average balance of our workplace professional management client.

On average we have about one out of five eligible workplace participants using our professional management or online advice services. We need to expand our offering to attract the roughly 80% of plan participants who have not actively engaged with our services. We believe enhancing our existing offering and adding an additional tier of service will appeal to a greater number of participants as well as help retain existing clients.

Key to the integration is to validate this new integrated product offer through pilot programs or plan sponsors, current clients and prospective clients. With sponsors, we are testing, learning and iterating to develop product offerings that sponsors will support which we believe will help drive participant enrollment and retention.

From there, we'll focus on developing a plan for scalable deployment of the new offerings in 2017. In late July, Land O'Lakes known to be best-in-class plan sponsor because of their plan design an extremely high 401(k) plan participation rates began testing our integrated product offer with their participants. We have another sign sponsor and we are in late stage discussions with other plan sponsor clients.

As a company we are moving very fast in a highly regulated complex ecosystem, serving the largest plans in America. The regulatory nature, and approval process of the business sometimes slows adoption and scaling on new services and products but the complexity of this business continues to be a unique advantage as it creates real barriers to entry for new firms who like to enter the space.

These barriers have been further strengthened given their requirements of the conflict of interest rule that many firms will struggle to implement. We're being disciplined and thoughtful on our go to market approach, because we want to get our new product offering right to plan sponsors and individuals we serve and for the long-term growth of our company.

I'm very encouraged by the collaboration happening on our new combined company and our conversation with plan sponsors and participants about the new integrated product offer. Our long-term thesis to help more people with scalable but comprehensive personalized services is intact and I'm very pleased with the progress we are making.

In 2004, we launched our managed account offering in the workplace because clients told us they could not manage retirement savings and investing on their own. That decision transformed our business fast forward to today and clients are still telling us it is hard.

The country is facing a retirement crisis, the employee benefit research institute estimates the aggregate retirement saving shortfall is a daunting $4.13 trillion. The proliferation of financial products over the last decade, the complex rules and regulations, the general lack of trust of financial services firms in the industry is a mix that is just hard to navigate for the typical American. And according to a National Institute of Retirement Security survey 81% of Americans believe it will only get harder to prepare for retirement in the future.

Earlier this year, the US Department of Labor issued, the final conflict of interest rule, which provides enhanced fiduciary protections for retirement investors. While the rule faces, some continued resistance, we believe it is likely to survive substantially in its present form. We'll have a significant positive impact on the financial services industry, as one the biggest changes to the retirement landscape in the past 40 years.

With this rule, the DOL has clearly recognized the changing face of retirement paradigm. The individual is now largely responsible for creating their own retirement security through their defined contribution plan in their own individual retirement accounts. And in response has expanded the protected zone of accounts that need fiduciary protections.

As advisor that has been on the right side of the regulation and has been acting in the best interest of our clients since our founding, we believe that Financial Engines is uniquely situated to make this protected zone real for plan sponsors and their participants with our new integrated offer, enabling unbiased, comprehensive help at scale to all participants tailored to the individual needs and provide with a fiduciary protection they deserve.

So just as we did in 2004, I believe today we have an opportunity to re-imagine what Financial help looks like for the typical hard-working American, we have an opportunity before us to help drive favorable trends in the financial services industry. Our position as the largest independent RIA, our distribution channels, our rapid old role as a fiduciary, our established sponsor relationships and our ability to provide comprehensive financial help in the 401-K and beyond makes us distinctive.

I believe Financial Engines is uniquely positioned to take advantage of the trends in the financial services industry and a growing opportunity to help millions of investors reach all of their financial goals.

Now I'd like to turn the call over to our CFO, Ray Sims to discuss our financial results in more detail. Ray?

Ray Sims

Thanks, Larry. Let's take a look at our consolidated numbers for the second quarter. Total revenue increased 36% to $106.2 million in the second quarter of 2016 compared to 78.2 million in the prior year period. The increase in revenue was driven by $27.4 million of revenue related to the acquisition of the Mutual Fund Store.

Professional management revenue increased 38% to $96.1 million in the second quarter of 2016 compared to $69.7 million in the prior-year second quarter, driven primarily by $25.2 million of professional management revenue related to the acquisition.

