3
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20172018
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-34835
Envestnet, Inc.
(Exact name of registrant as specified in its charter)
Delaware |
| 20-1409613 |
(State or other jurisdiction of |
| (I.R.S Employer |
35 East Wacker Drive, Suite 2400, Chicago, IL |
| 60601 |
(Address of principal executive offices) |
| (Zip Code) |
Registrant’s telephone number, including area code:
(312) 827-2800
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☒ |
| Accelerated filer ☐ |
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|
Non-accelerated filer ☐ |
| Smaller reporting company ☐
Emerging growth company ☐
|
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of November 5, 2017, 44,305,791August 1, 2018, 45,384,004 shares of the common stock with a par value of $0.005 per share were outstanding.
2
Envestnet, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share information)
(unaudited)
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| September 30, |
| December 31, |
| June 30, |
| December 31, |
| ||||
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| 2017 |
| 2016 |
| 2018 |
| 2017 |
| ||||
Assets |
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Current assets: |
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Cash and cash equivalents |
| $ | 48,704 |
| $ | 52,592 |
| $ | 134,032 |
| $ | 60,115 |
|
Fees and other receivables, net |
|
| 49,726 |
|
| 44,268 | |||||||
Fees receivable, net |
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| 64,164 |
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| 51,522 |
| ||||||
Prepaid expenses and other current assets |
|
| 23,999 |
|
| 16,224 |
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| 22,721 |
|
| 19,470 |
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Total current assets |
|
| 122,429 |
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| 113,084 |
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| 220,917 |
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| 131,107 |
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Property and equipment, net |
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| 35,274 |
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| 33,000 |
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| 40,397 |
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| 35,909 |
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Internally developed software, net |
|
| 20,279 |
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| 14,860 |
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| 29,257 |
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| 22,174 |
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Intangible assets, net |
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| 233,525 |
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| 265,558 |
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| 313,743 |
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| 222,731 |
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Goodwill |
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| 432,746 |
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| 431,936 |
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| 526,955 |
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| 432,955 |
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Other non-current assets |
|
| 17,969 |
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| 13,963 |
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| 23,907 |
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| 17,176 |
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Total assets |
| $ | 862,222 |
| $ | 872,401 |
| $ | 1,155,176 |
| $ | 862,052 |
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Liabilities and Equity |
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Current liabilities: |
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Accrued expenses and other liabilities |
| $ | 102,877 |
| $ | 87,763 |
| $ | 109,537 |
| $ | 105,897 |
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Accounts payable |
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| 13,215 |
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| 11,480 |
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| 21,133 |
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| 11,097 |
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Current portion of debt |
|
| — |
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| 37,926 | |||||||
Contingent consideration |
|
| 2,055 |
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| 2,286 |
|
| 707 |
|
| 2,115 |
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Deferred revenue |
|
| 18,388 |
|
| 16,499 |
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| 25,739 |
|
| 21,246 |
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Total current liabilities |
|
| 136,535 |
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| 155,954 |
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| 157,116 |
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| 140,355 |
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Convertible Notes |
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| 157,353 |
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| 152,575 | |||||||
Convertible Notes due 2019 |
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| 162,299 |
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| 158,990 |
| ||||||
Convertible Notes due 2023 |
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| 289,562 |
|
| — |
| ||||||
Revolving credit facility |
|
| 101,168 |
|
| — |
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| — |
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| 81,168 |
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Term Notes |
|
| — |
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| 100,409 | |||||||
Contingent consideration |
|
| 641 |
|
| 2,582 |
|
| — |
|
| 666 |
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Deferred revenue |
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| 14,454 |
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| 15,643 |
|
| 7,929 |
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| 12,047 |
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Deferred rent and lease incentive |
|
| 14,867 |
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| 12,060 |
|
| 17,334 |
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| 15,185 |
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Deferred tax liabilities, net |
|
| 12,216 |
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| 5,555 |
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| 2,154 |
|
| 969 |
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Other non-current liabilities |
|
| 14,527 |
|
| 13,436 |
|
| 16,744 |
|
| 15,102 |
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Total liabilities |
|
| 451,761 |
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| 458,214 |
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| 653,138 |
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| 424,482 |
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Commitments and contingencies |
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Redeemable units in ERS |
|
| 900 |
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| 900 |
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| 900 |
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| 900 |
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Equity: |
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Stockholders’ equity: |
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Preferred stock, par value $0.005, 50,000,000 shares authorized |
|
| — |
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| — |
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| — |
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| — |
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Common stock, par value $0.005, 500,000,000 shares authorized; 56,918,043 and 55,642,686 shares issued as of September 30, 2017 and December 31, 2016, respectively; 44,213,751 and 43,240,567 shares outstanding as of September 30, 2017 and December 31, 2016, respectively |
|
| 284 |
|
| 278 | |||||||
Common stock, par value $0.005, 500,000,000 shares authorized; 58,382,026 and 57,450,056 shares issued as of June 30, 2018 and December 31, 2017, respectively; 45,375,594 and 44,700,641 shares outstanding as of June 30, 2018 and December 31, 2017, respectively |
|
| 291 |
|
| 287 |
| ||||||
Additional paid-in capital |
|
| 544,895 |
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| 516,675 |
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| 624,378 |
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| 556,257 |
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Accumulated deficit |
|
| (91,499) |
|
| (70,574) |
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| (62,059) |
|
| (73,854) |
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Treasury stock at cost, 12,704,292 and 12,402,119 shares as of September 30, 2017 and December 31, 2016, respectively |
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| (44,687) |
|
| (33,068) | |||||||
Treasury stock at cost, 13,006,432 and 12,749,415 shares as of June 30, 2018 and December 31, 2017, respectively |
|
| (61,437) |
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| (47,042) |
| ||||||
Accumulated other comprehensive income (loss) |
|
| 170 |
|
| (422) |
|
| (739) |
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| 624 |
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Total stockholders’ equity |
|
| 409,163 |
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| 412,889 |
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| 500,434 |
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| 436,272 |
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Non-controlling interest |
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| 398 |
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| 398 |
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| 704 |
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| 398 |
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Total equity |
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| 409,561 |
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| 413,287 |
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| 501,138 |
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| 436,670 |
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Total liabilities and equity |
| $ | 862,222 |
| $ | 872,401 |
| $ | 1,155,176 |
| $ | 862,052 |
|
See accompanying notes to unaudited Condensed Consolidated Financial Statements.
3
Envestnet, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except share and per share information)
(unaudited)
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| Three Months Ended |
| Nine Months Ended |
| Three Months Ended |
| Six Months Ended | ||||||||||||||||
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| September 30, |
| September 30, |
| June 30, |
| June 30, | ||||||||||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||
Revenues: |
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Assets under management or administration |
| $ | 106,147 |
| $ | 90,042 |
| $ | 299,268 |
| $ | 258,969 | ||||||||||||
Subscription and licensing |
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| 62,963 |
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| 51,959 |
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| 180,675 |
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| 142,303 | ||||||||||||
Professional services and other |
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| 6,504 |
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| 7,154 |
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| 20,874 |
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| 21,412 | ||||||||||||
Asset-based |
| $ | 118,111 |
| $ | 98,959 |
| $ | 239,264 |
| $ | 193,121 | ||||||||||||
Subscription-based |
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| 71,779 |
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| 59,802 |
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| 141,474 |
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| 117,712 | ||||||||||||
Total recurring revenues |
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| 189,890 |
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| 158,761 |
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| 380,738 |
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| 310,833 | ||||||||||||
Professional services and other revenues |
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| 11,226 |
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| 8,656 |
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| 18,389 |
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| 14,370 | ||||||||||||
Total revenues |
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| 175,614 |
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| 149,155 |
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| 500,817 |
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| 422,684 |
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| 201,116 |
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| 167,417 |
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| 399,127 |
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| 325,203 |
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Operating expenses: |
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Cost of revenues |
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| 56,070 |
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| 47,259 |
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| 161,031 |
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| 132,319 |
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| 67,627 |
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| 55,735 |
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| 130,561 |
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| 104,961 |
Compensation and benefits |
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| 68,551 |
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| 60,345 |
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| 199,079 |
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| 180,625 |
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| 80,210 |
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| 64,996 |
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| 163,750 |
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| 130,528 |
General and administration |
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| 31,153 |
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| 26,150 |
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| 90,178 |
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| 80,249 |
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| 34,089 |
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| 28,478 |
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| 66,818 |
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| 59,025 |
Depreciation and amortization |
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| 15,492 |
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| 16,692 |
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| 46,792 |
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| 49,872 |
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| 19,185 |
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| 15,465 |
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| 38,731 |
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| 31,300 |
Total operating expenses |
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| 171,266 |
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| 150,446 |
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| 497,080 |
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| 443,065 |
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| 201,111 |
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| 164,674 |
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| 399,860 |
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| 325,814 |
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Income (loss) from operations |
|
| 4,348 |
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| (1,291) |
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| 3,737 |
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| (20,381) |
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| 5 |
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| 2,743 |
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| (733) |
|
| (611) |
Other expense, net |
|
| (3,986) |
|
| (4,434) |
|
| (13,838) |
|
| (13,214) |
|
| (5,430) |
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| (4,369) |
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| (10,684) |
|
| (9,852) |
Income (loss) before income tax provision (benefit) |
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| 362 |
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| (5,725) |
|
| (10,101) |
|
| (33,595) | ||||||||||||
Loss before income tax provision (benefit) |
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| (5,425) |
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| (1,626) |
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| (11,417) |
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| (10,463) | ||||||||||||
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Income tax provision (benefit) |
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| 1,682 |
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| (1,668) |
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| 10,824 |
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| (10,602) |
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| 566 |
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| 4,844 |
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| (13,428) |
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| 9,142 |
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Net loss |
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| (1,320) |
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| (4,057) |
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| (20,925) |
|
| (22,993) | ||||||||||||
Net income (loss) |
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| (5,991) |
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| (6,470) |
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| 2,011 |
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| (19,605) | ||||||||||||
Add: Net loss attributable to non-controlling interest |
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| — |
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| — |
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| — |
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| — |
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| 465 |
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| — |
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| 567 |
|
| — |
Net loss attributable to Envestnet, Inc. |
| $ | (1,320) |
| $ | (4,057) |
| $ | (20,925) |
| $ | (22,993) | ||||||||||||
Net income (loss) attributable to Envestnet, Inc. |
| $ | (5,526) |
| $ | (6,470) |
| $ | 2,578 |
| $ | (19,605) | ||||||||||||
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Net loss per share attributable to Envestnet, Inc.: |
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Net income (loss) per share attributable to Envestnet, Inc.: |
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Basic |
| $ | (0.03) |
| $ | (0.09) |
| $ | (0.48) |
| $ | (0.54) |
| $ | (0.12) |
| $ | (0.15) |
| $ | 0.06 |
| $ | (0.45) |
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Diluted |
| $ | (0.03) |
| $ | (0.09) |
| $ | (0.48) |
| $ | (0.54) |
| $ | (0.12) |
| $ | (0.15) |
| $ | 0.05 |
| $ | (0.45) |
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Weighted average common shares outstanding: |
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Basic |
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| 44,044,527 |
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| 42,843,103 |
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| 43,604,869 |
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| 42,704,383 |
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| 45,247,331 |
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| 43,855,479 |
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| 44,963,735 |
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| 43,513,074 |
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Diluted |
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| 44,044,527 |
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| 42,843,103 |
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| 43,604,869 |
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| 42,704,383 |
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| 45,247,331 |
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| 43,855,479 |
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| 47,156,205 |
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| 43,513,074 |
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See accompanying notes to unaudited Condensed Consolidated Financial Statements.
4
Envestnet, Inc.
