AssetMark Financial Holdings, Inc. (AMK) CEO Natalie Wolfsen on Q1 2022 Results - Earnings Call Transcript

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AssetMark Financial Holdings, Inc. (NYSE:AMK) Q1 2022 Results Conference Call April 28, 2022 5:00 PM ET

Company Participants

Taylor Hamilton - Head of Investor Relations

Natalie Wolfsen - Chief Executive Officer

Gary Zyla - Chief Financial Officer


Good afternoon, everyone, and welcome to AssetMark's First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. Today's call is being recorded.

Now I'd like to turn the call over to Taylor Hamilton, Head of Investor Relations. Please go ahead, Mr. Hamilton.

Taylor Hamilton

Thank you. Good afternoon, everyone, and welcome to AssetMark's first quarter 2022 earnings conference call. Joining me are AssetMark's Chief Executive Officer, Natalie Wolfsen; and Chief Financial Officer, Gary Zyla.

Today, they will discuss the results for the first quarter and provide an update to AssetMark's business outlook for 2022. Following our introductory remarks, we'll open up the call for questions. We also have an earnings presentation that Natalie and Gary will reference during their prepared remarks. It can be accessed on our IR website at

Before we get started, I'd like to note that certain statements made during this conference call are forward-looking statements. These forward-looking statements represent our outlook only as of the date of this call, and actual results could differ materially.

Additionally, during today's conference call, we'll be discussing net revenue, adjusted EBITDA, adjusted EBITDA margin and adjusted net income, all of which are non-GAAP financial metrics. Please refer to our earnings press release and SEC filings for more information on forward-looking statements, risk factors associated with our business and required disclosures related to non-GAAP financial information.

And with that, I'll turn the call over to my colleagues. Natalie, take it away.

Natalie Wolfsen

Thank you, Taylor, and hello, and welcome to our first quarter earnings call. I hope everyone is doing well. Since the last time we spoke, our team members have returned to the office in a hybrid schedule, and we've held our largest advisor event, Gold Forum in person, which was attended by close to 500 advisors representing about 1/3 of our platform assets. Our entire company is energized by seeing colleagues, advisors and partners in person.

Additionally, I'm excited about our strong first quarter results, highlighted by record quarterly revenue of $148 million and an adjusted EBITDA of $44.5 million, the second highest quarter in our company's history. We ended the first quarter with an adjusted EBITDA margin of 30%, up 140 basis points year-over-year. Gary will provide more color on our financial and operating results for the first quarter as well as provide an update on our 2022 outlook later in the call.

Today, I'll start with the findings of our latest impact of outsourcing study and then get into the five key components of our growth strategy. Starting on Slide 3 of the earnings presentation, our recently released impact of outsourcing study, further its initial research conducted in 2019 to uncover how the role of outsourcing has changed and what direction trends are heading in for financial advisors. Advisors who outsource spike a range of advantages, greater access to investment solutions, better relationships with clients, notable improvements in their businesses and personal benefit.

In fact, according to our most recent study, about 83% of advisors surveyed agreed that investment management outsourcing has better enabled them to strengthen client relationships, up from 68% in 2019, while 82% of advisors sighted increased client retention, up from 65% in 2019. Advisors also state that delegating investment management results in a tangible financial value. In fact, 91% of advisors in the study, which, by the way, was a mix of advisors who work with AssetMark don't work with AssetMark's outsource and don't outsource, reported growth in total assets as a result of outsourcing, while 84% reported higher business valuation, and 83% reported higher personal outcome.

The bottom line for us is that outsourcing works and AssetMark is built for advisors to make the decision to outsource. It's no surprise that 93% of advisors who use AssetMark as their primary outsourcing provider are highly likely to recommend outsourcing to other advisors. This is compared to 81% of advisors who outsource with another provider. We're focused on continuing to enhance our outsource offering as well as expand the channel of the impact.

