Envestnet (ENV) Q2 2016 Results - Earnings Call Transcript

| About: Envestnet, Inc. (ENV)
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Envestnet, Inc. (NYSE:ENV) Q2 2016 Earnings Call August 8, 2016 5:00 PM ET

Executives

Chris Curtis - Division CFO & Head of Investor Relations, Envestnet, Inc.

Judson T. Bergman - Chairman, Chief Executive Officer, Director

Peter H. D'Arrigo - Chief Financial Officer

Anil Arora - Vice Chairman and Chief Executive Officer, Envestnet | Yodlee

Analysts

Surinder Singh Thind - Jefferies LLC

Chris Charles Shutler - William Blair & Co. LLC

Peter J. Heckmann - Avondale Partners LLC

Hugh M. Miller - Macquarie Capital (NYSE:USA), Inc.

Christopher Roy Donat - Sandler O'Neill & Partners LP

Rishi Jaluria - JMP Securities LLC

Jeff Houston - Northland Securities, Inc.

Operator

Please stand by, we're about to begin. Good day, everyone, and welcome to the Envestnet Second Quarter 2016 Earnings Conference. Today's call is being recorded. At this time, I'd like to turn the conference over to Mr. Chris Curtis, Division CFO and Head of Investor Relations. Please go ahead, sir.

Chris Curtis - Division CFO & Head of Investor Relations, Envestnet, Inc.

Thank you and good afternoon everyone. With me on today's call are Jud Bergman, Chairman and Chief Executive Officer; Pete D'Arrigo, Chief Financial Officer; and Anil Arora, Vice Chairman and Chief Executive of Envestnet | Yodlee.

Our second quarter 2016 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. I'll point out that the structure and format of our release has been updated to confirm to the SEC's recent guidance on the use and disclosure of non-GAAP financial information.

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 and will not be updated to reflect subsequent material developments. We will take questions after our prepared remarks.

And with that, I will turn the call over to Jud.

Judson T. Bergman - Chairman, Chief Executive Officer, Director

Thank you, Chris. I add my own welcome to everyone on today's call. Thank you for joining us. Today, we'd like to share our results from the second quarter, provide an update on our business, and discuss our outlook going forward. June 30 marked a significant milestone for Envestnet. For the first time, total platform assets exceeded $1 trillion. This includes assets under management or administration as well as the subscription-based accounts that are advised by the more than 51,000 advisors who depend on our platform to support their advising on more than 5 million end investor accounts.

In addition to servicing over $1 trillion in advisor-supported assets, we aggregate multiple trillions of dollars of financial assets and support many billions of dollars and a growing number of defined contribution retirement plans through our Envestnet | Yodlee and Retirement Solutions businesses.

This growing base uniquely positions us to better understand trends in wealth management and consumer finance and enables us to provide the solutions and analytics that enable our customers to deliver better financial outcomes. This achievement is 16 years in the making. We thank all of our clients for the opportunity to serve them and for putting their trust in us every day. I'm also very grateful to Envestnet employees in the U.S., India, and internationally for all that they do; thank you.

In our core business results were solid during the past quarter in a somewhat challenging environment. Industry-wide enterprises have been grappling with the effects of the Department of Labor's new fiduciary rule. During this most recent period, advisor recruitment has slowed and enterprise deployment decisions have been delayed.

However, as enterprises begin to adopt our solutions to address this new rule, we expect that the short-term factor will become an important and positive tailwind in the intermediate and longer-term beginning in 2017. And in this environment, we continue to grow faster than the industry adding accounts and assets during the quarter. Accounts per advisor also grew at a somewhat improved rate over recent experience, further evidence that advisors using Envestnet's integrated technology and investment solutions can be more productive and grow their businesses faster.

Gross sales of assets under management to administration were nearly $24 billion excluding conversions, just short of last quarter's record levels. Conversions were strong during the second quarter as we added over $6 billion in assets under management or administration and on-boarded more than $100 billion in subscription and license based assets. This included a conversion of precedent setting size over $90 billion for one of the nation's largest life insurance companies. We are providing an integrated wealth management and enterprise data management solution for their entire advisor and agent base as well as for their home office.

Our solution encompasses all the clients and accounts of the firm's broker dealer, leveraging our Vantage Reporting Solutions across their various product lines. A conversion of this magnitude reinforces the core competence we have in converting and supporting large enterprises. We are in active conversations with several other firms to provide solutions of considerable breadth and scale. We believe this type of business represents a meaningful growth opportunity for us in the coming years, as additional firms choose to rely on Envestnet to support their entire wealth management activity. Overall, our pipeline of conversion opportunities remains very strong.

During the second quarter, we also completed the integration of WMS business. In June, the final client converted from the legacy mainframe system to Envestnet's integrated cloud-based platform. This enables us to realize additional cost savings, driving incremental cash flow of over $8 million per year beginning in this third quarter.

The trust accounting and multi-currency capabilities that we developed to support the WMS clients, enable promising opportunities in the bank channel and internationally looking forward. The Placemark integration remains on track from a client conversion perspective and cost savings slightly ahead of schedule as we discussed last quarter. We believe the integration will be complete in early 2017 as previously indicated.