Condensed Consolidated Statements of Comprehensive LossIncome (Loss)
(in thousands)
(unaudited)
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| Three Months Ended |
| Nine Months Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Net loss attributable to Envestnet, Inc. |
| $ | (1,320) |
| $ | (4,057) |
| $ | (20,925) |
| $ | (22,993) |
Other comprehensive income (loss), net of taxes |
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Foreign currency translation gain (loss) |
|
| (217) |
|
| 192 |
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| 592 |
|
| (122) |
Gains on foreign currency contracts designated as cash flow hedges reclassified to earnings |
|
| — |
|
| (556) |
|
| — |
|
| (204) |
Total other comprehensive income (loss), net of taxes |
|
| (217) |
|
| (364) |
|
| 592 |
|
| (326) |
Comprehensive loss, net of taxes |
| $ | (1,537) |
| $ | (4,421) |
| $ | (20,333) |
| $ | (23,319) |
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| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
Net income (loss) attributable to Envestnet, Inc. |
| $ | (5,526) |
| $ | (6,470) |
| $ | 2,578 |
| $ | (19,605) |
Other comprehensive income (loss), net of taxes: |
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Foreign currency translation gain (loss) |
|
| (1,036) |
|
| 76 |
|
| (1,363) |
|
| 809 |
Comprehensive income (loss) attributable to Envestnet, Inc. |
| $ | (6,562) |
| $ | (6,394) |
| $ | 1,215 |
| $ | (18,796) |
See accompanying notes to unaudited Condensed Consolidated Financial Statements.
5
Envestnet, Inc.
Condensed Consolidated Statement of Equity
(in thousands, except share information)
(unaudited)
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| Accumulated |
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| Accumulated |
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| Common Stock |
| Treasury Stock |
| Additional |
| Other |
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| Non- |
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| Common Stock |
| Treasury Stock |
| Additional |
| Other |
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| Non- |
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| Common |
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| Paid-in |
| Comprehensive |
| Accumulated |
| controlling |
| Total |
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| Common |
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| Paid-in |
| Comprehensive |
| Accumulated |
| controlling |
| Total | ||||||||||
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| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Deficit |
| Interest |
| Equity |
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Deficit |
| Interest |
| Equity | ||||||||||||||
Balance, December 31, 2016 |
| 55,642,686 |
| $ | 278 |
| (12,402,119) |
| $ | (33,068) |
| $ | 516,675 |
| $ | (422) |
| $ | (70,574) |
| $ | 398 |
| $ | 413,287 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Balance, December 31, 2017 |
| 57,450,056 |
| $ | 287 |
| (12,749,415) |
| $ | (47,042) |
| $ | 556,257 |
| $ | 624 |
| $ | (73,854) |
| $ | 398 |
| $ | 436,670 | |||||||||||||||||||||||||
Adoption of ASC 606 (See Note 4) |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| 9,217 |
|
| — |
|
| 9,217 | |||||||||||||||||||||||||
Exercise of stock options |
| 428,173 |
|
| 2 |
| — |
|
| — |
|
| 4,466 |
|
| — |
|
| — |
|
| — |
|
| 4,468 |
| 175,023 |
|
| 1 |
| — |
|
| — |
|
| 2,539 |
|
| — |
|
| — |
|
| — |
|
| 2,540 |
Issuance of common stock - vesting of restricted stock units |
| 847,184 |
|
| 4 |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 4 |
| 756,947 |
|
| 3 |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 3 |
Stock-based compensation expense |
| — |
|
| — |
| — |
|
| — |
|
| 23,754 |
|
| — |
|
| — |
|
| — |
|
| 23,754 |
| — |
|
| — |
| — |
|
| — |
|
| 18,971 |
|
| — |
|
| — |
|
| — |
|
| 18,971 |
Purchase of treasury stock for stock-based tax withholdings |
| — |
|
| — |
| (302,173) |
|
| (11,619) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (11,619) |
| — |
|
| — |
| (257,017) |
|
| (14,395) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (14,395) |
Foreign currency translation gain |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 592 |
|
| — |
|
| — |
|
| 592 | |||||||||||||||||||||||||
Net loss |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| (20,925) |
|
| — |
|
| (20,925) | |||||||||||||||||||||||||
Balance, September 30, 2017 |
| 56,918,043 |
| $ | 284 |
| (12,704,292) |
| $ | (44,687) |
| $ | 544,895 |
| $ | 170 |
| $ | (91,499) |
| $ | 398 |
| $ | 409,561 | |||||||||||||||||||||||||
Issuance of non-controlling units in private company |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 873 |
|
| 873 | |||||||||||||||||||||||||
Issuance of Convertible Notes due 2023, net of offering costs |
| — |
|
| — |
| — |
|
| — |
|
| 46,611 |
|
| — |
|
| — |
|
| — |
|
| 46,611 | |||||||||||||||||||||||||
Foreign currency translation loss |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| (1,363) |
|
| — |
|
| — |
|
| (1,363) | |||||||||||||||||||||||||
Net income (loss) |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| 2,578 |
|
| (567) |
|
| 2,011 | |||||||||||||||||||||||||
Balance, June 30, 2018 |
| 58,382,026 |
| $ | 291 |
| (13,006,432) |
| $ | (61,437) |
| $ | 624,378 |
| $ | (739) |
| $ | (62,059) |
| $ | 704 |
| $ | 501,138 |
See accompanying notes to unaudited Condensed Consolidated Financial Statements.
6
Envestnet, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
|
|
|
|
|
|
|
|
| Six Months Ended | ||||
|
| June 30, | ||||
|
| 2018 |
| 2017 | ||
OPERATING ACTIVITIES: |
|
|
|
|
|
|
Net income (loss) |
| $ | 2,011 |
| $ | (19,605) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
| 38,731 |
|
| 31,300 |
Deferred rent and lease incentive amortization |
|
| 1,069 |
|
| 583 |
Provision for doubtful accounts |
|
| 924 |
|
| 341 |
Deferred income taxes |
|
| (17,093) |
|
| 6,524 |
Stock-based compensation expense |
|
| 18,971 |
|
| 15,403 |
Non-cash interest expense |
|
| 5,630 |
|
| 4,853 |
Accretion on contingent consideration and purchase liability |
|
| 196 |
|
| 304 |
Payments of contingent consideration |
|
| — |
|
| (357) |
Loss allocation from equity method investment |
|
| 811 |
|
| 702 |
Loss on disposal of fixed assets |
|
| 10 |
|
| 69 |
Changes in operating assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
Fees receivable, net |
|
| (8,204) |
|
| (5,639) |
Prepaid expenses and other current assets |
|
| (3,426) |
|
| (2,681) |
Other non-current assets |
|
| (2,450) |
|
| (514) |
Accrued expenses and other liabilities |
|
| (5,448) |
|
| (752) |
Accounts payable |
|
| 4,166 |
|
| (184) |
Deferred revenue |
|
| 3,478 |
|
| 1,818 |
Other non-current liabilities |
|
| 1,578 |
|
| 3,022 |
Net cash provided by operating activities |
|
| 40,954 |
|
| 35,187 |
|
|
|
|
|
|
|
INVESTING ACTIVITIES: |
|
|
|
|
|
|
Purchase of property and equipment |
|
| (9,569) |
|
| (9,181) |
Capitalization of internally developed software |
|
| (10,622) |
|
| (5,651) |
Acquisition of businesses |
|
| (188,345) |
|
| — |
Net cash used in investing activities |
|
| (208,536) |
|
| (14,832) |
|
|
|
|
|
|
|
FINANCING ACTIVITIES: |
|
|
|
|
|
|
Proceeds from issuance of Convertible Notes due 2023 |
|
| 345,000 |
|
| — |
Convertible Notes due 2023 issuance costs |
|
| (9,488) |
|
| — |
Proceeds from borrowings on revolving credit facility |
|
| 195,000 |
|
| 25,000 |
Payments on revolving credit facility |
|
| (276,168) |
|
| (25,000) |
Payments of contingent consideration |
|
| (2,193) |
|
| (1,929) |
Payments of definite consideration |
|
| — |
|
| (445) |
Payments of purchase consideration liabilities |
|
| — |
|
| (235) |
Payment of Term Notes |
|
| — |
|
| (35,862) |
Proceeds from exercise of stock options |
|
| 2,540 |
|
| 2,617 |
Purchase of treasury stock for stock-based tax withholdings |
|
| (14,395) |
|
| (9,650) |
Issuance of restricted stock units |
|
| 3 |
|
| 4 |
Net cash provided by (used in) financing activities |
|
| 240,299 |
|
| (45,500) |
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH |
|
| (572) |
|
| 283 |
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH |
|
| 72,145 |
|
| (24,862) |
|
|
|
|
|
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD |
|
| 62,115 |
|
| 54,592 |
|
|
|
|
|
|
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD (See Note 2) |
| $ | 134,260 |
| $ | 29,730 |
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information - net cash paid during the period for income taxes |
| $ | 2,225 |
| $ | 275 |
Supplemental disclosure of cash flow information - cash paid during the period for interest |
|
| 4,271 |
|
| 3,960 |
Supplemental disclosure of non-cash operating, investing and financing activities: |
|
|
|
|
|
|
Leasehold improvements funded by lease incentive |
|
| 1,080 |
|
| 281 |
Purchase liabilities included in accrued expenses and other liabilities |
|
| 1,422 |
|
| 818 |
Purchase of fixed assets included in accounts payable and accrued expenses and other liabilities |
|
| 1,188 |
|
| 260 |
|
|
|
|
|
|
|
|
| Nine Months Ended | ||||
|
| September 30, | ||||
|
| 2017 |
| 2016 | ||
OPERATING ACTIVITIES: |
|
|
|
|
|
|
Net loss |
| $ | (20,925) |
| $ | (22,993) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
| 46,792 |
|
| 49,872 |
Deferred rent and lease incentive amortization |
|
| 709 |
|
| (324) |
Provision for doubtful accounts |
|
| 828 |
|
| 369 |
Deferred income taxes |
|
| 6,646 |
|
| (10,273) |
Stock-based compensation expense |
|
| 23,451 |
|
| 25,872 |
Non-cash interest expense |
|
| 8,711 |
|
| 6,955 |
Accretion on contingent consideration and purchase liability |
|
| 408 |
|
| 143 |
Fair market value adjustment on contingent consideration |
|
| — |
|
| 838 |
Loss on disposal of fixed assets |
|
| 69 |
|
| 220 |
Loss allocation from equity method investment |
|
| 984 |
|
| 1,130 |
Changes in operating assets and liabilities, net of acquisitions: |
|
|
|
|
|
|
Fees and other receivables |
|
| (6,286) |
|
| 4,077 |
Prepaid expenses and other current assets |
|
| (5,316) |
|
| (4,960) |
Other non-current assets |
|
| (1,784) |
|
| (4,271) |
Accrued expenses and other liabilities |
|
| 13,289 |
|
| 275 |
Accounts payable |
|
| 1,435 |
|
| 124 |
Deferred revenue |
|
| 740 |
|
| 1,959 |
Other non-current liabilities |
|
| 1,852 |
|
| 4,337 |
Net cash provided by operating activities |
|
| 71,603 |
|
| 53,350 |
|
|
|
|
|
|
|
INVESTING ACTIVITIES: |
|
|
|
|
|
|
Purchase of property and equipment |
|
| (11,432) |
|
| (10,839) |
Capitalization of internally developed software |
|
| (9,210) |
|
| (6,217) |
Investment in private company |
|
| (1,450) |
|
| (738) |
Purchase of ERS units |
|
| — |
|
| (1,500) |
Acquisition of businesses, net of cash acquired |
|
| — |
|
| (18,394) |
Net cash used in investing activities |
|
| (22,092) |
|
| (37,688) |
|
|
|
|
|
|
|
FINANCING ACTIVITIES: |
|
|
|
|
|
|
Payment of Term Notes |
|
| (35,862) |
|
| (6,000) |
Proceeds from borrowings on revolving credit facility |
|
| 35,000 |
|
| 25,000 |
Payments on revolving credit facility |
|
| (42,500) |
|
| (25,000) |
Debt issuance costs |
|
| (94) |
|
| — |
Payments of contingent consideration |
|
| (2,286) |
|
| (2,924) |
Payments of definite consideration |
|
| (445) |
|
| — |
Payments of purchase consideration liabilities |
|
| (235) |
|
| — |
Proceeds from exercise of stock options |
|
| 4,468 |
|
| 3,166 |
Purchase of treasury stock for stock-based tax withholdings |
|
| (11,619) |
|
| (9,517) |
Common stock acquired under the share repurchase program |
|
| — |
|
| (1,448) |
Issuance of restricted stock units |
|
| 4 |
|
| 5 |
Net cash used in financing activities |
|
| (53,569) |
|
| (16,718) |
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH |
|
| 170 |
|
| — |
|
|
|
|
|
|
|
DECREASE IN CASH AND CASH EQUIVALENTS |
|
| (3,888) |
|
| (1,056) |
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
| 52,592 |
|
| 51,718 |
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
| $ | 48,704 |
| $ | 50,662 |
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information - net cash refunded (paid) during the period for income taxes |
| $ | 1,449 |
| $ | (175) |
Supplemental disclosure of cash flow information - cash paid during the period for interest |
|
| 4,887 |
|
| 5,390 |
Supplemental disclosure of non-cash operating, investing and financing activities: |
|
|
|
|
|
|
Leasehold improvements funded by lease incentive |
|
| 2,098 |
|
| 1,522 |
Non-cash debt issuance costs |
|
| 2,230 |
|
| — |
Purchase liabilities included in accrued expenses and other liabilities |
|
| 837 |
|
| — |
Purchase of fixed assets included in accounts payable and accrued expenses and other liabilities |
|
| 505 |
|
| — |
Contingent consideration issued in a business acquisition |
|
| — |
|
| 1,929 |
See accompanying notes to unaudited Condensed Consolidated Financial Statements.