With that said, let's turn our attention to the five key components of our growth strategy. The first component of our growth strategy highlighted on Slide 4, is to meet advisors where they are, catering to a variety of affiliations and new growth-oriented for mature advisors. As more and more advisors embrace to RIA model, AssetMark Institutional or AMI, is well positioned to support their growth, efficiency and scale. I will split my update on AMI this quarter between a sales update and a features update.

Let's start with sales. We continue to see strong growth within our RIA segment with the Fee Only RIA leading the way. First quarter AMI production lift was 19%. In the first quarter, we also signed agreements with 18 new RIA firms. And in the second quarter, we will host our second annual RIA summit, and we're really excited to have one-on-one interactions with RIAs who served in those new prospects. On the feature side, we continue to enhance our offering. We are actively upgrading the Advisor Managed platform focused on bettering the advisor experience. In addition, later this year, we will begin to offer the start of a model marketplace. With this, advisors have more flexibility in terms of the models they choose to implement.

Turning to Slide 5. The second component of our growth strategy is to deliver a holistic differentiated experience to advisors and their clients, providing an end-to-end, easy-to-use platform designed to create meaningful conversations between advisors and their clients while also saving advisors a significant amount of time. The global market for planning and wellness has grown significantly. And Voyant's strategy focuses on expansion by geographic opportunity. In the U.K., where Voyant derives more than 50% of their revenue and is the market leader in the enterprise and independent space, the team is focusing on ClientGo that part of the Voyant platform to accelerate new business.

Financial wellness is a group endeavor in the U.K. between the advisor and the client and ClientGo allows end clients the ability to customize their plans on their own time before, after and in between meetings with advisors. In Canada, financial wellness and planning is the focal point of client engagement in all lines of business. Voyant is continuing to grow their enterprise banking market share and further enhance relationships with credit unions and independents.

Lastly, in the U.S. and Australia, both new markets for Voyant, the focus is to grow by individual advisors, key intermediaries and investment solutions providers. Feedback from our advisors using Voyant continue to be positive and Voyant is showing strong end user growth, having added nearly 10,000 enterprise consumer licenses since we acquired them in July of 2021. We are excited about Voyant's future growth opportunities across multiple geography. The third component of our growth strategy is to enable advisors to serve more investors across the wealth spectrum bearing life stages and generation.

For more, let's turn to Slide 6. This month, we launched our value-driven investing program, which includes four new ESG strategies. In addition to the four strategies, advisors will also have access to a suite of tools to help them facilitate values-driven investing conversations with our clients. The new resources include an investor questionnaire, client discovery tool, due diligence resources, ESG and impact reporting and educational materials. This new program is in response to rapidly increasing demand for ESG solutions from both advisors and their investors.

We look forward to continuing to provide our advisors and investors with a wide range of personalized investment options that allow them to reflect their preferences and values in their portfolios. More on this in the quarters to come. In addition to launching our value-driven investing program, AssetMark also launched our inaugural ESG report this month, another sign of our commitment to value-driven investing and diversity and inclusion.

The fourth component of our growth strategy is seen on Slide 7 is help advisors grow and scale their businesses by offering turnkey advisor solutions and programs. In the first quarter, we launched WealthBuilder Prospecting, a new tool designed to streamline prospecting for financial advisors and help them with insights to drive lead conversion. Broadridge's third annual financial advisor marketing study found that there was a huge disconnect between advisor prospecting and what investors want. Historically, prospecting takes a large investment of an advisor's time and money in a very inefficient process.

Investors want a process that is easy and flexible and they want to avoid setting up user names, passwords and sharing personal and sensitive data. With WealthBuilder Prospecting, the investor allows advisors to invite leads into the planning process and effectively kickstart a warm client engagement. In a time-efficient way that increases the chance of earning new business. While WealthBuilder Prospecting launched in late January, early feedback from our advisors has been extremely positive. In the two months post launch, advisors have already generated 100 to-date.