We did lose one Placemark Overlay services client in June. The broker-dealer chose to implement an in-house self-hosted solution and departed before we had the opportunity to convert them. This is disappointing, but we had incorporated it in our previous forecasts. Also, when modeling our overall acquisition economics, we don't assume 100% client retention, and as a result, we still expect to meet or exceed our target return on invested capital for the Placemark acquisition.

In addition to the integration activities related to WMS and Placemark, we are actively supporting our customers' transition to the Department of Labor's new fiduciary standard. The Envestnet platform has always supported the fiduciary process; however, we plan to offer additional capabilities that address the new rules. These include technology solutions related to the best interest contract or BIC provision, and also disclosure requirements including fee rationalization and other documentation and regulatory requirements. It also includes digital advice and advisory solutions that leverage Yodlee's Personal Financial Management applications and data aggregation capabilities, as well as the goals-based financial planning tools from Envestnet. It also includes enterprise solutions that assist the enterprise with overall compliance with the fiduciary rule and the monitoring of their advisor activity.

While generally expected for some time, the specifics of the DOL rule had been a question and a concern until the final rule was announced. Now, many enterprises are turning to Envestnet for solutions. We expect this activity will drive additional growth for us later in 2017 and in 2018. These solutions are consistent with how our platform has evolved over time. Our research confirms that advisors or experts who effectively leverage technology enhance their own productivity and improve their clients' outcomes. That's the premise behind what we recall the Kasparov Principle, which posits that experts plus machines deliver better outcomes than experts or machines can deliver alone.

Helping advisors cross the digital divide is core to our mission and Yodlee is an essential component in this. We are more enthusiastic today about the potential of this business combination than we were when we announced the transaction one year ago. We see that financial planning, including trust, the state, tax and retirement planning is moving to the center of the advisor value proposition and is largely improved by Yodlee data aggregation and client on-boarding capabilities. These capabilities dramatically enrich an advisor's ability to more fully know their customer, especially in light of the new best interest standard.

This and the attendant analytics represent the next phase of advisor productivity lift and ability to leverage insights in order to deliver better client outcomes. Yodlee continues to deliver solid revenue growth with excellent improvement in profitability. We are seeing early signs of the long-term opportunity as we pursue the various cross-sell synergies we expect will be achieved over time.

Last quarter we announced a partnership between Yodlee and United Capital, an existing Envestnet customer, and we have a number of verbal commitments, some very significant that are in the contract execution stage. We have also made good progress integrating products for new sales opportunities, setting the stage for future growth.

We expect to announce some important cross-sell wins in the second half of this year, including customers expanding their relationship with us, leveraging Yodlee data aggregation and PFM applications, combined with Envestnet data reconciliation and integrity, plus our own financial advice engine. These firms see the potential for a productivity gain and for making gains of greater share of wallet with their best customers.

I will conclude with a few remarks in a moment, but, first, will turn it over to Pete to discuss our financial performance in greater detail.

Peter H. D'Arrigo - Chief Financial Officer

Thank you, Jud. I'll start by summarizing Envestnet's second quarter results comparing the second quarter of 2016 to 2015. Revenue and adjusted revenue grew 38% to $142 million. Revenue from assets under management or administration grew 3% to $86 million. Subscriptions and licensing revenue increased more than 200% to $47 million, up from $15 million in 2015. Professional services and other revenue more than doubled to just under $9 million. Growth in our subscription and licensing revenue as well as our professional services and other revenue benefited from the inclusion of Yodlee's results this quarter as they were not in the prior year.

Recurring revenue was 94% of total revenue during the quarter. Our cost of revenue increased to $45 million from $42 million as a percentage of revenue from assets under management and administration; cost of revenue was approximately 52%. Approximately $2 million of other revenue and an equivalent amount of cost of revenue are reflected in our results for the second quarter related to Advisor Summit.

GAAP net loss was $8 million compared to net income of $3 million a year-ago due in part to the large increase in amortization connected to the acquisition of Yodlee. Adjusted EBITDA was $22.3 million or 27% increase over the $17.6 million we reported last year. Adjusted earnings per share was $0.21 in the second quarter. While our adjusted net income and adjusted EPS assumes a 40% tax rate, our actual Federal cash tax rate will be virtually zero for the next several years assuming we're able to fully utilize our net operating losses as we continue to optimize our after tax cash flow. However, we will have cash obligations for foreign taxes and state taxes.

Moving to our outlook for 2016, which is also included in our earnings release. In the third quarter we expect revenue from assets under management or administration to be between $88 million and $89 million, reflecting an effective fee rate of approximately 11.1 basis points to 11.2 basis points on our June 30 assets under management and administration asset base of $317 billion.

Subscription and licensing revenue should be between $52 million and $53 million on an adjusted basis. Professional services and other revenue should be between $5.5 million and $6 million. This results an adjusted revenue between $145.5 million and $148 million for the quarter. Cost of revenue should be between $46 million and $47 million. Adjusted EBITDA should be between $25.5 million and $26.5 million in the third quarter.

Using a normalized effective tax rate of 40% and assuming approximately 44.5 million diluted shares outstanding, this translates to adjusted earnings per share of $0.25 to $0.26 in the third quarter.