7
See accompanying notes to unaudited Condensed Consolidated Financial Statements.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(in thousands, except share and per share amounts)
1.Organization and Description of Business
Envestnet, Inc. (“Envestnet”) and its subsidiaries (collectively, the “Company”) provide intelligent systems for wealth management and financial wellness. Envestnet’s unified technology enhances advisor productivity and strengthens the wealth management process, delivering unparalleled flexibility, accuracy, performance, and value. Envestnet enables a transparent, independent, objective, and fiduciary standard of care, and empowers enterprises and advisors to more fully understand their clients.process. Through a combination of platform enhancements, partnerships and acquisitions, Envestnet uniquely provides a financial network connecting software, servicesempowers enterprises and data, delivering better intelligenceadvisors to more fully understand their clients and enabling its customers to drivedeliver better outcomes.
The Company offers these solutions principally through the following product/product and services suites:
· | Envestnet | Enterprise provides an end-to-end open architecture wealth management platform, through which advisors can construct portfolios for clients. It begins with aggregated household data which then leads to a financial plan, asset allocation, investment strategy, portfolio management, rebalancing and performance reporting. Advisors have access to over |
· | Envestnet | TamaracTM provides leading trading, rebalancing, portfolio accounting, performance reporting and client relationship management |
· | Envestnet | Retirement Solutions (“ERS”) offers a comprehensive suite of services for advisor-sold retirement plans. Leveraging integrated technology, ERS addresses the regulatory, data, and investment needs of retirement plans and delivers the information holistically. |
· | Envestnet | PMC® or Portfolio Management Consultants (“PMC”) provides research, due diligence and consulting services to assist advisors in creating investment solutions for their clients. These solutions include |
· | Envestnet | YodleeTM is a leading data aggregation and data |
Envestnet operates threefour RIAs and a registered broker-dealer. The RIAs are registered with the Securities and Exchange Commission (“SEC”). The broker-dealer is registered with the SEC, all 50 states and the District of Columbia and is a member of the Financial Industry Regulatory Authority (“FINRA”).Authority.
2.Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company as of SeptemberJune 30, 20172018 and for the three and ninesix months ended SeptemberJune 30, 20172018 and 20162017 have not been audited by an independent registered public accounting firm. These unaudited condensed consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements for the year ended December 31, 20162017 and reflect all normal recurring adjustments which are, in the opinion of management, necessary to present fairly the Company’s financial position as of SeptemberJune 30, 20172018 and the results of operations, equity, comprehensive lossincome (loss) and cash flows for the periods presented herein. The unaudited condensed consolidated financial statements include the accounts of Envestnet and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Accounts for the Envestnet segment that are denominated in a non-U.S. currency have been re-measured using the U.S. dollar as the functional currency. Certain accounts within the Envestnet | Yodlee segment are recorded and measured in foreign currencies. The assets and liabilities for those subsidiaries with a foreign currency functional currency are translated at
8
exchange rates in effect at the balance sheet date, and revenues and expenses are translated at average exchange rates. Differences arising from these foreign currency translations are recorded in the unaudited condensed consolidated balance sheets as accumulated other comprehensive income (loss) within stockholders’ equity. The results of operations for the three and ninesix months ended SeptemberJune 30, 20172018 are not necessarily indicative of the operating results to be expected for other interim periods or for the full fiscal year.
8
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2017, filed with the SEC on March 24, 2017.February 28, 2018.
The preparation of these unaudited condensed consolidated financial statements requires management to make estimates and assumptions related to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these unaudited condensed consolidated financial statements in conformity with GAAP. Areas requiring the use of management estimates relate to estimating uncollectible receivables, revenue recognition, the determination of the period of benefit for deferred sales incentive commissions, valuations and assumptions used for impairment testing of goodwill, intangible and other long-lived assets, fair value of restricted stock and stock options issued, fair value of contingent consideration, realization of deferred tax assets, uncertain tax positions, sales tax liabilities, fair value of the liability portion of the convertible debt and assumptions used to allocate purchase prices in business combinations. Actual results could differ materially from these estimates under different assumptions or conditions.
Share repurchase program – On February 25, 2016,The following table reconciles cash, cash equivalents and restricted cash from the Company announced that its Boardcondensed consolidated balance sheets to amounts reported within the condensed consolidated statements of Directors had authorized a share repurchase program under which the Company may repurchase up to 2,000,000 shares of its common stock. The timing and volume of share repurchases will be determined by the Company’s management based on its ongoing assessments of the capital needs of the business, the market price of its common stock and general market conditions. No time limit has been set for the completion of the repurchase program, and the program may be suspended or discontinued at any time. The repurchase program authorizes the Company to purchase its common stock from time to time in the open market (including pursuant to a “Rule 10b5-1 plan”), in block transactions, in privately negotiated transactions, through accelerated stock repurchase programs, through option or other transactions or otherwise, all in compliance with applicable laws and other restrictions. As of September 30, 2017, 1,956,390 shares could still be purchased under this program. For the nine month period ended September 30, 2017, the Company purchased no shares under this program. cash flows:
|
|
|
|
|
|
|
|
| June 30, | ||||
|
| 2018 |
| 2017 | ||
Cash and cash equivalents |
| $ | 134,032 |
| $ | 27,730 |
Restricted cash included in prepaid expenses and other current assets |
|
| 228 |
|
| 2,000 |
Total cash, cash equivalents and restricted cash |
| $ | 134,260 |
| $ | 29,730 |
Recent Accounting Pronouncements - In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASUAccounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,” which amends the existing accounting standards for revenue recognition. ASU 2014-09This standard is based on principles that governeffective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2017. These changes became effective for the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers.
The original effective date for ASU 2014-09 wouldCompany’s fiscal year beginning January 1, 2018 and have required the Company to adopt beginningbeen reflected in its first quarter of 2017. However, in July 2015, the FASB voted to amend ASU 2014-09 by approving a one-year deferral of the effective date as well as providing the option to early adopt the standard on the original effective date. Accordingly, the Company will adopt the standard in its first quarter of 2018.
In 2016, the Company began evaluating the impact of the adoption of the new revenue standard on itsthese condensed consolidated financial statements including enhanced disclosures, as well as assessing the impact on systems, processes and controls. The Company expects the new revenue standard to have an impact on the estimation of variable transaction considerations, the allocation of variable considerations across distinct services, and the tracking and amortization of contract costs. The new revenue standard may have an impact on the Company’s principal versus agent considerations. We expect to begin capitalizing certain costs to obtain a contract upon adoption of the new standard and are currently in the process of evaluating the period over which to amortize these capitalized costs. The Company has made progress on its contract and business process reviews but has not yet quantified these amounts.
The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company plans to adopt the standard using the modified retrospective approach with the cumulative effect recognized as of the date of adoption.(See “Note 4 – Revenue”).
In February 2016, the FASB issued ASU 2016-02, “Leases.” This update amends the requirements for assets and liabilities recognized for all leases longer than twelve months. Lessees will be required to recognize a lease liability measured on a discounted basis, which is the lessee’s obligation to make lease payments arising from the lease, and a right-of-use asset, which is an asset that
9
represents the lessee’s right to use, or control the use of, a specified asset for the lease term. This standard will be effective for financial statements issued by public companies for the annual and interim periods beginning after December 15, 2018.2018 and will be applied using a modified retrospective approach with optional practical expedients. Early adoption of the standard is permitted. The Company is currently evaluatingwill adopt the potentialnew standard on its effective date of January 1, 2019 and expects to elect certain available transitional practical expedients. Based on current analysis, the adoption of the standard may have a material impact of this guidance on our consolidated balance sheets and related disclosures while not significantly impacting financial statements.
In March 2016, The FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This update is intended to reduce the cost and complexity of accounting for share-based payments; however, some changes may also increase volatility in reported earnings. Under the new guidance, all excess tax benefits and deficiencies will be recorded as an income tax benefit or expense in the income statement and excess tax benefits will be recorded as an operating activity in the statements of cash flows. Upon adoption, we determined that we did not have previously unrecognized excess tax benefits to be recognized on a modified retrospective transition method as an adjustment to retained earnings. The new guidance also allows withholding up to the maximum individual statutory tax rate without classifying the awards as a liability.results. We did not elect an accounting policy change to withhold at the maximum individual statutory tax rate. The cash paid to satisfy the statutory income tax withholding obligation will continue to be classified as a financing activity inevaluate the statementsaccounting, transition, and disclosure requirements of cash flows. Lastly, the update allows forfeitures to be estimated or recognized when they occur. The requirements for the excess tax effects related to share-based payments at settlement must be applied on a prospective basis, and the other requirements under this standard are to be applied on a retrospective basis. We did not elect an accounting policy change to record forfeitures as they occur and will continue to estimate forfeitures at each period. This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2016. These changes became effective for the Company’s fiscal year beginning January 1, 2017 and have been reflected in these condensed consolidated financial statements. As a result of the retrospective adoption of ASU 2016-09, for the nine months ended September 30, 2016, net cash provided by operating activities increased by $1,470 with a corresponding offset to net cash used for financing activities.standard.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments,” which clarifies eight specific cash flow issues in an effort to reduce diversity in practice in how certain transactions are classified within the statement of cash flows. This ASUstandard is effective for the Company January 1, 2018 with early adoption permitted. The ASU requires a retrospective application unless it is determined that it is impractical to do so for which it must be retrospectively applied at the earliest date practical. Upon adoption, the Company does not anticipate significant changes to the Company’s existing accounting policies or presentation of the consolidated statements of cash flows.