Professional management revenue growth was driven by higher AUM which reached $125.3 billion at the end of the second quarter, compared to $114.5 billion at the end of the prior-year second quarter. The increase in AUM was driven primarily by new assets from new and existing clients and new AUM of $10 billion attributable to the acquisition, partially offset by cancellations and market performance. Platform and other revenue increased by 19% to $10.2 million in the second quarter of 2016 compared with $8.5 million for the second quarter of 2015. This increase was due primarily to the addition of account service fee and franchise royalty revenue of $2 million.

As a result of acquisition activity included in other revenue, partially offset by a decrease in platform revenue, due primarily to a small number of sponsor terminations as well as platform fee reductions resulting from a small number of sponsors converting to a sub-advisory plan provider or adding new services. These decreases were partially offset by an increase in platform fees due to service availability at new sponsors.

Expenses increased by $24.9 million or 38% in the second quarter of 2016 compared to the second quarter of 2015. This was due primarily to employee-related costs, including wages and cash incentive compensation expense, due primarily to the addition of approximately 300 newly acquired employees, advisor center variable incentive cash compensation expense related to ongoing asset management, increased intangibles, amortization, primarily related to acquisitions and increased marketing programs expense, due primarily to radio and digital advertising.

Non-cash, stock-based compensation also increased across all functional areas, due primarily towards associated with the acquisition. Cost of revenue increased 38% to $46.5 million for the quarter compared to $33.7 million for the prior-year second quarter, due primarily to the addition of costs related to the acquisition of the mutual fund store.

A significant portion of the acquired costs were categorized as cost of revenue, primarily the advisors and advisor centers. As a percentage of revenue, cost of revenue increased to 44% in the second quarter of 2016 from 43% in the second quarter of 2015.

Research and development expense increased to $9 million for the quarter, up 1% from $8.8 million in the prior-year’s second quarter. As a percentage of revenue, R&D decreased to 9% in the second quarter of 2016 from 11% in the second quarter of 2015.

Sales and marketing expense increased to $21.7 million for the quarter, up 35% from $16.1 million in the prior year’s quarter, due primarily to radio and digital advertising, employee-related expense, and travel and entertainment. As a percentage of revenue, sales and marketing expenses decreased to 20% in the second quarter of 2016 from 21% in the second quarter of 2015.

General, administrative expense increased to $9.8 million for the quarter, up 56% from $6.3 million in the prior-year second quarter and this was mainly due to newly acquired employees and their related expenses, as well as increased consulting and professional services expenses related to the acquisition. As a percentage of revenue, general and administrative expense increased to 9% in the current period from 8% in the second quarter of 2015.

Income from operations as a percentage of revenue, decreased to 14% for the second quarter of 2016 from 15% in the prior-year second quarter. Our effective tax rate increased to 38% in the second quarter of 2016, compared to 30% in the prior-year quarter, due primarily to resolution of income tax uncertainties and changes in state taxes, resulting in the recognition of tax benefits in the prior-year quarter. We expect our tax rate to be approximately 38% for the remainder of the year.

Net income increased 6% to $9 million in the second quarter of 2016, compared with net income of $8.5 million in the second quarter of 2015. Diluted earnings per share decreased 13% to $0.14 per share in the second quarter of 2016, compared to $0.16 per share, a year ago.

As many of you know, we look at non-GAAP adjusted EBITDA as a key measure of our financial performance and it is one of the metrics we use to determine employee cash incentive compensation. Adjusted EBITDA reflects the elements of profitability that can most directly be impacted by employees. Our management believes that this metric motivates executives to focus on profitable growth.

Our management team believes that these non-GAAP performance measures provide useful information about our operating results and thus are appropriate to enhance the overall understanding and evaluation of our past financial performance and our prospects for the future. These adjustments to the GAAP results are made with the intent of providing both management and investors a more complete understanding of our underlying operational results, trends and performance

Our earnings release has tables that reconcile our GAAP net income to non-GAAP adjusted EBITDA, non-GAAP adjusted net income and non-GAAP adjusted earnings per share. Non-GAAP adjusted EBITDA in the quarter increased to $33.4 million, up 48%, from $22.7 million in the second quarter of 2015.

We are currently estimating the remaining integration related expenses in the second half of 2016 to be approximately $13 million, excluding non-cash stock-based compensation expense in addition to $10.5 million incurred in the first half of 2016. This estimate has increased from the estimate provided last quarter, due primarily to the expected recognition of estimated future losses related to certain franchises upon acquisition. These expenses will be added back to net income in the calculation of non-GAAP adjusted EBITDA and non-GAAP adjusted net income. The related tax affected adjustments will be calculated using an estimated statutory tax rate of 38.2%.