For the full year, we expect adjusted revenue to be between $576 million and $585 million. This update represents about 1% change from previous expectations. This assumes a lower contribution from flows and mix during the second half of the year in light of the industry dynamics Jud discussed earlier and expected client-driven delay in the implementation of a previously announced conversion, and Yodlee likely coming in towards the lower end of their full year range due to the timing of new enterprise deals.

We are actively managing expenses across the organization as we do in any environment. We expect adjusted EBITDA to be consistent with last quarter's expectation for the full year. We are narrowing our range and now expect adjusted EBITDA to be between $98 million and $102 million. At the midpoint, this represents year-over-year growth of more than 30%.

Thank you again for your interest and support of Envestnet. And I will hand it back to Jud for his closing remarks.

Judson T. Bergman - Chairman, Chief Executive Officer, Director

Thank you, Pete. I would like to close with a few thoughts about our near-term outlook and longer-term opportunity. By automating the full spectrum of wealth management applications, data aggregation, new client on-boarding, financial planning, investment program implementation and monitoring, our customers experience a productivity boost, which also benefits Envestnet as advisors to deliver better outcomes for their clients.

Our development efforts are broadening our value proposition from being investment-centric to becoming wealth management-centric. Over the next several years, we target organic revenue growth in the mid-teens. We expect that disciplined acquisition activity will accelerate that growth over time.

As we have demonstrated historically, we expect adjusted EBITDA to grow faster than our organic revenue growth, approaching 20% per year over the next several years before any incremental growth in EBITDA that would come from the acquisition activity.

In the near-term, we are not focused on large strategic transactions. We do remain interested in opportunistic consolidating acquisitions that leverage our core competence in converting large books of business and that have a financial return profile consistent with our return on invested capital targets.

We are also evaluating modest opportunities that would strengthen our capabilities in data analytics. This business line is already growing; we expect that it'll have a run rate revenue of around $40 million for us by the end of this year.

With thousands of enterprises, tens of thousands of advisors, millions of investor accounts, over $1 trillion in advisor-supported assets and multiple trillions of aggregated assets, we are uniquely positioned to empower enterprises and advisors to deliver better financial outcomes, whether it's providing the solutions necessary to support compliance with new regulations or responding more effectively in an increasingly digital world or leveraging our unique dataset and turning it into actionable insights. We believe that given us our scaled solutions, Envestnet is uniquely positioned to help our customers adapt and succeed and create value for shareholders.

I want to thank you again for your time this afternoon. Thank you for your support of Envestnet. And with the completion of our prepared remarks, Pete, Anil and I are happy to take your questions.

Question-and-Answer Session

Operator

Thank you. And we'll go first to Surinder Thind with Jefferies.

Surinder Singh Thind - Jefferies LLC

Good afternoon guys. I'd like to start to touch base on just the DOL and clients in terms of what you guys are seeing. Is it a case of where clients are just kind of paralyzed in the near-term in terms of evaluating business models, whether it's commission-based versus fee-based, or can your provide a little bit more color on the dynamic there, please?

Judson T. Bergman - Chairman, Chief Executive Officer, Director

Yeah. I think that's basically the dynamic, although paralyzed is too stronger word. What you'll see is that advisor recruitment efforts have slowed considerably since the end of last year. And right now there is an extended period of analysis and evaluation looking at what's the best way to cope with this. Is it to create a series of exemptions and continue to do commission-based business which some clients are going to opt for that, or is it going to be what we're seeing an emerging preference for and that would be to accelerate those IRA assets that had been commission-based into fee-based advisory or discretionary programs.

But in order for that to happen, there is a process of getting their arms around where those accounts are today, what are the metrics of those accounts, what are they yielding in terms of commissions or ongoing 12b-1 fees, what are the average sizes of those accounts, and then matching those accounts up with programs either that they have or that they need to develop.

So this is something that we – this dynamic is something that we see is a short-term pause and something that we expect will be a meaningful and positive enhancement for us as these programs begin to be implemented as early as later this year, as early as the fourth quarter, a number of them coming in in the first part of 2017, and we expect that the real growth that will come from this is going to happen later in 2017 and in 2018.

Just remember that this doesn't have to begin to be implemented until the second quarter of 2017 and they've got more than probably a year at least to actually implement those changes.

So I think you characterized it well. I don't know if you want me to add more to it than that. But we think that this is a positive intermediate and long-term development for a business like ours.

Surinder Singh Thind - Jefferies LLC

That's very helpful. And then just a second question here on Yodlee. Can you kind of talk a little bit about, or provide a little bit more color on the business? It still looks like there is a pretty significant ramp in the second half and maybe especially in 4Q?

Judson T. Bergman - Chairman, Chief Executive Officer, Director

So, Anil, will add to my comments. There is a bit of seasonality in Yodlee's business anyway in the fourth quarter given how implementations had historically worked through. We're seeing very strong progression in that business, mid 20% year-over-year growth in terms of topline, much faster in terms of the adjusted EBITDA; something that we had expected when we had announced the transaction, seeing them as something of an inflection point of moving from scale. And it's a very scale business to super-scale.

And so we are affirming where we had originally been in terms of guidance. And we expect there will be some nice announcements of cross-sell opportunities in the second half of the year. And as we've previously indicated, we don't expect that to be material contributors to revenue until 2017, 2018 and beyond, but we're getting a lot of interest and some very significant verbal commitments at this point.