In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350),”which removes step two from the goodwill impairment test. As a result, an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units’ fair value. This standard will be effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2019. Early2017. These changes became effective for the Company’s fiscal year beginning January 1, 2018 and have been reflected in these condensed consolidated financial statements. Retrospective adoption is permitted. The Company has adopted this standard as of April 1, 2017, however itASU 2016-15 did not have a material impact on the Company’s presentation of the condensed consolidated statements of cash flows.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230) – Restricted Cash,” which amends ASC 230 to provide clarifying guidance on the classification and presentation of restricted cash in the statement of cash flows. Additional disclosure is required to reconcile between the statement of financial statements.position and the statement of cash flows when the
9
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
statement of financial position includes more than one line item for cash, cash equivalents, restricted cash, and restricted cash equivalents. This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2017. These changes became effective for the Company’s fiscal year beginning January 1, 2018 and included $228 and $2,000 of restricted cash in the total of cash, cash equivalents and restricted cash in the condensed consolidated statements of cash flows for the six months ended June 30, 2018 and 2017, respectively. A reconciliation of restricted cash for each period is included within this footnote.
In January 2017, the FASB issued ASU 2017-01, Business“Business Combinations: Clarifying the Definition of a Business (Topic 805),” which provides a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This standard will beis effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2017. Early adoption is permittedThese changes became effective for transactionsthe Company’s fiscal year beginning January 1, 2018 and did not yet reported in financial statements issued or made available for issuance. The Company is currently evaluating the potentialhave a material impact of this guidance on ourto these condensed consolidated financial statements. This standard will be applied to all future business acquisition and disposal transactions.
In May 2017, the FASB issued ASU 2017-09, Compensation“Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” This update clarifies which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting. Specifically, an entity would not apply modification account if the fair value, vesting conditions, and classification as an equity or liability instrument are the same before and after the modification. The ASUThis standard is effective for financial statements issued by public companies for the annual and interim periods beginning after December 15, 2017. These changes became effective for the Company’s fiscal year beginning January 1, 2018. This standard will be applied to all future modifications of share-based payment awards.
In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718):Improvements to Nonemployee Share-Based Payment Accounting.” This update clarifies the accounting for share-based payment transactions for acquiring goods and services from nonemployees. Specifically, the update aligns the accounting for payments to nonemployees to match the accounting for payments to employees, no longer accounting for these transactions differently. This standard is effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2018. Early adoption of the standard is permitted. The standard will be applied prospectively to awards modified on or after the adoption date. The Company is currently evaluating the potential impact of our adoption of this guidance on our consolidated financial statements.
3.Business Acquisitions
FolioDynamix
On September 25, 2017,January 2, 2018, the Company entered into an agreement and plan of mergeracquired (the “Merger Agreement”“Acquisition”) with Folio Dynamics Holdings, Inc., a Delaware corporation (“FolioDynamix”), FCD Merger Sub, Inc., a Delaware corporation and a wholly
10
owned subsidiaryall of the Companyissued and outstanding membership interests of FolioDynamics Holdings, Inc. (“Merger Sub”FolioDynamix”), and Actua USA Corporation, through a Delaware corporation, solely in its capacity as the representativemerger of the stockholders of FolioDynamix. Pursuant to the Merger Agreement, Merger Sub will mergeFolioDynamix with and into FolioDynamix, with FolioDynamix continuing as the surviving corporation (the “Acquisition”) and a wholly owned subsidiary of the Company. FolioDynamix will be included in the Envestnet segment.Envestnet.
FolioDynamix provides financial institutions, registered investment advisors,RIAs, and other wealth management clients with an end-to-end technology solution paired with a suite of advisory tools including model portfolios, research, and overlay management services. FolioDynamix is included in the Envestnet segment.
The Company plans to acquireacquired FolioDynamix to add complementary trading tools as well as commission and brokerage support to Envestnet’s existing suite of offerings. The CompanyEnvestnet expects to integrate the technology and operations of FolioDynamix into the Company’s wealth management channel, enabling the Company to further leverage its operating scale and data analytics capabilities.
Subject to the terms and conditions of the Merger Agreement, the Company will pay $195,000 in cash for all the outstanding shares of FolioDynamix, subject to certain post-closing adjustments. The Company will fundfunded the Acquisition pricetransaction with a combination of cash on the Company’s balance sheet, purchase consideration liabilities and borrowings under its revolving credit facility. Either the Company or FolioDynamix may terminate the Agreement if the closing does not occur by March 31, 2018.
The applicable antitrust pre-clearance filings were made by the parties on October
10 2017
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and October 11, 2017. The Company is withdrawing its filing and plans to refile it immediately thereafter to allow the Department of Justice additional time to review the filing without having to issue a second request. The Company continues to expect the transaction to close in the first quarter of 2018, subject to satisfaction of the closing conditions. The Company and FolioDynamix will continue to operate separately until the transaction closes.per share amounts)
Wheelhouse Analytics LLC
On October 3, 2016, the Company acquired all of the issued and outstanding membership interests of Wheelhouse Analytics LLC (“Wheelhouse”). Wheelhouse is a technology company that provides data analytics, mobile sales solutions, and online education tools to financial advisors, asset managers and enterprises. Wheelhouse is included in the Envestnet | Yodlee segment.
The Company acquired Wheelhouse to be integrated with Yodlee’s industry-leading data and analytics solutions to strengthen Envestnet’s data-driven insights to financial advisors, asset managers and enterprises enabling them to better manage their businesses and client relationships and deliver better outcomes to their clients. Envestnet expects to deeply integrate Wheelhouse’s tools, delivering robust online dashboards and reporting that provides actionable intelligence.
In connection with the acquisition of Wheelhouse, the Company paid cash consideration of $13,299 and is required to pay contingent consideration with the aggregate amount not to exceed $4,000 and certain holdbacks upon release. Changes to the estimated fair value of the contingent consideration are recognized in earnings of the Company.
The estimated consideration transferred in the acquisition was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Measurement |
|
|
|
|
|
|
| Measurement |
|
|
| ||
|
| Preliminary |
| Period |
| As of |
| Preliminary |
| Period |
| Revised | ||||||
|
| Estimate |
| Adjustments |
| September 30, 2017 |
| Estimate |
| Adjustments |
| Estimate | ||||||
Cash consideration |
| $ | 13,299 |
| $ | — |
| $ | 13,299 |
| $ | 187,580 |
| $ | 12,297 |
| $ | 199,877 |
Contingent consideration liability |
|
| 2,582 |
|
| (218) |
|
| 2,364 | |||||||||
Purchase consideration liability |
|
| 887 |
|
| — |
|
| 887 |
|
| 12,297 |
|
| (12,297) |
|
| — |
Working capital adjustment |
|
| 110 |
|
| — |
|
| 110 | |||||||||
Cash acquired |
|
| (80) |
|
| — |
|
| (80) | |||||||||
Working capital and other adjustments |
|
| (3,893) |
|
| (2,500) |
|
| (6,393) | |||||||||
Total |
| $ | 16,798 |
| $ | (218) |
| $ | 16,580 |
| $ | 195,984 |
| $ | (2,500) |
| $ | 193,484 |
11
working capital balances, property and equipment, deferred revenue, deferred income taxes, unrecognized tax benefits, identifiable intangible assets and goodwill are provisional and are based on the information that was available as of the acquisition date. The estimated fair values of these provisional items are based on certain valuation and other studies and are in progress and not yet at the point where there is sufficient information for a definitive measurement. The Company believes the preliminary information provides a reasonable basis for estimating the fair values of these amounts, but is waiting for additional information necessary to finalize those fair values. Therefore, provisional measurements of fair values reflected are subject to change and such changes could be significant. The Company expects to finalize the valuation of tangible assets and liabilities, identifiable intangible assets and goodwill, and complete the acquisition accounting as soon as practicable but no later than January 2, 2019.
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Measurement |
|
|
|
|
|
| Measurement |
|
|
| |||
|
| Preliminary |
| Period |
| As of |
| Preliminary |
| Period |
| Revised | ||||||
|
| Estimate |
| Adjustments |
| September 30, 2017 |
| Estimate |
| Adjustments |
| Estimate | ||||||
Total tangible assets acquired |
| $ | 399 |
| $ | (14) |
| $ | 385 | |||||||||
Total liabilities assumed |
|
| (1,459) |
|
| 39 |
|
| (1,420) | |||||||||
Cash and cash equivalents |
| $ | 4,876 |
| $ | — |
| $ | 4,876 | |||||||||
Accounts receivable |
|
| 4,962 |
|
| — |
|
| 4,962 | |||||||||
Prepaid expenses and other current assets |
|
| 1,600 |
|
| — |
|
| 1,600 | |||||||||
Property and equipment, net |
|
| 927 |
|
| — |
|
| 927 | |||||||||
Other non-current assets |
|
| 441 |
|
| — |
|
| 441 | |||||||||
Identifiable intangible assets |
|
| 7,300 |
|
| (700) |
|
| 6,600 |
|
| 117,700 |
|
| — |
|
| 117,700 |
Goodwill |
|
| 10,558 |
|
| 457 |
|
| 11,015 |
|
| 97,248 |
|
| (2,624) |
|
| 94,624 |
Total assets acquired |
|
| 227,754 |
|
| (2,624) |
|
| 225,130 | |||||||||
Accounts payable |
|
| (5,358) |
|
| — |
|
| (5,358) | |||||||||
Accrued expenses |
|
| (7,173) |
|
| — |
|
| (7,173) | |||||||||
Deferred tax liability |
|
| (18,245) |
|
| — |
|
| (18,245) | |||||||||
Deferred revenue |
|
| (930) |
|
| 124 |
|
| (806) | |||||||||
Other non-current liabilities |
|
| (64) |
|
| — |
|
| (64) | |||||||||
Total liabilities assumed |
|
| (31,770) |
|
| 124 |
|
| (31,646) | |||||||||
Total net assets acquired |
| $ | 16,798 |
| $ | (218) |
| $ | 16,580 |
| $ | 195,984 |
| $ | (2,500) |
| $ | 193,484 |
The goodwill arising from the acquisition represents the expected synergistic benefits of the transaction, primarily related to lower future operating expenses and the knowledge and experience of the workforce in place. The goodwill is not deductible for income tax purposes.
11
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
A summary of preliminary estimated identifiable intangible assets acquired, preliminary estimated useful lives and amortization method is as follows:
AS |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
|
|
|
| Measurement |
|
|
|
|
|
|
|
|
|
|
| Measurement |
|
|
|
|
|
|
| ||
|
| Preliminary |
| Period |
| As of |
| Estimated |
| Amortization |
| Preliminary |
| Period |
| Revised |
|
|
| Amortization | ||||||
|
| Estimate |
| Adjustments |
| September 30, 2017 |
| Useful Life in Years |
| Method |
| Estimate |
| Adjustments |
| Estimate |
| Useful Life in Years |
| Method | ||||||
Customer list |
| $ | 4,100 |
| $ | (100) |
| $ | 4,000 |
| 15 |
| Accelerated |
| $ | 95,000 |
| $ | 500 |
| $ | 95,500 |
| 12 |
| Accelerated |
Proprietary technology |
|
| 3,000 |
|
| (500) |
|
| 2,500 |
| 6 |
| Straight-line |
|
| 18,000 |
|
| (500) |
|
| 17,500 |
| 5 |
| Straight-line |
Trade names and domains |
|
| 200 |
|
| (100) |
|
| 100 |
| 2 |
| Straight-line |
|
| 4,700 |
|
| — |
|
| 4,700 |
| 6 |
| Straight-line |
Total |
| $ | 7,300 |
| $ | (700) |
| $ | 6,600 |
|
|
|
|
| $ | 117,700 |
| $ | — |
| $ | 117,700 |
|
|
|
|
The results of Wheelhouse’sFolioDynamix’s operations are included in the condensed consolidated statements of operations beginning October 3, 2016,January 2, 2018. FolioDynamix’s revenues for the three and six month periods ended June 30, 2018 totaled $17,346 and $34,800, respectively. FolioDynamix’s pre-tax loss for the three and six month periods ended June 30, 2018 totaled $3,255 and $7,981, respectively. The pre-tax loss includes estimated acquired intangible asset amortization of $4,390 and $8,701 for the three and six month periods ended June 30, 2018.