Non-GAAP adjusted EPS increased 22% to $0.28 per share for the second quarter of 2016, compared with $0.23 per share in the second quarter of 2015. Our earnings release has tables that reconcile our GAAP net income to non-GAAP adjusted EBITDA, non-GAAP adjusted net income and non-GAAP adjusted earnings per share.

As a result of the purchase of The Mutual Fund Store, acquisition-related expenses and amortization of acquired intangible assets, as well as their related tax effect are being added back to GAAP net income to compute non-GAAP adjusted net income and non-GAAP adjusted EPS.

As of June 30, 2016, we had total cash and cash equivalents of $101 million, compared with total cash, cash equivalents and short-term investments of $317 million as of June 30, 2015.

In the third quarter, we purchased the assets and operations of eight franchised advisor centers for aggregate cash consideration of approximately $12 million. Year-to-date, we have repurchased 15 franchised advisor centers for an aggregate cost of approximately $27 million.

Now, on to our outlook for 2016, based on financial markets remaining at July 29, 2016 levels, we estimate 2016 revenue to be in the range of $415 million to $422 million, 2016 GAAP net income to be in the range of $24 million to $27 million and 2016 non-GAAP adjusted EBITDA to be in the range of $127 million to $132 million.

Our earnings release has a table that reconciles our estimated GAAP net income to our outlook for non-GAAP adjusted EBITDA. We expect that the bulk of the financial synergies from the combination of the companies will be realized beginning in 2017 and beyond. Post-closing, we remain debt free and expect to continue to generate cash.

We encourage investors to utilize the percentage breakdown of our aggregate portfolios provided in our earnings release to estimate market sensitivities, as international equity and bond market performance may deviate substantially from the S&P 500’s performance. The recommended indices are the Russell 3000 for domestic equities, the MSCI EAFE Index for international equities, and the Barclays Capital U.S. Aggregate Bond Index for bonds.

With that, operator, we would like to open the call up for questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Bob Napoli of William Blair. Please go ahead.

Bob Napoli

Thank you. Good afternoon. A nice job in the quarter. I guess, I'd like to – can the outperformance, the increase in guidance, is it solely market-related timing-related, or were there some things that performed there were better than what you expected?

Ray Sims

Hi. This is Ray. Thank you. Most of the increase in the guidance at the revenue line is market related. And in terms of outperformance, we were pretty careful with expenses through the period of market uncertainty and everything we expect for the rest of the year, as I always say, is reflected in outlook.

Bob Napoli

Okay. The cancellations were lower than what we had expected, and I'm not sure, do you – I mean, the Brexit cancellations does some of that show up in the third quarter or why was there the improvement in the cancellations that on a trend base, it seems to be better than – and in the first quarter was unusual, but just on a trend basis, it seems somewhat better?

Larry Raffone

Hey, Bob. This is Larry. It is better on a trend basis. The first half of this year has had volatility, right. First in Q1 and then Brexit was, I think, mostly unexpected. We are definitely getting better on the cancellation side, on our 90-day cancellations, the period, right after enrollment, where we have experienced most of our pressure. We have deployed some new advisor programs there, we're doing more welcome calls, we've got more welcome e-mails and videos. We're feeling like those are having an effect and being born out and the numbers there.

We also feel like the involuntary cancels, it was pretty clear in Q1 that we thought that was an anomaly. Sponsor terminations are lumpy. We do expect and that's the reason why we kind of use that, an average, because they generally – sponsor generally terminate to go either to another record keeper usually and that's usually at the very last day of the quarter or the following day, so they can move. We fully expect that those involuntary cancels look at our more historic rates.

So I feel that we are continuing to make improvements on the voluntary cancels, where we have the most control. The involuntary cancels, let me point out, there’s only two things. It is the sponsor terminations, which I again say, it's going to be at historic levels, but two-thirds of those assets are also folks leaving the plan, which are IRAs, they are rollovers. And so, obviously, the program that we're putting in place there is a program where we purchased The Mutual Fund Store and we'll talk a little bit more about our new tiered offer that we think will help make some improvement there. So it's been a big area of focus over the last 18 months. We are expecting continued improvement it did bare out the numbers this quarter.