Anil Arora - Vice Chairman and Chief Executive Officer, Envestnet | Yodlee

And to just add a little bit of color to what Jud just said. On an annual basis, I think we expect our growth to be consistent in the mid 20% on revenue, which is very consistent with what we've seen over the last couple of years. Also consistent is on a quarter-by-quarter basis, Surinder, we see some variance driven primarily by the fact that our core customers are large enterprises, so our deals tend to be lumpy in terms of deployment.

We have very good visibility into it, but there is some lumpiness quarter-to-quarter, and we are, as you pointed out, skewed a little bit to the second half. There is a little bit of seasonality in Q4, that is helpful. And we also, as Jud mentioned, expect to see the first trickle of synergy revenues kick in towards the end of the year. So it's all three factors combined that will deliver the projections that Pete and Jud had summarized.

Surinder Singh Thind - Jefferies LLC

That's helpful. Thanks a lot guys and I'll just jump back into the queue.

Operator

Thank you. We'll take our next question from Chris Shutler with William Blair.

Chris Charles Shutler - William Blair & Co. LLC

Hey, guys. Good afternoon.

Judson T. Bergman - Chairman, Chief Executive Officer, Director

Hey, Chris.

Chris Charles Shutler - William Blair & Co. LLC

So on the guidance, a couple of questions. So I guess, first, just wondering what the guidance assumes for markets; just looking at markets maybe through mid last week, all else equal, I guess, I would have expected maybe a $3 million to $4 million benefit from markets versus where the prior guide was, maybe you could talk about that first?

Judson T. Bergman - Chairman, Chief Executive Officer, Director

Yeah. It's as of the market as of June 30, have done any updated...

Chris Charles Shutler - William Blair & Co. LLC

Oh, it is June.

Judson T. Bergman - Chairman, Chief Executive Officer, Director

Have not done any updating since June 30.

Chris Charles Shutler - William Blair & Co. LLC

That's very helpful. Okay. Thanks. And then on the cost of revenue, it looks...

Judson T. Bergman - Chairman, Chief Executive Officer, Director

And...

Chris Charles Shutler - William Blair & Co. LLC

Yeah. Go ahead.

Judson T. Bergman - Chairman, Chief Executive Officer, Director

The reason for that is that, for a quarter which is – that's the – the part that we're giving the highest degree of specificity on, any increase since June 30 is not meaningful for us.

Chris Charles Shutler - William Blair & Co. LLC

For Q3, right?

Judson T. Bergman - Chairman, Chief Executive Officer, Director

Yes.

Chris Charles Shutler - William Blair & Co. LLC

Understood. Okay. And then on the cost of revenue, it looks like the Q3 guide implies cost of revenue as a percentage of AUM – cost of revenue as a percentage of AUMA revenue ticks up just a touch from Q2, which isn't normally the seasonal pattern given the conference, maybe just talk about what's driving that difference?

Peter H. D'Arrigo - Chief Financial Officer

So Jud mentioned the broker-dealer that left during the second quarter; that one was a relationship that was – had a no cost of revenue associated with it. It was all billed at net revenue. And so when that comes out, there is a little greater impact on the overall in terms of that percentage that drives it up.

Chris Charles Shutler - William Blair & Co. LLC

Okay. Make sense. And then that, I guess, I could probably do the math, but that planned client departure, I guess, first, did it – has already happened? And what is the annualized revenue impact from that?

Peter H. D'Arrigo - Chief Financial Officer

So we're not going to go with the details about what that client was paying. We've given the details in the press release about the metrics that went with it. And so you can get pretty close if you make some assumptions about that revenue across the business.

Chris Charles Shutler - William Blair & Co. LLC

Yeah. Okay. And then last one on the M&A environment guys. I know you're saying likely no strategic deals anytime soon, but consolidating very much remain of interest. I guess, I'm just curious how much is out there right now for sale? And given the TAMP space is pretty weighted to the top few players, how big is the universe of potential consolidating deals at this point that could really have an impact on your financials?

Judson T. Bergman - Chairman, Chief Executive Officer, Director

So there are – I think at last count, Tiburon Research identified some 47 TAMPs out there. Of course, it's dominated by the large ones but there are a number of subscale and boutique TAMPs. So those would be potential acquisition candidates. And TAMPs would not be the only candidate that would fall into a consolidating transaction.

Single point application providers are providing activity that we're already doing. For example, performance reporting would also fall into the consolidating acquisition opportunity set. And there are a number of firms whether they are TAMPs or single point application providers, that for whatever reasons, deciding that they will never achieve the super scale that's necessary to compete, are seeking other alternatives.

Now, what we have mentioned in the past is that private equity has been more active with these kinds of opportunities more recently than they have in the past. And so prices that we have seen last several quarters have been higher and have affected our ability or our willingness to go forward. But we continue to see opportunities and we expect that we will continue to see those opportunities in the coming quarters.

Chris Charles Shutler - William Blair & Co. LLC

All right. Thanks a lot.

Operator

Thank you. We'll take our next question from Peter Heckmann with Avondale Partners.

Peter J. Heckmann - Avondale Partners LLC

Good morning, gentlemen.

Judson T. Bergman - Chairman, Chief Executive Officer, Director

Hey, Peter.