For the three and six month periods ended June 30, 2018, acquisition related costs for FolioDynamix totaled $167 and $594, respectively, and are not considered materialincluded in general and administration expenses. The Company will incur additional acquisition related costs during 2018.
Pro forma results for Envestnet, Inc. giving effect to the Company’sFolioDynamix acquisition
The following pro forma financial information presents the combined results of operations. As such, nooperations of Envestnet and FolioDynamix for the three and six month periods ended June 30, 2017. The pro forma financial information presents the results as if the acquisition had occurred as of the beginning of 2017.
The unaudited pro forma results presented include amortization charges for acquired intangible assets, interest expense and stock-based compensation expense.
Pro forma financial information is presented for informational purposes and is not indicative of the three and nine months ended September 30, 2016.results of operations that would have been achieved if the acquisitions had taken place as of the beginning of 2017.
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended | ||
| June 30, 2017 |
| June 30, 2017 | ||
Revenues | $ | 177,297 |
| $ | 344,514 |
Net loss |
| (12,624) |
|
| (31,873) |
Net loss per share: |
|
|
|
|
|
Basic |
| (0.29) |
|
| (0.73) |
Diluted |
| (0.29) |
|
| (0.73) |
4.Revenue
On January 1, 2018, the Company adopted ASU 2014-09 and all subsequent ASUs that modified Topic 606 (“ASC 606” or “new revenue standard”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. The Company recognized the cumulative effect of the initial application of the new revenue standard as an adjustment to the opening balance of accumulated deficit. The comparative information has not been restated and will continue to be reported under the accounting standards in effect for those periods. The Company does not expect the adoption of the new revenue standard to have a material impact to the results of operations on an ongoing basis.
The majority of our revenues continue to be recognized when services are provided. The adoption of the new revenue standard primarily impacts timing of revenue recognition for initial implementation services, deferral of incremental direct costs in obtaining contracts with customers and gross versus net presentation related to certain third party manager agreements.
12
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
4. CostThe cumulative effect of Revenuesthe changes made to the Company’s condensed consolidated balance sheets as of January 1, 2018 for the adoption of the new revenue standard was as follows:
|
|
|
|
|
|
|
|
|
|
|
| Balance at |
| Cumulative Catch-up |
| Balance at | |||
|
| December 31, 2017 |
| Adjustments |
| January 1, 2018 | |||
Balance Sheets |
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
Other non-current assets |
| $ | 17,176 |
| $ | 5,315 |
| $ | 22,491 |
Liabilities: |
|
|
|
|
|
|
|
|
|
Deferred revenue, current |
|
| 21,246 |
|
| (1,122) |
|
| 20,124 |
Deferred revenue, non-current |
|
| 12,047 |
|
| (2,780) |
|
| 9,267 |
Equity: |
|
|
|
|
|
|
|
|
|
Accumulated deficit |
|
| (73,854) |
|
| 9,217 |
|
| (64,637) |
In accordance with the new revenue standard requirements, the impact of adoption on the Company’s condensed consolidated statements of operations and condensed consolidated balance sheets was as follows:
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended June 30, 2018 | |||||||
|
|
|
| Without Adoption of |
| Effect of Change | |||
|
| As Reported |
| ASC 606 |
| Higher/(Lower) | |||
Statements of Operations |
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
Asset-based |
| $ | 118,111 |
| $ | 121,646 |
| $ | (3,535) |
Subscription-based |
|
| 71,779 |
|
| 71,779 |
|
| — |
Total recurring revenues |
|
| 189,890 |
|
| 193,425 |
|
| (3,535) |
Professional services and other revenues |
|
| 11,226 |
|
| 11,385 |
|
| (159) |
Total revenues |
|
| 201,116 |
|
| 204,810 |
|
| (3,694) |
Operating expenses: |
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
| 67,627 |
|
| 71,162 |
|
| (3,535) |
Compensation and benefits |
|
| 80,210 |
|
| 80,530 |
|
| (320) |
Total operating expenses |
|
| 201,111 |
|
| 204,966 |
|
| (3,855) |
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
| 5 |
|
| (156) |
|
| 161 |
|
|
|
|
|
|
|
|
|
|
Net loss |
|
| (5,991) |
|
| (6,152) |
|
| 161 |
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Envestnet, Inc. |
|
| (5,526) |
|
| (5,687) |
|
| 161 |
13
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, 2018 | |||||||
|
|
|
| Without Adoption of |
| Effect of Change | |||
|
| As Reported |
| ASC 606 |
| Higher/(Lower) | |||
Statements of Operations |
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
Asset-based |
| $ | 239,264 |
| $ | 246,399 |
| $ | (7,135) |
Subscription-based |
|
| 141,474 |
|
| 141,474 |
|
| — |
Total recurring revenues |
|
| 380,738 |
|
| 387,873 |
|
| (7,135) |
Professional services and other revenues |
|
| 18,389 |
|
| 18,585 |
|
| (196) |
Total revenues |
|
| 399,127 |
|
| 406,458 |
|
| (7,331) |
Operating expenses: |
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
| 130,561 |
|
| 137,696 |
|
| (7,135) |
Compensation and benefits |
|
| 163,750 |
|
| 164,197 |
|
| (447) |
Total operating expenses |
|
| 399,860 |
|
| 407,442 |
|
| (7,582) |
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
| (733) |
|
| (984) |
|
| 251 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
| 2,011 |
|
| 1,760 |
|
| 251 |
|
|
|
|
|
|
|
|
|
|
Net income attributable to Envestnet, Inc. |
|
| 2,578 |
|
| 2,327 |
|
| 251 |
|
|
|
|
|
|
|
|
|
|
|
| At June 30, 2018 | |||||||
|
|
|
| Without Adoption of |
| Effect of Change | |||
|
| As Reported |
| ASC 606 |
| Higher/(Lower) | |||
Balance Sheets |
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
Fees receivable, net |
| $ | 64,164 |
| $ | 63,218 |
| $ | 946 |
Other non-current assets |
|
| 23,907 |
|
| 18,145 |
|
| 5,762 |
Liabilities: |
|
|
|
|
|
|
|
|
|
Accounts payable |
|
| 21,133 |
|
| 20,187 |
|
| 946 |
Deferred revenue, current |
|
| 25,739 |
|
| 26,720 |
|
| (981) |
Deferred revenue, non-current |
|
| 7,929 |
|
| 10,654 |
|
| (2,725) |
Equity: |
|
|
|
|
|
|
|
|
|
Accumulated deficit |
|
| (62,059) |
|
| (71,527) |
|
| 9,468 |
The impact of adoption on the Company’s condensed consolidated statements of cash flows is immaterial.
Summary of Significant Accounting Policies
Except for the accounting policies for revenue recognition, fees receivable including unbilled receivables and deferred sales incentive compensation that were updated as a result of adopting ASC 606, there have been no changes to our significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on February 28, 2018, that have had a material impact on our condensed consolidated financial statements and related notes.
Revenue Recognition
The Company derives revenues from asset-based and subscription-based services and professional services and other sources. Revenues are recognized when control of these services is transferred to our customers, in an amount that reflects the consideration that we expect to be entitled to in exchange for those services. All revenue recognized in the condensed consolidated statements of operations is considered to be revenue from contracts with customers. Sales and usage-based taxes are excluded from revenues.
14
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Asset-based revenue (formerly assets under management or administration revenue)
Asset-based revenue primarily consists of fees for providing customers continuous access to platform services through the Company’s uniquely customized platforms. These platform services include investment manager due diligence and research, portfolio diagnostics, proposal generation, investment model management, rebalancing and trading, portfolio performance reporting and monitoring solutions, billing and back office and middle-office operations and administration and are made available to customers throughout the contractual term from the date the customized platform is launched.
The asset-based fees the Company earns are generally based upon variable percentages of assets managed or administered on our platforms. The fee percentage varies based on the level and type of services the Company provides to its customers, as well as the values of existing customer accounts. The values of the customer accounts are affected by inflows or outflows of customer funds and market fluctuations.
The platform services are substantially the same over each quarter and performed in a similar manner over the contract period, and are considered stand-ready promises. The platform services that are delivered to the customer over the quarter are considered distinct, as the customer benefits distinctly from each increment of our services and each quarter is separately identified in the contract, and are considered to be a single performance obligation under the new revenue standard.
The pricing generally resets each quarter and the pricing structure is consistent throughout the term of the contract. The variable fees are generally calculated and billed quarterly in advance based on preceding quarter-end values and the variable amounts earned from the platform services relate specifically to the benefits transferred to the customer during that quarter. Accordingly, revenue is allocated to the specific quarter in which services are performed.
The asset-based contracts generally contain one performance obligation and revenue is recognized on a ratable basis over the quarter beginning on the date that the platform services are made available to the customer as the customer simultaneously consumes and receives the benefits of the services. All asset-based fees are recognized in the Envestnet segment.
For certain services provided by third parties, the Company evaluates whether it is the principal (revenues reported on a gross basis) or agent (revenues reported on a net basis). Generally, the Company reports customer fees including charges for third party service providers where the Company has a direct contract with such third party service providers on a gross basis, whereas the amounts billed to its customers are recorded as revenues, and amounts paid to third party service providers are recorded as cost of revenues. The Company is the principal in the transaction because it controls the services before they are transferred to its customers. Control is evidenced by the Company being primarily responsible to its customers and having discretion in establishing pricing.
Subscription-based revenue (formerly subscription and licensing revenue)
Subscription-based revenue primarily consists of fees for providing customers continuous access to the Company’s platform for wealth management and financial wellness. The subscription-based fees generally include fixed fees and or usage-based fees.
Generally, the subscription services are substantially the same over each quarter and performed in a similar manner over the contract period, and are considered stand-ready promises. Quarterly subscription services are considered distinct as the customer can benefit from each increment of services on its own and each quarter is separately identified in the contract, and services are considered to be a single performance obligation under the new revenue standard.
The usage-based pricing generally resets each quarter and the pricing structure is generally consistent throughout the term of the contract. The fixed fees are generally calculated and billed quarterly in advance. The usage-based fees are generally calculated and are billed either monthly or quarterly based on the actual usage and relate specifically to the benefits transferred to the customer during that quarter. Accordingly, revenue is allocated to the specific quarter in which services are performed.
Certain subscription-based contracts contain multiple performance obligations(i.e. platform services performance obligation and professional services performance obligation). Fixed fees are generally recognized on a ratable basis over the quarter beginning when the subscription services are made available to the customer, as the customer simultaneously receives and consumes the benefits of the
15
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
subscription services. Usage-based revenue is recognized on a monthly basis as the customer receives and consumes the benefit as the Company provides the services. Subscription-based fees are recognized in both the Envestnet and Envestnet | Yodlee segments.
Professional services and other revenues
The Company earns professional services fees by providing contractual customized services and platform software development as well as initial implementation fees. Professional services contracts generally have fixed prices, and generally specify the deliverables in the contract. Certain professional services contracts are billed on a time and materials basis and revenue is recognized over time as the services are performed. For contracts billed on a fixed price basis, revenue is recognized over time based on the proportion of services performed. Initial implementation fees are fixed and recognized ratably over the contract term.
Other revenue primarily includes revenue related to the Advisor Summit. Other revenue is recognized when the events are held. Other revenue is not significant.
The majority of the professional services and other contracts contain one performance obligation. Professional services and other revenues are recognized in both the Envestnet and Envestnet | Yodlee segments.