Bob Napoli

And then, my last question before I turn it over is just on The Mutual Fund Store, you talked about Land O'Lakes, have you actually done some cross-sell and what is – I mean, as you sit here today from when you announced the deal several quarters ago, what are your feelings on the ability on how much success you're going to have in cross-selling? And then, if you look at it from an MFS perspective, what is the cost per account that they get through the relationship with Financial Engines versus what they had previously, just going directly outside of Financial Engines?

Larry Raffone

A lot in that question. Let me start with the high-level, right. So, first and foremost, we're still up five months into this. We are live with a pilot, we said we would be live with a pilot in the summertime. Land O'Lakes is a great client of ours. It is a big brand name. We have rebranded the stores in that area. We have trained the advisors in that area. We've enabled our workplace links which is the messaging that's going on. So we are really servicing that account. Now, it is early days, but we're excited. We're excited, we are learning a lot, right. We're testing everything. We're testing what it's like to be on-site, live events, the marketing messages with the links to get people, looking monitoring since these stores are nearby the offices, walk-ins, the stores now say Financial Engines.

And so, more to come, it's only been a couple of weeks. But we are encouraged. So we would expect that our workplace account acquisition cost is pretty modest, I'll let Ray address that. It will likely be a little bit more, right, because we've got some more on-site. We're doing some more things, but it will be nowhere near our retail – the cost there, I'll have Ray address it. Actually, I forgot the next two parts of that though. So it was – so we have a pilot in motion.

We said we have another one signed. I'm excited we have a good pipeline of sponsors that are interested. We're being thoughtful about it, though, right, because the first pilots that we want to put out there, we want them close to where our stores and our advisors are deep, we want the kind of – right kind of sponsor that will let us do the things that we need to test and learn. But we're pretty excited about, both the acceptance of the sponsors in the field. How quickly the teams have been able to put the services together, our live events continue to drive high participant enrollment. We're seeing roughly 36% to 38% of folks want to sign out – want to meet with an advisor afterwards. So all the leading indicators are positive, but it's only been a short period of time.

Ray Sims

Hey, Bob, its Ray.

Bob Napoli

Hi, Ray.

Ray Sims

And we said that revenue synergies would be expected in 2017 and beyond. So we kind of need folks to contain their enthusiasm. I'll remind you that everything we expect for this year is reflected in the outlook. Having said that, the Holy Grail is at traditional Financial Engines professional management, we net about 19 to 20, they call it 19 basis points and our acquisition cost per client is about $150.

So at the margin, a new client at an existing sponsor will give us something a little north of $300 a year in revenue and the acquisition cost is $150. At the Mutual Fund Store, because the service is a much more comprehensive, the average fee is north of 100 basis points without the big drag of the data connectivity fee, that we pay sponsors. Their acquisition cost is in the low thousands and so the Holy Grail is to get a revenue closer to what the mutual fund store is getting, at an acquisition cost closer to what Financial Engines is paying and the revenue will come down in terms of basis points at the sponsor level and the acquisition cost will go up, but nowhere near we hope where it is presently.

Larry Raffone

Bob, let me just add one more thing, we also expect we can get more base enrollment into managed accounts, because the offer is much better, the branding of being on-site is pretty powerful, the store is nearby and so we have these three tiers now. We've enhanced our online advice, which is really compelling. Now, we've also created an upgrade path to manage the accounts. We have our basic managed account offering which now we wrapped to the wellness rapper, improve some of the services there and it's kind of the middle tier, plus now we're on-site and we have these live events. So it's a good place for people to get started. And you have more complex needs, which are generally folks with bigger balances, you want to meet with personal advisor, you have that as well. So, what we're really trying to do is, just get people to enroll, pick the service, which is right for them and we feel it clearly will – they will be better off. The big companies will be happy that people are getting help and of course it'll improve our growth rate.

Bob Napoli

Okay. Thank you very much. Appreciate it.

Larry Raffone

Okay. Thanks Bob.

Operator

Our next question comes from Peter Heckmann of Avondale Partners. Please go ahead.

Peter Heckmann

Good afternoon, everyone. Nice results.

Ray Sims

Hey, Pete.

Peter Heckmann

Hey, Ray, could you metric that I think would be interesting for you to give going forward would be the number of advisors to the extent that you don't want to give a hard number every quarter, but could you comment on the number of advisors that you had prior to the close and Mutual Fund Store and then any net increase was in the second quarter and then as well. What would be your plans for net increase or total number of advisors by year-end?