Peter J. Heckmann - Avondale Partners LLC

I just had a – hey, I had a few follow-ups. When you talk about the longer-term margin accretion, you are not talking specifically 2017, you're looking a little bit further out and talking about kind your goals about EBITDA that 2017 has some unique characteristics as regards to the accretion from WMS, Placemark and Yodlee. But when you look out further, what would you say target EBITDA margins might be five years out?

Peter H. D'Arrigo - Chief Financial Officer

So, Peter, we've talked about growing EBITDA at a faster rate when adjusted for acquisitions. We do expect that there will continue to be somewhere around four percentage points or five percentage points difference between the revenue growth rate and the EBITDA growth rate. And if you play that out, again it's longer-term, but you can get into the mid-20%s in terms of percentage for margin in about four years.

And I don't think I want to project beyond that much. Obviously, we have the cost of revenue built in to the business model, which is going to effectively take out the range of 50% of the AUM and AUA revenue.

And so we're kind of starting from that point in terms of longer-term and going beyond four years, five years even if it starts approaching 30% or so, it's going to be a while, and it's going to be certainly dependent on what happens between now and then with acquisitions and conversions and things like that that have greater impact on that than just the business as we have it today.

Peter J. Heckmann - Avondale Partners LLC

That's fair, that's fair. And then, Jud, are you seeing anything in terms of changes in trends as regards to consumer fee sensitivity, for the fees that they're paying their advisors?

Judson T. Bergman - Chairman, Chief Executive Officer, Director

We track that and we have not published it, but we have seen – we have seen some fee compression in what the average advisor fee rate is over the last 10 years. We have not seen a marked acceleration or change in that over the last year or so. And it hasn't changed as much as one might think. But we do have unique insight into that based on all of the accounts that are build on our platform.

Peter J. Heckmann - Avondale Partners LLC

Okay. That's helpful. Let me get back in the queue.

Operator

Thank you. We'll take our next question from Hugh Miller with Macquarie.

Hugh M. Miller - Macquarie Capital (USA), Inc.

Hi. Thanks for taking my questions.

Judson T. Bergman - Chairman, Chief Executive Officer, Director

Hey, Hugh.

Hugh M. Miller - Macquarie Capital (USA), Inc.

Hi there. So just – I guess I wanted to follow up a little bit on the DOL. Obviously, you guys are talking about some of the solutions that you're looking for in terms of implementing. Can you just give us a sense as to – as you think about those solutions that clients are asking for, a little bit more color on what's most top of mind in terms of their kind of compliance in some of the things that they're looking to address. But also, as you think about that, is that something we should consider as an incremental source of revenue or would that be a service that would just obviously help to differentiate the platform and improve adoption?

Judson T. Bergman - Chairman, Chief Executive Officer, Director

So let me answer that one first, that second part of the question. We see it as a boost in terms of revenue or business opportunity, because they are new solutions that will be adopted by new customers – over and above – also by existing customers, but over and above whatever same-store trends that we've been able to model and expect over the last number of years. So we see that, in some cases these would be completely new clients; in other cases it would be existing clients that are looking for a solution.

Now, to the specifics, here is an example, a XYZ broker-dealer firm has tens of thousands of brokerage accounts that are IRAs that have commissioned front-end loaded mutual fund shares with 12b-1 fees attached to them. They may have fairly small or low minimums. So there are firms that are looking to automate as much of the paper work, and if you will, the repapering and administering of those accounts as possible. And so we've got clients that are looking for very targeted programs to automate the repapering of commission-based IRA accounts into fee-based fiduciary or discretionary accounts, that's an example.

We're also seeing enterprise clients who now have a responsibility for oversight on these and in the past – I'll take a step back, I described briefly the enterprise data solution for the very large insurance company. This was in part driven by a forward-looking group of executives of that firm that looked to where their likely obligation was going to be and they have a compliance and a regulatory requirement for even assets that are held directly with the mutual fund sponsors. So not on the custodian of their choice or the custodian of record, but, if you will, held away assets directly with the mutual fund sponsors.

So by creating an enterprise data solution where we report on those held-away assets. And this capability is only enhanced by Yodlee. We are able to provide an enterprise with a solution that they didn't need before DOL, but now increasingly will need, because they have to monitor not just brokerage assets that are at their custodian of record, but also held-away assets that are directly held with the mutual funds.

So we expect that we are going to get more of these enterprise-wide data solutions. I've indicated in past calls that this is a business, this enterprise data business that didn't exist for us seven months ago. And I said that we reasonably expect that by early 2017, there will be two or three large clients that are generating in the mid – in the low-to-mid eight digits of recurring revenue for us.

So it's a growth area that we expect will – that the DOL regs will boost, not going to be a material acceleration of our growth rates, but it'll be a meaningful improvement over time in terms of our adoption, and it will strengthen our overall revenue growth targets. So that's how I'd answer that to you. I hope that's helpful.

Hugh M. Miller - Macquarie Capital (USA), Inc.

Absolutely now. It's very helpful. Thank you. And then, I guess one more just in terms of – obviously, you've given some sense as to some of the near-term headwinds with regard to uncertainty about DOL. Obviously, as we get clarity in the two implementation phases for that, that should help. But in terms of your expectation for maybe the medium term to longer term tailwind from things and – is that driven more by just getting rid of the uncertainty or is there an expectation that you guys expect more of a shift to fee-based accounts relative to the clients that are considering doing things under the BIC exemption?