Arrangements with multiple performance obligations
Certain of the Company’s contracts with customers contain multiple performance obligationssuch as platform services performance obligation and professional services performance obligation. For such arrangements, the Company allocates revenue to each performance obligation based on its relative standalone selling price. Standalone selling prices of services are estimated based on observable transactions when these services are sold on a standalone basis or based on expected cost plus margin.
Disaggregation of Revenue
The following table presents the Company’s revenues disaggregated by major source:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended June 30, | ||||||||||||||||
|
| 2018 |
| 2017 | ||||||||||||||
|
| Envestnet |
| Envestnet | Yodlee |
| Consolidated |
| Envestnet(1) |
| Envestnet | Yodlee(1) |
| Consolidated(1) | ||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-based |
| $ | 118,111 |
| $ | — |
| $ | 118,111 |
| $ | 98,959 |
| $ | — |
| $ | 98,959 |
Subscription-based |
|
| 33,023 |
|
| 38,756 |
|
| 71,779 |
|
| 25,471 |
|
| 34,331 |
|
| 59,802 |
Total recurring revenues |
|
| 151,134 |
|
| 38,756 |
|
| 189,890 |
|
| 124,430 |
|
| 34,331 |
|
| 158,761 |
Professional services and other revenues |
|
| 5,794 |
|
| 5,432 |
|
| 11,226 |
|
| 4,942 |
|
| 3,714 |
|
| 8,656 |
Total revenues |
| $ | 156,928 |
| $ | 44,188 |
| $ | 201,116 |
| $ | 129,372 |
| $ | 38,045 |
| $ | 167,417 |
(1) | As noted above, prior period amounts have not been adjusted under the modified retrospective method. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, | ||||||||||||||||
|
| 2018 |
| 2017 | ||||||||||||||
|
| Envestnet |
| Envestnet | Yodlee |
| Consolidated |
| Envestnet(1) |
| Envestnet | Yodlee(1) |
| Consolidated(1) | ||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-based |
| $ | 239,264 |
| $ | — |
| $ | 239,264 |
| $ | 193,121 |
| $ | — |
| $ | 193,121 |
Subscription-based |
|
| 65,608 |
|
| 75,866 |
|
| 141,474 |
|
| 50,708 |
|
| 67,004 |
|
| 117,712 |
Total recurring revenues |
|
| 304,872 |
|
| 75,866 |
|
| 380,738 |
|
| 243,829 |
|
| 67,004 |
|
| 310,833 |
Professional services and other revenues |
|
| 8,044 |
|
| 10,345 |
|
| 18,389 |
|
| 6,861 |
|
| 7,509 |
|
| 14,370 |
Total revenues |
| $ | 312,916 |
| $ | 86,211 |
| $ | 399,127 |
| $ | 250,690 |
| $ | 74,513 |
| $ | 325,203 |
(1) | As noted above, prior period amounts have not been adjusted under the modified retrospective method. |
16
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
The following table presents the Company’s revenues disaggregated by geography, based on the billing address of the customer:
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||
| June 30, |
| June 30, | ||||||||
| 2018 |
| 2017(2) |
| 2018 |
| 2017(2) | ||||
United States | $ | 193,237 |
| $ | 151,621 |
| $ | 381,552 |
| $ | 293,583 |
International (1) |
| 7,879 |
|
| 15,796 |
|
| 17,575 |
|
| 31,620 |
Total | $ | 201,116 |
| $ | 167,417 |
| $ | 399,127 |
| $ | 325,203 |
(1) | No foreign country accounted for more than 10% of total revenues. |
(2) | As noted above, prior period amounts have not been adjusted under the modified retrospective method. |
One customer accounted for more than 10% of the Company’s total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
| Six Months Ended |
| ||||
|
| June 30, |
|
| June 30, |
| ||||
|
| 2018 |
| 2017 |
|
| 2018 |
| 2017 |
|
Fidelity |
| 16 | % | 16 | % |
| 16 | % | 16 | % |
Remaining Performance Obligations
The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) as of June 30, 2018:
|
|
|
|
Years ending December 31: |
|
|
|
Remainder of 2018 |
| $ | 105,353 |
2019 |
|
| 164,482 |
2020 |
|
| 92,639 |
2021 |
|
| 53,793 |
2022 |
|
| 40,774 |
Thereafter |
|
| 54,122 |
Total |
| $ | 511,163 |
Only fixed consideration from significant contracts with customers is included in the amounts presented above.
The Company has applied the practical expedients and exemption and does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less; (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed; and (iii) contracts for which the variable consideration is allocated entirely to a wholly unsatisfied performance obligations or to a wholly unsatisfied promise to transfer a distinct service that forms part of a single performance obligation.
Contract Balances
The Company records contract liabilities (deferred revenue) when cash payments are received in advance of its performance. The term between invoicing date and when payment is due is generally not significant. For the majority of its arrangements, the Company requires advance quarterly payments before the services are delivered to the customer.
Deferred revenue primarily consists of implementation fees, professional services, and subscription fee payments received in advance from customers.
Contract assets would exist when revenues have been recorded (i.e. control of goods or services has been transferred to the customer) but customer payment is contingent on a future event beyond the passage of time (i.e. satisfaction of additional performance obligations). The Company does not have any material contract assets. Unbilled receivables, which are not classified as contract assets, represent arrangements in which revenues have been recorded prior to billing and right to payment is unconditional.
17
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
The opening and closing balances of the Company’s billed receivables, unbilled receivables, and deferred revenues are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Receivables, |
| Unbilled receivables, |
|
|
|
| ||||
|
| which are included in |
| which are included in |
| Deferred Revenue |
| Deferred Revenue | ||||
|
| Fees receivable, net |
| Fees receivable, net |
| (current) |
| (non-current) | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening balance as of January 1, 2018 |
| $ | 36,605 |
| $ | 13,229 |
| $ | 20,124 |
| $ | 9,267 |
Increase/(decrease), net |
|
| 11,177 |
|
| 3,153 |
|
| 5,615 |
|
| (1,338) |
Ending balance as of June 30, 2018 |
| $ | 47,782 |
| $ | 16,382 |
| $ | 25,739 |
| $ | 7,929 |
The increase in receivables is primarily a result of timing of payments for subscription-based revenues relative to the first six months of 2018 and the acquisition of FolioDynamix.
The increase in unbilled receivables is primarily driven by revenue recognized in excess of billings related to asset-based services during the six months ended June 30, 2018.
The increase in deferred revenue is primarily the result of an increase in deferred revenue related to subscription-based services during the six months ended June 30, 2018, most of which will be recognized over the course of the next twelve months.
The amount of revenue recognized that was included in the opening deferred revenue balance was $5,737 and $13,253 for the three and six months ended June 30, 2018, respectively. The majority of this revenue consists of subscription-based revenue and professional services arrangements. The amount of revenue recognized from performance obligations satisfied in prior periods was not material.
Deferred sales incentive compensation
Sales incentive compensation earned by the Company’s sales force is considered an incremental and recoverable cost to acquire a contract with a customer. Sales incentive compensation for initial contracts is deferred and amortized on a straight-line basis over the period of benefit, which the Company has determined to be five years. The Company determined the period of benefit by taking into consideration its customer contracts, life of the technology and other factors. Sales incentive compensation for renewal contracts are deferred and amortized on a straight-line basis over the related contractual renewal period. Deferred sales incentive compensation is included in other non-current assets on the consolidated balance sheet and amortization expense is included in compensation and benefits expenses on the condensed consolidated statements of operations.
Deferred sales incentive compensation was $5,762 as of June 30, 2018. Amortization expense for the deferred sales incentive compensation was $536 and $1,018 for the three and six months ended June 30, 2018, respectively. No significant impairment loss for capitalized costs was recorded during the period.
The Company has applied the practical expedient to recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period would have been one year or less. These costs are included in compensation and benefits expenses on the condensed consolidated statements of operations.
18
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
5.Cost of Revenues
The following table summarizes cost of revenues by revenue category for the periods presented herein:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| Three Months Ended |
| Six Months Ended | ||||||||||||||||
|
| September 30, |
| September 30, |
| June 30, |
| June 30, | ||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||
Assets under management or administration |
| $ | 50,597 |
| $ | 41,960 |
| $ | 142,097 |
| $ | 117,369 | ||||||||||||
Subscription and licensing |
|
| 5,076 |
|
| 5,110 |
|
| 14,832 |
|
| 11,934 | ||||||||||||
Asset-based |
| $ | 56,748 |
| $ | 47,015 |
| $ | 114,320 |
| $ | 91,500 | ||||||||||||
Subscription-based |
|
| 6,213 |
|
| 5,142 |
|
| 11,439 |
|
| 9,756 | ||||||||||||
Professional services and other |
|
| 397 |
|
| 189 |
|
| 4,102 |
|
| 3,016 |
|
| 4,666 |
|
| 3,578 |
|
| 4,802 |
|
| 3,705 |
Total |
| $ | 56,070 |
| $ | 47,259 |
| $ | 161,031 |
| $ | 132,319 |
| $ | 67,627 |
| $ | 55,735 |
| $ | 130,561 |
| $ | 104,961 |
5.6.Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
|
|
|
|
|
|
|
|
| June 30, |
| December 31, | ||
|
| 2018 |
| 2017 | ||
Prepaid technology |
| $ | 7,293 |
| $ | 1,843 |
Non-income tax receivable |
|
| 3,332 |
|
| 2,704 |
Prepaid outside information services |
|
| 1,556 |
|
| 1,395 |
Prepaid insurance |
|
| 1,355 |
|
| 575 |
Service tax receivable |
|
| 1,277 |
|
| 1,507 |
Prepaid rent |
|
| 856 |
|
| 959 |
Restricted cash |
|
| 228 |
|
| 2,000 |
Income tax receivable |
|
| — |
|
| 1,684 |
Other |
|
| 6,824 |
|
| 6,803 |
|
| $ | 22,721 |
| $ | 19,470 |
7. Property and Equipment, Net
Property and equipment, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
|
|
| June 30, |
| December 31, |
| ||||
|
| Estimated Useful Life |
| 2017 |
| 2016 |
| Estimated Useful Life |
| 2018 |
| 2017 |
| ||||
Cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer equipment and software |
| 3 years |
| $ | 60,073 |
| $ | 52,921 |
| 3 years |
| $ | 60,525 |
| $ | 56,192 |
|
Leasehold improvements |
| Shorter of the lease term or useful life of the asset |
|
| 22,580 |
|
| 17,286 |
| Shorter of the lease term or useful life of the asset |
|
| 25,448 |
|
| 23,192 |
|
Office furniture and fixtures |
| 3-7 years |
|
| 8,048 |
|
| 6,911 |
| 3-7 years |
|
| 8,498 |
|
| 8,110 |
|
Other office equipment |
| 3-5 years |
|
| 1,883 |
|
| 1,367 |
| 3-5 years |
|
| 5,075 |
|
| 2,052 |
|
|
|
|
|
| 92,584 |
|
| 78,485 |
|
|
|
| 99,546 |
|
| 89,546 |
|
Less: accumulated depreciation and amortization |
|
|
|
| (57,310) |
|
| (45,485) |
|
|
|
| (59,149) |
|
| (53,637) |
|
Property and equipment, net |
|
|
| $ | 35,274 |
| $ | 33,000 |
|
|
| $ | 40,397 |
| $ | 35,909 |
|
During the three and six months ended June 30, 2018, the Company retired property and equipment that were no longer in service in the amount of $3,651 and $6,738, primarily related to fully depreciated computer equipment and software assets. Of the $3,651, $1,126 of the assets originated in the Envestnet segment and the remaining $2,525 originated in the Envestnet | Yodlee segment for the three months ended June 30, 2018. Of the $6,738, $3,337 of the assets originated in the Envestnet segment and the remaining $3,401 originated in the Envestnet | Yodlee segment for the six months ended June 30, 2018. Asset retirements during the
19
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
three and six months ended June 30, 2017 were not material. Losses on asset retirements were not material during the three and six months ended June 30, 2018 and 2017.