Ray Sims

So there is over 130 advisors at the mutual fund store locations and we have about 80 in our center in Phoenix and a few more scattered around the country. But those kind of grow with the need, its relatively predictable, how many clients an advisor can handle. And we hire ahead as the service migrates to a more advisor-intensive model, we will probably increase advisors. But the capacity exists today to acquire quite a few more clients without making a major increase in the number of advisors.

Larry Raffone

And Pete, this is Larry. Let me also explain. So last year we invested in advisor related tool right so we did add advisors down the stretch in 2015 in anticipation of this. We are training advisors, we are tiering advisors and one of the real benefits of this integration and what we brought in from The Mutual fund Store is an incredible advisor expertise. And so we're significantly better that we have intelligent call routing, which is better than we had before, we're training specialists was better than we had before, operational metrics are better than we had before. There's more advisors than we had before. We have field advisors and we now have a culture of service and sales culture that's leading to some better results.

So we think this whole package is synergistic, better systems, better processes, new CRM system, better trained advisors and in many cases upgraded the advisors that we've had. So it has been a big investment and I feel like we do have capacity from here on out. So we're not looking to add a bunch more, it will grow the business, but that has what's given us the ability to quickly respond to Brexit, which we haven't had in the past and I think it's also where you're seeing some of the benefit in our cancellation numbers.

Peter Heckmann

Got it, got it, that's helpful. And then, if I have it correct in my notes, did you say Ray that you've bought in 15 franchise centers year-to-date, including what you purchased in July?

Ray Sims

Yes. That's right. That leaves seven and we've said before, our strategy is to get out of the franchise business. It makes it more comfortable for sponsors to deal with owned operations. Franchise accounting is pretty complicated and we love to be able to simplify. If we bought back the rest at basically the same cost that's specified in the agreements, we would probably spend a bit under $40 million in total. That's including what we've spent to date, which is $27 million.

Peter Heckmann

Okay. And does your outlook for the year contemplate the buying of those franchises or not?

Ray Sims

Yes. Well, remember that the change in revenue and earnings only happens after the franchise is acquired. So the chorus I love to sing is to saying is everything is reflected in the current outlook.

Peter Heckmann

Helpful. Okay. And then, just lastly, and this subject is going to come up again as the cash continues to build, but any considerations as regards uses of cash and you had a pretty successful buyback program last year. Any additional thoughts reinstating one for this year?

Ray Sims

So certainly, when we had over $6 a share in cash. We've got the question a lot, we found a really good use of cash is partial consideration for the acquisition, as you saw where we are about 100 million in cash now, we expect that to grow modestly even in the face of the franchise, acquisitions and the rebranding and the ongoing dividend and the Board will periodically look at capital structure and decide what's appropriate for the company.

Peter Heckmann

All right. I'll get back in the queue. Thanks.

Operator

Our next question comes from Surinder Thind of Jefferies. Please go ahead.

Surinder Thind

Hi guys. A couple of quick questions here, one is on the new marketing campaign. In terms of the – did I hear correctly that you said about half of the direct sponsors have been targeted with the new marketing campaign at this point? Is that what I heard correctly?

Larry Raffone

Yes, that's right. This is Larry, we have it rolled out to about half of our direct sponsors.

Surinder Thind

And then, how should we think about the evolution of that in terms of your penetration going forward for the rest of the year and for the direct sponsors?

Larry Raffone

Yes, I mean, I think logically, I mean part of what we did was we rolled it out and then we continue to test and iterate and so we I would expect that we will focus more on the rest of the direct. We maybe not get to all of them by the end of the year and we will start bringing our advice clients on as well as we head into next year into 2017. I would expect over the course of, probably the next realistically four quarters, that we will have it kind of fully deployed. I'd like to point out that it's kind of two things that we have going on and I know there are some subtleties in here, but we've done two things with our campaigns.

So, first, we had a campaign that was paper-based and we really had run the same campaign for kind of 10 or 12 years. So we've moved that to more of a digital campaign, we call it our rebase line. So, we had this new package. We've also created more of a relationship engagement model where we start – we are marketing now in a digital format four times a year in smaller bite-sized increments. So we're trying to build a relationship over time as opposed to the once a year, one big campaign. They are put together in a complementary fashion.