Turning to Slide 8. The final component of our growth strategy is to pursue strategic transactions by adding capabilities and assets that improve advisors' ability to serve investors and expand their businesses. As I have mentioned on previous calls, we are more deliberately focused on M&A than we have ever been before, but will remain a very disciplined buyer, looking only to buy capabilities that we feel could be a strong fit for our platform.

I will now turn the call over to Gary, who will take us through a deeper dive of our first quarter 2022 results and provide an updated outlook for 2022.

Gary Zyla

Thank you, Natalie, and good afternoon to all those on the call. It's so great to be talking to so many of you. As Natalie mentioned, it is great to be back in the office with all of our team members and also great to see our advisors in person. Just last week, I attended one of our 20 Premier Advisor meeting held this month. And the atmosphere, the advisor engagement of the reopening or our reopening after two years of COVID is just great for our business and for our communities. As usual, I will start with a discussion of our platform assets, then talk about revenue, expenses and then our earnings. I will conclude with an update on our outlook for 2022.

Turning to Slide 9, first quarter platform assets were $90.8 billion, up 15% year-over-year. This growth reflects first quarter net flows of $2.1 billion, which were up more than 10% year-over-year. Offsetting our strong quarterly net flows was $4.8 billion in market loss net of fees. Annualized net flow as a percentage of our beginning period assets was 9.1% is slightly below our target of 10% for 2022.

Momentum is continuing in the second quarter and as we are near the end of April, I can say that we are expecting monthly flows about $350 million, which reflects normal seasonality or the normal seasonal impact of the tax treatment as well as some outflows due to market volatility. As a reminder, last year's taxes was due in May, which was our second lowest month flows today.

Let's now turn our attention to our advisory metrics. Please turn to Slide 10. In the first quarter, we added 195 new producing advisors or NPA. As we always point out, growing the number of engaged advisors on our platform is a key focus for management as it is crucial to drive further growth for our business and financials. We define engaged as those with over $5 million in assets in our platform. Our total engaged advisors at the end of the first quarter was 2,815. This reflects 61 net new engaged advisors, but offset by 104 advisors dropping below $5 million due to market depreciation. Our engaged advisors would make up 92% of our platform asset.

Now let's turn to Slide 11 to discuss this quarter's revenue, which was a record $148 million. As you know, we focus on our revenue net related variable expenses. In the first quarter of 2022, our net revenue of $106 million was up 29% year-over-year. This is driven by asset-based net revenue, which is up 25% to $100 million and the addition of subscription-based revenue from Voyant which was $3.3 million. Spread-based revenue for the first quarter was $1.6 million.

We expect spread-based revenue to begin to pick up this year with the Fed raising rates of 25 percentage points during their March meeting and signaling to net rate nearly 2% by the end of this year. I will provide additional details on how we expect these rate increases will impact our financials when I discuss our 2022 outlook.

Slide 12 details our year-over-year net revenue walk. As the waterfall shows, net revenue was up year-over-year driven money impact or asset growth, we generated $20 million in additional net revenue. Also adding to our increased net revenue is a $3.6 million reduction in our asset-based incentives.

As a reminder, this is ongoing savings is primarily driven by restructured agreements with providers, will first realize in the second quarter of last year. Year-over-year fee compression was approximately 1 basis point in line with expectation. Subscription revenues in Voyant added $3.3 million in additional revenue as Voyant's consulting revenue both increased in our other revenue line as well. Lastly, spread-based revenue decreased about $400,000 year-over-year due to the decline in our average yield of 31 basis points to 22 basis points.

Now let's discuss percentage as shown on Slide 13. Total adjusted expenses increased 23% year-over-year to $111 million. Quarterly operating expenses were up 28% year-over-year to $61.7 million, driven by a $5.5 million increase in compensating expense and an $8.2 million increase in SG&A. And we quickly run through our adjustments for the quarter. We added back a total of $8.1 million of pretax, which is comprised of three items.