Judson T. Bergman - Chairman, Chief Executive Officer, Director

So obviously – let me state the obvious. First of all, with our very large registered investment advisor base of clients, there is not a meaningful impact here, because most overwhelmingly are already fee only or fee-based advisors following a fiduciary standard. So it's in the independent broker dealer, the insurance broker dealer, the bank broker dealer and the regional broker dealer, and a space that this is relevant for.

What we expect to see is that the long-term trend of moving from commission-based to fee-based will be slightly accelerated by the DOL regulations. And what that means is that, on balance, most of these assets now will we expect – will find a home in fee-based programs as opposed to commission-based programs. And that's another way of saying we expect this to be a boost to the long-term trend of moving from commission-based assets to fee-based assets.

Hugh M. Miller - Macquarie Capital (USA), Inc.

That's helpful. Thank you very much.

Operator

Thank you. And we'll go next to Chris Donat with Sandler O'Neill.

Christopher Roy Donat - Sandler O'Neill & Partners LP

Good afternoon, gentlemen. Thanks for taking my questions.

Judson T. Bergman - Chairman, Chief Executive Officer, Director

Hi, Chris.

Christopher Roy Donat - Sandler O'Neill & Partners LP

Just one more on your adjustments to the platform you're making for the best interest contract exemption and additional disclosures with DOL. Do you think those additions to the platform will have any meaningful expenses or the revenue opportunity shouldn't – much more than offset them? I'm just wondering should we be expecting some uptick in expenses here. Is this just part of your normal development process?

Peter H. D'Arrigo - Chief Financial Officer

Yeah. We've got hundreds of engineers that are solely focused on wealth management technology, data aggregation technology, Personal Financial Management applications and data analytics; that's all we do. And most of our development through multiple releases of year – most our development expense is just that, it's expensed.

We do capitalize some of it, but it's in accordance with GAAP, that we capitalize, we expense the lion's share of expenditure in the current period. So this is not something that we expect to see an increase in that engineering expense, nor do we expect to see a material change in the amount of software that we are capitalizing.

So these are – this is ongoing development and it's picking up a bigger share of what our development spend is, but it's because we expect that it'll have a meaningfully positive impact on our clients' businesses, and by extension, a meaningfully positive impact on our own business.

Christopher Roy Donat - Sandler O'Neill & Partners LP

Okay. And a separate question here, but looking at your – if we take your redemption rates and annualize them, we calculated, for AUM it was 36% redemption rate and 26% for AUA. So a little elevated compared to prior months – prior quarters. Is that a function of the broker-dealer departure or end client activity around the Brexit vote or something else? I'm just wondering if it's something transitory (43:15)

Judson T. Bergman - Chairman, Chief Executive Officer, Director

So, yes, it's – the client departure has an effect on that, and even adjusted for that client departure, it was in the 2.2% to 2.4% monthly rate, which is 10% to 20% above what we expected for forecast and we attribute that to the dislocation that happened at near quarter's end. We saw a lot of activity that was the result of the Brexit scare. Now, thankfully that seems to have calmed down at least from a capital market standpoint, but those are the factors.

Christopher Roy Donat - Sandler O'Neill & Partners LP

Okay. Thanks very much Jug.

Operator

Thank you. And we'll go next to Rishi Jaluria with JMP Securities.

Rishi Jaluria - JMP Securities LLC

Hey, guys. Thank you for taking my questions. I wanted to follow up on a few topics that we've discussed so far on the call. Just first on the disruption from the DOL ruling, is this something we're seeing across the board, or is it occurring more maybe at the low end or high end of the advisor market?

Judson T. Bergman - Chairman, Chief Executive Officer, Director

Well, the opportunity is across the board of the broker-dealer channels. The opportunity, it's small, large, independent, insurance, bank, regional, even wirehouse, national wirehouses. And so the opportunity that we see is across the board. And it has a – it has a fairly near-term beginning point. It's a intermediate term. We expect that the changes we're making now will result in adoption late fourth quarter this year throughout the first and second quarters of next year, throughout all of next year, and have a result following that. It's been something that's been a long-time incoming, it was generally expected. But the specifics, even in the last go round changed considerably. And so there is now still a high degree of analysis and trying to get their arms around what does this mean to our business going forward.

Rishi Jaluria - JMP Securities LLC

Okay. So there's no particular type that's maybe – of advisor that's seeing this uncertainty or disruptions, it's just across board regardless of AUM, is that a correct statement?

Judson T. Bergman - Chairman, Chief Executive Officer, Director

It's across the board within the broker-dealer community. As I mentioned before maybe it's stating the obvious, but I'll say it again. This is not affecting the registered investments advisor channels. Because RIAs tend to be fee-based or fee-only advisors that have been pursuing a fiduciary standard as long as they've been RIAs. So they do not have the repapering requirements because they've already been acting in the best interest of those clients.

Rishi Jaluria - JMP Securities LLC

Okay. Got it. That makes sense. And the headwind and disruption we're seeing here, is that purely around the actual DOL ruling or is there may be some component of uncertainty that similar sort of rules could be adopted for non-retirement accounts on the broker-dealer side?