So we have those light touches over the course of four quarters, hoping to get people in, what we call an awakening moment where they had a promotion or a new baby or a right that it resonates more than just that once a year cumulative effect. We're also running these live events and now, these new annual campaigns are both in a complementary way, which gives you more of a deeper dive which encourage you to engage with an advisor to retirement checkup and has all the three stop lights. So we kind of feel like this whole package of a new campaign in these new marketing engagement model and conjunction with our live events and our new offer all that together. And so that's why we're being thoughtful about how we are rolling it out. It's a more comprehensive package we didn't just take an all campaign, it’s roll it out replace with the – with the new campaign. We really – it’s been a bunch of time trying to study some of behavioral aspects. If you think about hiring us, they trust higher, it’s a real considered purchase. And so. we feel like spending a little bit more time where you could try some more byte size pieces will lead to higher enrollment over time.

Surinder Thind

That’s helpful. And my second question is just around the P&L. Now that you guys have effectively had a full quarter of The Mutual Fund Store in there, just geographically, excluding obviously some of the one-time items, is this kind of a normalized P&L that we should think about and how should we think about stock-based comp going forward? It seems like the dilution rate is about 2% annually right now.

Ray Sims

Yes. This is Ray. We have a table in the back of the release that attempts to reconcile our GAAP net income with the adjusted EBITDA that we’ve been using historically to get ahead of SEC rules on that. So, I would say, that the but the P&L is not totally normalized, there continue to be some acquisition-related costs. We’re going to try to get through all of those one-time items this calendar year. But there are some new items on the P&L, like the amortization of intangibles for both the acquisition of The Mutual Fund Store and the acquisition of the franchises, each one of which has a split of the assets among physical assets plus, goodwill plus intangibles and only the intangibles get amortized.

So the accounting is relatively complicated. So there will probably be a little more explanation required until at about Q2 of next year when I think things will really normalize on a comparable basis. In terms of stock-based compensation, for practical purposes, we hired 300 some odd employees when we made the acquisition. And we gave those 300 employees the same grants we give new Financial Engines employees and the way we amortize our stock-based compensation is about 52% gets amortized in the first 12 months and 26% in the second 12 months and then the rest spread over the last two years of the vesting period.

So the rate of expense is higher now than it will be, because historically the ongoing grants are fraction of the hiring grants and they are given to a fraction of the population. So I would expect that the dilution rate, which I think maybe a bit more than 2% ought to come down over time.

Surinder Thind

That’s helpful. Thank you.

Operator

Our next question comes from Mike Grondahl of Northland Securities. Please go ahead.

Mike Pei

Hi guys, this is Mike Pei on for Mike Grondahl. Thanks for taking my questions. First, I was just wondering, you’re looking at a blended basis or total AUM, is that increase coming just from The Mutual Fund Store?

Ray Sims

So if you look year-on-year and you take out The Mutual Fund Store, you see a relatively modest increase in AUM at the Financial Engines level. Remember that in 2015, the market really peaked at the end of Q2. So we’re looking at sort of a peak to trough comparison. But during that period, we added well over 40,000 new clients. So there are more assets, which will be affected by market movement going forward. So, yes, mathematically because of market levels in the periods, most of the increase came from the addition of The Mutual Fund Store at about $10 billion.

Larry Raffone

And remember, we said the, I mean, Brexit timing couldn’t have been worse and July has been fantastic, right. So we ended up marking the market on the Friday after the Friday Brexit vote and since then, markets have significantly recovered.

Mike Pei

Sure, go ahead. And then, secondly, just on the pilot, you mentioned Land O’Lakes and if we could get like a timeline on that versus if it’s a new client versus somebody that’s already been on the system?

Larry Raffone

Well, not sure I understand your question. So, we are introducing the new service to our existing clients, first and foremost, right. That’s the best place to test rather than with a new client. And so, what we’re doing right now is where we’re working through a list of basically our top clients. We started within a month after the acquisition closed in February. And so, we have a pipeline. We signed Land O’Lakes which is a perfect client. We had two stores right by their main buildings and we have another one signed and a pipeline of others that we are setting up timing. So we expect to be rolling out several of these pilots between now and the end of the year. We likely aren’t going to then make it be pilots and rollouts going into next year.