Depreciation and amortization expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Depreciation and amortization expense |
| $ | 3,724 |
| $ | 3,740 |
| $ | 11,668 |
| $ | 11,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
Depreciation and amortization expense |
| $ | 3,920 |
| $ | 3,853 |
| $ | 7,838 |
| $ | 7,944 |
6.8. Internally Developed Software, Net
Internally developed software, net consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
|
|
| June 30, |
| December 31, | ||||
|
| Estimated Useful Life |
| 2017 |
| 2016 |
| Estimated Useful Life |
| 2018 |
| 2017 | ||||
Internally developed software |
| 5 years |
| $ | 42,928 |
| $ | 33,718 |
| 5 years |
| $ | 56,964 |
| $ | 46,342 |
Less: accumulated amortization |
|
|
|
| (22,649) |
|
| (18,858) |
|
|
|
| (27,707) |
|
| (24,168) |
Internally developed software, net |
|
|
| $ | 20,279 |
| $ | 14,860 |
|
|
| $ | 29,257 |
| $ | 22,174 |
Amortization expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Amortization expense |
| $ | 1,391 |
| $ | 917 |
| $ | 3,791 |
| $ | 2,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
Amortization expense |
| $ | 1,846 |
| $ | 1,241 |
| $ | 3,539 |
| $ | 2,400 |
13
7.9.Goodwill & Intangible Assets, Net
Changes in the carrying amount of goodwill were as follows:
|
|
|
|
|
|
|
|
|
|
|
| Envestnet |
| Envestnet | Yodlee |
| Total | |||
Balance at December 31, 2016 |
| $ | 163,751 |
| $ | 268,185 |
| $ | 431,936 |
Purchase accounting adjustments - Wheelhouse |
|
| — |
|
| 457 |
|
| 457 |
Foreign currency translation |
|
| — |
|
| 353 |
|
| 353 |
Balance at September 30, 2017 |
| $ | 163,751 |
| $ | 268,995 |
| $ | 432,746 |
|
|
|
|
|
|
|
|
|
|
|
| Envestnet |
| Envestnet | Yodlee |
| Total | |||
Balance at December 31, 2017 |
| $ | 163,751 |
| $ | 269,204 |
| $ | 432,955 |
FolioDynamix acquisition |
|
| 94,624 |
|
| — |
|
| 94,624 |
Foreign currency |
|
| — |
|
| (624) |
|
| (624) |
Balance at June 30, 2018 |
| $ | 258,375 |
| $ | 268,580 |
| $ | 526,955 |
Intangible assets, net consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
| September 30, 2017 |
| December 31, 2016 |
|
|
|
|
|
| June 30, 2018 |
| December 31, 2017 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
| Gross |
|
|
|
| Net |
| Gross |
|
|
|
| Net |
|
|
|
|
|
| Gross |
|
|
|
| Net |
| Gross |
|
|
|
| Net | ||||||||
|
| Estimated |
| Carrying |
| Accumulated |
| Carrying |
| Carrying |
| Accumulated |
| Carrying |
| Estimated |
| Carrying |
| Accumulated |
| Carrying |
| Carrying |
| Accumulated |
| Carrying | ||||||||||||||||||
|
| Useful Life |
| Amount |
| Amortization |
| Amount |
| Amount |
| Amortization |
| Amount |
| Useful Life |
| Amount |
| Amortization |
| Amount |
| Amount |
| Amortization |
| Amount | ||||||||||||||||||
Customer lists |
| 4 | - | 15 | years |
| $ | 259,350 |
| $ | (72,743) |
| $ | 186,607 |
| $ | 259,490 |
| $ | (54,861) |
| $ | 204,629 |
| 7 | - | 15 | years |
| $ | 354,850 |
| $ | (96,095) |
| $ | 258,755 |
| $ | 259,350 |
| $ | (78,482) |
| $ | 180,868 |
Proprietary technologies |
| 2 | - | 8 | years |
|
| 57,328 |
|
| (27,979) |
|
| 29,349 |
|
| 57,770 |
|
| (20,214) |
|
| 37,556 |
| 4 | - | 8 | years |
|
| 75,543 |
|
| (38,411) |
|
| 37,132 |
|
| 57,377 |
|
| (31,067) |
|
| 26,310 |
Trade names |
| 2 | - | 7 | years |
|
| 24,889 |
|
| (8,766) |
|
| 16,123 |
|
| 25,007 |
|
| (6,178) |
|
| 18,829 |
| 1 | - | 7 | years |
|
| 29,540 |
|
| (11,923) |
|
| 17,617 |
|
| 24,840 |
|
| (9,701) |
|
| 15,139 |
Backlog |
|
|
| 4 | years |
|
| 11,000 |
|
| (9,554) |
|
| 1,446 |
|
| 11,000 |
|
| (6,456) |
|
| 4,544 |
|
|
| 4 | years |
|
| 11,000 |
|
| (10,761) |
|
| 239 |
|
| 11,000 |
|
| (10,586) |
|
| 414 |
Total intangible assets |
|
|
|
|
|
| $ | 352,567 |
| $ | (119,042) |
| $ | 233,525 |
| $ | 353,267 |
| $ | (87,709) |
| $ | 265,558 |
|
|
|
|
|
| $ | 470,933 |
| $ | (157,190) |
| $ | 313,743 |
| $ | 352,567 |
| $ | (129,836) |
| $ | 222,731 |
20
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Amortization expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Amortization expense |
| $ | 10,377 |
| $ | 12,035 |
| $ | 31,333 |
| $ | 36,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
Amortization expense |
| $ | 13,419 |
| $ | 10,371 |
| $ | 27,354 |
| $ | 20,956 |
Future amortization expense of the intangible assets as of SeptemberJune 30, 2017,2018, is expected to be as follows:
|
|
|
|
|
Years ending December 31: |
|
|
|
|
Remainder of 2017 | $ | 10,232 | ||
2018 |
| 35,657 | ||
Remainder of 2018 | $ | 26,051 | ||
2019 |
| 32,038 |
| 47,690 |
2020 |
| 28,344 |
| 43,548 |
2021 |
| 20,638 |
| 34,762 |
2022 |
| 32,168 | ||
Thereafter |
| 106,616 |
| 129,524 |
| $ | 233,525 | $ | 313,743 |
8.Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
|
|
|
|
|
|
|
|
| September 30, |
| December 31, | ||
|
| 2017 |
| 2016 | ||
Non-income tax receivable |
| $ | 4,952 |
| $ | 3,879 |
FinaConnect escrow |
|
| 2,000 |
|
| 429 |
Income tax receivable |
|
| 2,267 |
|
| 1,864 |
Prepaid technology |
|
| 1,827 |
|
| 1,318 |
Prepaid insurance |
|
| 1,055 |
|
| 552 |
Other |
|
| 11,898 |
|
| 8,182 |
|
| $ | 23,999 |
| $ | 16,224 |
1421
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
9.10.Other Non-Current Assets
Other non-current assets consist of the following:
|
|
|
|
|
|
| June 30, |
| December 31, | ||
| 2018 |
| 2017 | ||
Assets to fund deferred compensation liability | $ | 6,729 |
| $ | 5,185 |
Deposits: |
|
|
|
|
|
Lease |
| 4,086 |
|
| 4,291 |
Other |
| 248 |
|
| 615 |
Deferred sales incentive compensation |
| 5,762 |
|
| — |
Unamortized issuance costs on revolving credit facility |
| 2,679 |
|
| 3,106 |
Investments in private companies |
| 1,920 |
|
| 2,731 |
Other |
| 2,483 |
|
| 1,248 |
| $ | 23,907 |
| $ | 17,176 |
11.Accrued Expensesand Other Liabilities
Accrued expenses and other liabilities consist of the following:
|
|
|
|
|
|
| September 30, |
| December 31, | ||
| 2017 |
| 2016 | ||
Assets to fund deferred compensation liability | $ | 5,122 |
| $ | 2,738 |
Deposits: |
|
|
|
|
|
Lease |
| 4,548 |
|
| 4,262 |
Other |
| 614 |
|
| 2,083 |
Unamortized issuance costs on revolving credit facility |
| 3,320 |
|
| — |
Investments in private companies |
| 3,216 |
|
| 2,750 |
Other |
| 1,149 |
|
| 2,130 |
| $ | 17,969 |
| $ | 13,963 |
|
|
|
|
|
|
|
|
| June 30, |
| December 31, | ||
|
| 2018 |
| 2017 | ||
Accrued investment manager fees |
| $ | 44,154 |
| $ | 39,324 |
Accrued compensation and related taxes |
|
| 38,597 |
|
| 43,724 |
Sales and use tax payable |
|
| 9,408 |
|
| 9,037 |
Accrued professional services |
|
| 4,432 |
|
| 4,985 |
Accrued interest |
|
| 864 |
|
| — |
Definite consideration |
|
| — |
|
| 1,250 |
Other accrued expenses |
|
| 12,082 |
|
| 7,577 |
|
| $ | 109,537 |
| $ | 105,897 |
12. Debt
The Company’s outstanding debt obligations as of June 30, 2018 and December 31, 2017 were as follows:
|
|
|
|
|
|
|
|
| June 30, |
| December 31, | ||
|
| 2018 |
| 2017 | ||
Convertible Notes due 2019 |
| $ | 172,500 |
| $ | 172,500 |
Unaccreted discount on Convertible Notes due 2019 |
|
| (8,832) |
|
| (11,677) |
Unamortized issuance costs on Convertible Notes due 2019 |
|
| (1,369) |
|
| (1,833) |
Convertible Notes due 2019 carrying value |
| $ | 162,299 |
| $ | 158,990 |
|
|
|
|
|
|
|
Convertible Notes due 2023 |
| $ | 345,000 |
| $ | — |
Unaccreted discount on Convertible Notes due 2023 |
|
| (47,016) |
|
| — |
Unamortized issuance costs on Convertible Notes due 2023 |
|
| (8,422) |
|
| — |
Convertible Notes due 2023 carrying value |
| $ | 289,562 |
| $ | — |
|
|
|
|
|
|
|
Revolving credit facility balance |
| $ | — |
| $ | 81,168 |
22
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Interest expense was comprised of the following and is included in other expense, net in the condensed consolidated statement of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
Interest on revolving credit facility |
| $ | 1,429 |
| $ | 1,110 |
| $ | 3,994 |
| $ | 2,455 |
Accretion of debt discount |
|
| 2,411 |
|
| 1,344 |
|
| 3,829 |
|
| 2,681 |
Coupon interest |
|
| 1,366 |
|
| 754 |
|
| 2,121 |
|
| 1,509 |
Amortization of issuance costs |
|
| 621 |
|
| 616 |
|
| 1,071 |
|
| 2,046 |
Undrawn and other fees |
|
| 165 |
|
| 53 |
|
| 213 |
|
| 122 |
|
| $ | 5,992 |
| $ | 3,877 |
| $ | 11,228 |
| $ | 8,813 |
Credit Agreement
In July 2017, the Company and certain of its subsidiaries entered into a Second Amended and Restated Credit Agreement (the “Second Amended and Restated Credit Agreement”) with a group of banks (the “Banks”). Pursuant to the Second Amended and Restated Credit Agreement, the Banks have agreed to provide to the Company revolving credit commitments (the “Revolving Credit Facility”) in the aggregate amount of up to $350,000 which amount may be increased by $50,000.
The Company owns 756,347 Class B Unitsincurs interest on borrowings made under the Second Amended and Restated Credit Agreement at rates between 1.50 percent and 3.25 percent above LIBOR based on the Company’s total leverage ratio. Borrowings under the Second Amended and Restated Credit Agreement are scheduled to mature on July 18, 2022.