First, $3.1 million of noncash share-based compensation, this is $30 million lower than the first quarter of 2021 and represents the first quarter without the equity charges that resulted from our IPO. Second adjustment to expenses is $1.7 million from amortization expense related to prior acquisitions. We expect this number to be up quarterly run rate in 2022. Lastly, there's $3.3 million related primarily to reorganization and integration costs and onetime costs related to the pandemic.

Now let's turn to Slide 14 to discuss our earnings. First quarter '22 adjusted EBITDA was $44.5 million, up 30% year-over-year and our second highest quarterly adjusted EBITDA in our company's history. We are extremely pleased with our adjusted EBITDA this quarter expecting and includes a rapid sizable expense related to our annual in-person Gold Forum event, whilst this event last year was much less as it was held virtually. Adjusted EBITDA margin for the quarter was 30%, up 120 basis points year-over-year. Our reported net income for the quarter was $22.2 million compared to $25.7 million for the full year of 2021, while adjusted net income for the first quarter was $28.8 million or $0.39 per share.

This is based on first quarter diluted share count of 73.7 million. Our adjusted effective tax rate for the full year is unchanged at 23.5%. Further color, please see adjusted net income walk on Slide 19. Turning to Slide 15, I want to spend some time this quarter highlighting our cash balance and cash generation, both of which heavily are key positives. We ended the first quarter, we had just under $100 million of cash in the balance sheet and had $375 million of available credit via our credit facility, providing us plenty of dry powder for future M&A opportunities.

Cash generation also remains strong. We continue to generate more cash each year, and we expect to generate between USD85 million and USD100 million of cash this year. And a strong cash balance in addition to our ability to generate cash, we feel we have great mix for M&A and investments for the dividends.

Let's turn to Slide 16 to provide an update on our 2022 expectation. We have flexibility in our business model, given that we build and advance and have a strong track record of expense management. Prior to market volatility, I am pleased to announce that we are reaffirming our earnings outlook as well as our EBITDA margin expansion targets for the year. We share with you what gives us this confidence. First, let's start with our revenue outlook.

As a result of our billing events, we have already collected revenues for about half the year based on any platform assets tool on December 31, 2021, now on March 31, 2022. Our 2022 revenue asset was impacted by about $17 million has been impacted about $17 million due to the market probability and another $5 million related to timing issues with Voyant as a result of global macroeconomic and pandemic issues. Prior to offsetting this is a forecasted increase in spread amount with a 25 basis point increase in March and signals in the fed and we look to raise rates to about 2% by year-end.

We expect an additional $9 million in spread revenue in our outlook. Reminder, our last outlook did not forecast any rate increase in 2022. As a result of the market volatility and the Voyant revenue environment, we were revising our revenue growth expectations from a range of 18% to 22%, down to 16% to 20%.

Turning to our expense outlook, our model is less still in our expense space, and we remain disciplined, so it did not outpace revenue growth. And our revenue once again is coming down slightly due to the market volatility and the timing of Voyant contract. We will also revising our expense growth outlook from a range of 16% to 20%, 14% to 18%. By doing so, we look to take about $9 million of expense from our forecast in 2022. These reductions are surgical related to travel and event costs, high new hires and delayed nongrowth nongrowth centric -- non growth non essential products.

We remain incredibly excited about 2022 and AssetMark's ability to continue to drive and grow. We are reaffirming our outlook of 20%-plus adjusted EBITDA growth for the year and EBITDA margin expansion of 100 basis points.

With that, I'll hand over to Natalie for concluding remarks. Thanks, Gary, and thank you, everyone, on the call today. We look forward to seeing you in person sometime soon. This concludes our prepared remarks, and I will turn the call back to the operator to begin questions and answers.

Question-and-Answer Session


Natalie Wolfsen

All right. Thank you, everyone. We appreciate you joining us on the call today and look forward to meeting with you soon.

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