We just want to test and learn, put the systems together, harmonize the methodology, figure out the marketing, packaging, pricing, own plan on doing is trying to turning it on wherever we can as more of those scaled roll out into 2017. But there’s a lot to get right. We’ve got multiple systems, we’ve got advisor training, we’ve got to figure out how to market the multiple offerings that we have and so that’s the basic plan right now is kind of every period of time here over between now and late fall, we would like to have multiple pilots out there and running with different kind of demographics, different kinds of companies. So we can get the key learning, just so we can then take that into more of a scaled rollout into next year.

Mike Pei

Got you. Thanks.

Larry Raffone

I guess to your point though, it is being packaged into new sales. It’s just new sales have a longer timeline. So there is not – this will be our offering on a go-forward basis. But we are testing with existing clients.

Mike Pei

Sure.

Operator

Our next question is a follow-up from Bob Napoli of William Blair. Please go ahead.

Bob Napoli

Thank you. Just the one of your clients, I think Mercer, one of your – was acquired by Transamerica and I believe you retained that relationship, and I just wondered if there is any changes to that relationship or if there is an opportunity for you to get into the Transamerica network?

Larry Raffone

Yes. So, the deal hasn’t closed yet, but Transamerica acquired the Mercer book of business. We have a very strong relationship with those Mercer clients and as you know with these other mergers, when you acquire these clients, your first intention is to maintain them. So we are clearly going to continue to work with them. The deal closes I think somewhere around December. We are definitely in conversations with Transamerica and to know each other. I think the first thing is that we plan on retaining all the business and I think, that’s Transamerica is going to be good with that and I do think there’s some opportunity there. But we are getting to know each other, they are in the middle of trying to close the deal. They do have a decent client list. So we are in active discussion.

Bob Napoli

Okay. No, I think…

Larry Raffone

You can ask me about the other one too, Bob.

Bob Napoli

Yes, right.

Larry Raffone

Okay. We’ll answer the question you were thinking of asking.

Ray Sims

Because I thought you were [indiscernible] We did do a one-off connection to save a big client.

Bob Napoli

Right, yes.

Ray Sims

We have done that before.

Bob Napoli

Yes.

Ray Sims

Generally, the only reason why we do deals with providers is more from a strategic reason, right, like Wells Fargo, which we’re pleased to have live, they moved up from nowhere on the list to number eight and they were a great participant experience, big companies, we’re going to them. So it was a strategic reason to go there and so now, we’re live and excited about that, but we have done some one-off ones. But we have a really big client that goes to some record-keeper that wants to work with us on kind of a one-off basis and particularly clients that want to offer all our best stuff and they’re big. We are great at putting these connections together. So we have done some lightweight connections in the past and we did do that to save this one big client.

Bob Napoli

And so that means what you’re suggesting is that you believe there is an opportunity to – with this very large record-keeper to expand business beyond that one client?

Ray Sims

It’s not a very large record-keeper.

Bob Napoli

Okay.

Ray Sims

But just one of the things we haven’t added providers for a long time. We have been good at it. We have now decided, we added [indiscernible] we added Wells Fargo. We have this Transamerica conversation going on. We did do another one-off connection. So it is something we if we consider doing. Yes, I think there is opportunity with its other client wins. I mean it’s not a big opportunity but nonetheless, once you have a connection, there are opportunities to do more in that channel.

Bob Napoli

You had a good quarter of new client assets coming on board. But to beat last year’s numbers, you need to have a pretty strong second half of the year. Do you still think that you will be able to grow the AUM from enrollment in 2016 versus 2015?

Larry Raffone

We had two of the top four biggest companies in the world that rolled out in the middle of last year.

Bob Napoli

Yes.

Larry Raffone

So I mean we don’t have that this year, but we have the base of that business and we have some things that are improving, right. Our cancels are improving, our campaigns. So actually…

Bob Napoli

Wells Fargo coming.

Larry Raffone

Wells Fargo coming on board. I don’t know, Ray, if you’ve got that number. I mean, we’re expecting a good rest of the year, but I don’t know whether with the – on the heels of two of the biggest, whether we’re having that.

Ray Sims

Yes. So the first two quarters were very difficult comparisons because the market was good this year and last year. The second two quarters, the comparisons are going to be easier because we don’t know what the market will do, but it had a pretty rough second half of 2015. But I would say it’s a stretch to think that we would outdo last year’s new AUM.

Bob Napoli

Okay. Right. Thank you.

Operator

[Operator Instructions] And this concludes today’s question and answer session. And it also closes today’s conference call. We want to thank you all for attending today’s presentation. You may now disconnect your lines. Have a great day.

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