Judson T. Bergman - Chairman, Chief Executive Officer, Director

Well, I think the slowdown you saw in advisor recruitment among those firms and some of the slowness to actually adopt the new change was very DOL rules specific. I think that there still is uncertainty about will the standard be applied more broadly, but that's not anything anybody can answer, and I don't believe that that will translate into any kind of headwinds. In fact, once these adjustments are in place, I expect, I reasonably expect, that it will not affect – it will affect not only IRA accounts but other commission-based accounts as well.

So I think that this is like the first change in the system that will accelerate – first change in many years. It's not the first time ever. I mean, back in 2004, 2005, there was a ruling for a large broker-dealer that made fee-based brokerage accounts far more attractive to administer under a discretionary arrangement and billions of dollars of fee-based brokerage accounts became fee-based advisory accounts.

And if you want to see how we think this will play out in the coming years, it looks a lot like those years of 2004 and 2005 in the independent broker-dealer space where there was an acceleration of the growth rate of movement from commission-based to fee-based accounts.

Rishi Jaluria - JMP Securities LLC

Okay, great. And, Pete, I wanted to touch on one topic that you said during your prepared remarks and please correct me if I'm mistaken or I took my notes down wrong. But it sounds like you saw Yodlee coming in kind of at the lower end of expectations and that being one of the contributors for the guidance. Can you expand a little bit about what the dynamics, what the puts and takes here are?

Judson T. Bergman - Chairman, Chief Executive Officer, Director

Regarding Yodlee, you're talking about?

Rishi Jaluria - JMP Securities LLC

Yeah. Regarding Yodlee and I guess why it's coming more towards the low end of the range, you said due to timing of deals but just wanted to expand to make sure I understand that properly.

Peter H. D'Arrigo - Chief Financial Officer

Sure. So we have indicated a range for Yodlee for the year in $135 million to $139 million in revenue and the indication was to be closer to the lower end of that range. Again, a lot of Yodlee's deals are driven by adding enterprise clients, adding manager clients, and some of that comes with professional services work, and a lot of the new implementations are related to the timing of when the deal is actually completed.

So the way that timing is shaking out, we are expecting more of that to come towards the lower end of the range as the way their pipeline looks. Anil, if you're able to add any further color to that?

Anil Arora - Vice Chairman and Chief Executive Officer, Envestnet | Yodlee

Yes. Actually I do. Thanks, Pete, and, hi, Rishi. I think that one layer of explanation beyond what Pete just shared is at heart of the what's driving the timing on our large enterprise deal is a few of our enterprise prospects that we are working with slowed down in terms of their process with us because they wanted to see with the fully integrated Yodlee | Envestnet (sic) [Envestnet | Yodlee] product looks like. Obviously, we had a compelling offering prior to the acquisition; but post-acquisition, we're adding a lot of value to the platform.

So as a simple example, we did – we have aggregated data that we do a lot of enhancement on. Now, with the integration, we not only enhance the data, but we are doing a full reconciliation leveraging Envestnet's core capabilities. So that's one simple example. We have also combined our applications. We're doing a lot of integration on the platform. And the clients who are in the pipeline wanted to see the full capability of what Envestnet | Yodlee are bringing together. That had a slight impact on timing of a few of our large enterprise deals. They did increase the size and potential of the deal, but they pushed the timing back a shade. So, back to Pete's point, it's still within range, but the timing impact is going to push us towards the lower end of that range.

Rishi Jaluria - JMP Securities LLC

Okay, great. That's helpful. And one last one from – question from me and I'll jump off the line. But just in looking at the fee rates, are you seeing any headwind maybe on the pricing side or a fee side from a continued adoption of the robo-advisors or intelligent advisors, be them the standalone firms or from the larger ones like Fidelity which just introduced their own robo-advisor product recently?

Judson T. Bergman - Chairman, Chief Executive Officer, Director

No, we're not seeing any fee rate decline because of that. We've identified the areas that are – that do adjust our revenue yield. The biggest one is product mix, more reporting or enterprise data solution assets coming on; more advisors portfolio manager, APM assets; less full AUM or full AUA assets. And then even within the AUA and the AUM side, there is a continued movement away from active strategies and towards passive or more rules-based investment strategies.

And this also has an effect on the revenue yield from these activities. So that's what the driver of it is. And we expect that – on the digital advice side, what we expect is that, having a robust digital offering is becoming table stakes for the successful registered investment advisor or the successful broker-dealer or the successful bank and trust offering of the future, and we expect that our clients will increasingly be looking to Envestnet to extend our capability on their behalf.

Rishi Jaluria - JMP Securities LLC

Okay, great. Very helpful. Thank you so much.

Operator

Thank you. We'll take our next question from David Grossman with Stifel Financial.

Unknown Speaker

Hi. This is Frank Poerio (53:55) on for David.

Judson T. Bergman - Chairman, Chief Executive Officer, Director

Hey, Frank (53:56).

Unknown Speaker

Hi. Can you hear me?

Judson T. Bergman - Chairman, Chief Executive Officer, Director

Yes.

Unknown Speaker

Okay. First question I wanted to ask is related to the large licensing conversion. And just, how should we think about the economics of this and the frequency of similar transactions in the future?

Judson T. Bergman - Chairman, Chief Executive Officer, Director

Well, this is a license-based transaction where we are providing a tremendous amount of value to the home office and to the advisors that are looking to aggregate and consolidate their entire book of business under one dashboard. So as I indicated, this is a business line, a product line, that we didn't even offer until – this is now the first actionable revenue that we've received from this activity.

I also indicated that we thought this was an area that given – there was an example that I used as what's driving enterprise adoption of our solutions in a post-DOL world. And the factor that is addressed by this insurance company is our ability to a subscription-based arrangement, provide them with ongoing and dynamically updated consolidation of their held-away assets that are direct with the mutual fund companies and with some of the additional annuity providers.

So we expect that this is going to grow nicely for us. The only thing that we've given by way of an indication is that – I've said in the past that we expect that, in the first half of 2017 we expect this business to be generating more than $10 million a year for us on a revenue run rate. And we expect that – identified in the cross-sell synergies, we expected that there would be one or two of these over the next several years that would be actually cross-sold into Yodlee's client base. So we expect that it's going to be an important element of what our growing product solution set is going forward.

Unknown Speaker

Okay, great. And then just another question, going back to guidance and kind of where we stand, the range came down but then we also saw strong performance in the markets. So I'm just trying to understand a little bit better how much of that dynamic is attributed to – I think you listed in the prepared remarks three different factors: one, was lower contribution from flow and mix; the second was client-driven delay; the third was Yodlee coming in lower. How do you think about shift – the lower revenue guide, combined with the market outperformance as it ties to those three categories.

Judson T. Bergman - Chairman, Chief Executive Officer, Director

Well, the first thing is that – Pete is going to address the first two, but the third – we're not guiding lower for Yodlee. We are affirming the range and we're saying that's likely to come in at the lower end of that range, but we're not lowering guidance for Yodlee. So I wanted to make that clear, but Pete?

Peter H. D'Arrigo - Chief Financial Officer

Yeah. So I think the larger impact of the other two factors is picking up on some of the flow and fee rate mix issues that we identified in Q2. Certainly redemption is a little bit above what we expected and that impact is something that carries forward through the rest of the year.

As we factor out the rest of the year for that one, that is also going to be impacted by the flow activity that we're expecting, which is less what we have started the year with and what we've seen in the first half of the year.

The timing of the conversion; again, it's a client – that is driven by – client-driven change driven primarily by activity that the client is doing for additional testing, additional suitability for what their needs are. And so, we don't think that's slipping dramatically, but even if that does that's a smaller impact.

Judson T. Bergman - Chairman, Chief Executive Officer, Director

And then something that you didn't ask that I would just add to, but that was touched on with the William Blair comments is that, a lot of the change has happened post June 30 and we haven't – the market change has happened post June 30 and we haven't factored that yet.

Unknown Speaker

Great. Thank you very much.

Judson T. Bergman - Chairman, Chief Executive Officer, Director

I think we're running up on 5 o'clock but we have one more question in the queue, let's take that one – one additional question.

Operator

Absolutely. And we'll take that final question from Jeff Houston with Northland.

Judson T. Bergman - Chairman, Chief Executive Officer, Director

Hi, Jeff.

Jeff Houston - Northland Securities, Inc.

Hey, Jud. Thanks for taking my questions and squeezing me in here. I know it's been a long day. So looking at the WMS acquisition, did I hear you right that it closed a bit early? I think before you were targeting fourth quarter of the year. And then, also...

Judson T. Bergman - Chairman, Chief Executive Officer, Director

No, no, no. Our updated target was June 30 and that was – not to bring up old news, but that was later than what we had originally expected on that transaction; but June 30 was the updated date of expected completion. We got the final conversion across in early June which was again in accordance with expectations, but we're not going to see the full result of the benefit from that until the third quarter and not fully until the fourth quarter.

Jeff Houston - Northland Securities, Inc.

Got it. Got it. Okay. And what are the similar metrics for Placemark, just – when is that expected to close?

Judson T. Bergman - Chairman, Chief Executive Officer, Director

Well, we've closed on the transactions. We expect to complete the necessary conversions and related activity in early 2017.

Jeff Houston - Northland Securities, Inc.

Got it. Okay. And then just for those two close to being now under your belt now; any lessons from WMS and Placemark that you ply to some of the prospective acquisitions you're looking at?

Judson T. Bergman - Chairman, Chief Executive Officer, Director

That's a great question. I don't know if I'll be able to squeeze a complete answer in the time we have left, but I will say that mainframe legacy systems, the cloud-based systems are hard. And it's easier to do a web-based to web-based conversion. Mainframe legacy systems to cloud-based conversions are hard. And yet tremendous amount of effort by our engineering and operational teams. The capabilities that we've been able to expand now with the multicurrency and the trust capabilities is every bit worth it. And we're expecting to see some nice additional adoptions, enterprise adoptions that we would not have gotten had we not developed that multicurrency and trust accounting capabilities.

Jeff Houston - Northland Securities, Inc.

Got it. All right. Thank you.

Judson T. Bergman - Chairman, Chief Executive Officer, Director

I think that that is what all we have time for. I do want to thank you for calling in, for supporting, for your interest in Envestnet. And we expect we will be talking again in about three months' time. Thank you very much.

Operator

And that does conclude today's call. Thank you for your participation.

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