Obligations under the Second Amended and Restated Credit Agreement are guaranteed by substantially all of the Company’s U.S. subsidiaries. The Second Amended and Restated Credit Agreement includes certain financial covenants and, as of June 30, 2018, the Company was in compliance with these requirements.
On May 24, 2018, Envestnet Inc. and certain of its subsidiaries entered into a privately held companyfirst amendment to the second amended and restated credit agreement (the “Credit Agreement Amendment”) amending the second amended and restated credit agreement, dated as of July 18, 2017. The Credit Agreement Amendment made certain technical changes to the calculations of various covenants contained in the Credit Agreement.
Convertible Notes due 2019
On December 15, 2014, the Company issued $172,500 of Convertible Notes that mature on December 15, 2019. The Convertible Notes bear interest at a historical purchase pricerate of $1,250.1.75 percent per annum payable semiannually in arrears on June 15 and December 15 of each year, beginning on June 15, 2015. The Company uses the cost methodConvertible Notes are general unsecured obligations, subordinated in right of accounting for this investment.payment to our obligations under our Credit Agreement.
TheUpon the occurrence of a “fundamental change,” as defined in the indenture, the holders may require the Company previously owned 1,500,000 Class A units representing 21.4%to repurchase all or a portion of the outstanding membership interests of a privately held companyConvertible Notes for cash considerationat 100% of $1,500. During the third quarterprincipal amount of 2017, the CompanyConvertible Notes being purchased, an additional 1,450,000 Class A units in this privately held company for cash consideration of $1,450. The additional investment increased the Company’s ownership interest to 34.5%.plus any accrued and unpaid interest.
The Convertible Notes are convertible into shares of the Company’s common stock under certain circumstances prior to maturity at a conversion rate of 15.9022 shares per $1 principal amount of the Convertible Notes, which represents a conversion price of $62.88 per share, subject to adjustment under certain conditions. Holders may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding July 1, 2019, under certain circumstances. The Company’s stated policy is to settle the debt component of the Convertible Notes at least partially or wholly in cash. This policy is based both on the Company’s intent and the Company’s ability to settle these instruments in cash.
23
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
The effective interest rate of the liability component of the Convertible Notes is equal to the stated interest rate plus the accretion of original issue discount. The effective interest rate on the liability component of the Convertible Notes due 2019 for the three and six months ended June 30, 2018 and 2017 was 6%.
Convertible Notes due 2023
In May 2018, the Company usesissued $345,000 of Convertible Notes that mature on June 1, 2023. The Convertible Notes bear interest at a rate of 1.75 percent per annum payable semiannually in arrears on June 1 and December 1 of each year, beginning on December 1, 2018. The Convertible Notes are general unsecured obligations, subordinated in right of payment to our obligations under our Credit Agreement. The notes are structurally subordinated to the equity methodindebtedness and other liabilities of accountingany of our subsidiaries, other than our wholly owned subsidiary, Envestnet Asset Management, Inc., which will fully and unconditionally guarantee the notes on an unsecured basis. The Convertible Notes rank equally in right of payment with all our other existing and future senior indebtedness.
Upon the occurrence of a “fundamental change,” as defined in the indenture, the holders may require the Company to record itsrepurchase all or a portion of this privately held company’s net income or loss on a one quarter lag from the actual resultsConvertible Notes for cash at 100% of operations.the principal amount of the Convertible Notes being purchased, plus any accrued and unpaid interest. The Company usesmay redeem for cash all or any portion of the equity methodnotes, at our option, on or after June 5, 2021 if the last reported sale price of accounting becauseour common stock has been at least 130% of its less than 50 percent ownership.the conversion price then in effect for at least 20 trading days, consecutive or non-consecutive, within a 30 consecutive trading day period ending on, and including, any of the five trading days immediately preceding the date on which we provide notice of redemption.
The Convertible Notes are convertible into shares of the Company’s common stock under certain circumstances prior to maturity at a conversion rate of 14.6381 shares per $1 principal amount of the Convertible Notes, which represents a conversion price of $68.31 per share, subject to adjustment under certain conditions. Holders may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding December 15, 2022, under certain circumstances. The Company’s interest instated policy is to settle the earnings or lossesdebt component of the privately held companyConvertible Notes at least partially or wholly in cash. This policy is reflected in other expense, netbased both on the condensed consolidated statementsCompany’s intent and the Company’s ability to settle these instruments in cash.
The effective interest rate of operations.the liability component of the Convertible Notes is equal to the stated interest rate plus the accretion of original issue discount. The effective interest rate on the liability component of the Convertible Notes due 2023 for the three and six months ended June 30, 2018 was 6%.
See “Note 17 – Net Income (Loss) Per Share” for further discussion of the effect of conversion on net loss per common share.
13. Other Non-Current Liabilities
Other non-current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
| June 30, |
| December 31, |
| ||
|
| 2018 |
| 2017 |
| ||
Uncertain tax positions |
| $ | 10,827 |
| $ | 10,640 |
|
Deferred compensation liability |
|
| 5,852 |
|
| 4,364 |
|
Other |
|
| 65 |
|
| 98 |
|
|
| $ | 16,744 |
| $ | 15,102 |
|
10.14.Fair Value Measurements
The Company follows ASC 825-10, Financial Instruments, which provides companies the option to report selected financial assets and liabilities at fair value. ASC 825-10 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities and to more easily understand the effect of the company’s choice to use fair value on its earnings. ASC 825-10 also requires entities to display the fair value of the selected assets and liabilities on the face of the balance sheet. The Company has not elected the ASC 825-10 option to report selected financial assets and liabilities at fair value.
24
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Financial assets and liabilities at fair value are categorized based upon a fair value hierarchy established by GAAP, which prioritizes the inputs used to measure fair value into the following levels:
Level I: |
| Inputs based on quoted market prices in active markets for identical assets or liabilities at the measurement date. |
|
|
|
Level II: |
| Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or inputs that are observable and can be corroborated by observable market data. |
|
|
|
Level III: |
| Inputs reflect management’s best estimates and assumptions of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the valuation of the instruments. |
The following tables set forth the fair value of the Company’s financial assets and liabilities measured at fair value on a recurring basis in the condensed consolidated balance sheets as of SeptemberJune 30, 20172018 and December 31, 2016,2017, based on the three-tier fair value hierarchy.
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 | June 30, 2018 | ||||||||||||||||||||
| Fair Value |
| Level I |
| Level II |
| Level III | Fair Value |
| Level I |
| Level II |
| Level III | ||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Money market funds(1) | $ | 28,179 |
| $ | 28,179 |
| $ | — |
| $ | — | |||||||||||
Assets to fund deferred compensation liability(2) |
| 5,122 |
|
| — |
|
| — |
|
| 5,122 | |||||||||||
Money market funds and other (1) | $ | 106,038 |
| $ | 106,038 |
| $ | — |
| $ | — | |||||||||||
Assets to fund deferred compensation liability(2) |
| 6,729 |
|
| — |
|
| — |
|
| 6,729 | |||||||||||
Total assets | $ | 33,301 |
| $ | 28,179 |
| $ | — |
| $ | 5,122 | $ | 112,767 |
| $ | 106,038 |
| $ | — |
| $ | 6,729 |
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration | $ | 2,696 |
| $ | — |
| $ | — |
| $ | 2,696 | $ | 707 |
| $ | — |
| $ | — |
| $ | 707 |
Deferred compensation liability(3) |
| 4,006 |
|
| 4,006 |
|
| — |
|
| — | |||||||||||
Deferred compensation liability(3) |
| 5,852 |
|
| 5,852 |
|
| — |
|
| — | |||||||||||
Total liabilities | $ | 6,702 |
| $ | 4,006 |
| $ | — |
| $ | 2,696 | $ | 6,559 |
| $ | 5,852 |
| $ | — |
| $ | 707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2016 | December 31, 2017 | ||||||||||||||||||||
| Fair Value |
| Level I |
| Level II |
| Level III | Fair Value |
| Level I |
| Level II |
| Level III | ||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Money market funds(1) | $ | 31,644 |
| $ | 31,644 |
| $ | — |
| $ | — | |||||||||||
Assets to fund deferred compensation liability(2) |
| 2,738 |
|
| — |
|
| — |
|
| 2,738 | |||||||||||
Money market funds(1) | $ | 39,400 |
| $ | 39,400 |
| $ | — |
| $ | — | |||||||||||
Assets to fund deferred compensation liability(2) |
| 5,185 |
|
| — |
|
| — |
|
| 5,185 | |||||||||||
Total assets | $ | 34,382 |
| $ | 31,644 |
| $ | — |
| $ | 2,738 | $ | 44,585 |
| $ | 39,400 |
| $ | — |
| $ | 5,185 |
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration | $ | 4,868 |
| $ | — |
| $ | — |
| $ | 4,868 | $ | 2,781 |
| $ | — |
| $ | — |
| $ | 2,781 |
Deferred compensation liability(3) |
| 2,885 |
|
| 2,885 |
|
| — |
|
| — | |||||||||||
Deferred compensation liability(3) |
| 4,364 |
|
| 4,364 |
|
| — |
|
| — | |||||||||||
Total liabilities | $ | 7,753 |
| $ | 2,885 |
| $ | — |
| $ | 4,868 | $ | 7,145 |
| $ | 4,364 |
| $ | — |
| $ | 2,781 |
(1) | The fair values of the Company’s investments in money-market funds are based on the daily quoted market prices for the net asset value of the various money market |
(2) | The fair value of assets to fund deferred compensation liability approximates the cash surrender value of the life insurance premiums and is included in other non-current assets in the condensed consolidated balance sheets. |
(3) | The deferred compensation liability is included in other non-current liabilities in the condensed consolidated balance sheets and its fair market value is based on the daily quoted market prices for the net asset |
25
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Level I assets and liabilities include money-market funds not insured by the FDIC and deferred compensation liability. The Company periodically invests excess cash in money-market funds not insured by the FDIC. The Company believes that the investments in money market funds are on deposit with creditworthy financial institutions and that the funds are highly liquid. These money-market funds are considered Level I and are included in cash and cash equivalents in the condensed consolidated balance sheets. The fair value of the deferred compensation liability is based upon the daily quoted market prices for net asset value on the various funds selected by participants. Time deposit account fair values are determined by trade confirmations which mature daily and therefore are considered highly liquid investments.
Level III assets and liabilities consist of the estimated fair value of contingent consideration as well as the assets to fund deferred compensation liability. The fair market value of the assets to fund deferred compensation liability is based upon the cash surrender value of the life insurance premiums.
The fair value of the contingent consideration liabilitiesliability related to the FinaConnect and Wheelhouse acquisitions wereacquisition was estimated using a discounted cash flow method with significant inputs that are not observable in the market and thus represent a Level III fair value measurement as defined in ASC 820, Fair Value Measurements and Disclosures. The significant inputs in the Level III measurement not supported by market activity included our assessments of expected future cash flows related to our acquisitionsacquisition of FinaConnect and Wheelhouse during the subsequent periods from the date of acquisition, appropriately discounted considering the uncertainties associated with the obligation, and calculated in accordance with the terms of the agreement.
The Company utilized a discounted cash flow method with expected future performance of FinaConnect and Wheelhouse, and theirits ability to meet the target performance objectives as the main driver of the valuation, to arrive at the fair valuesvalue of theirits respective contingent consideration. The Company will continue to reassess the fair value of the contingent consideration made subsequent to the measurement period for each acquisition at each reporting date until settlement. Changes to the estimated fair values
16
of the contingent consideration will be recognized in earnings of the Company and included in general and administration on the condensed consolidated statements of operations.
The table below presents a reconciliation of contingent consideration liabilities of which the Company measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the period from December 31, 2016 to September 30, 2017:
|
|
|
|
|
| Fair Value of | |
|
| Contingent | |
|
| Consideration | |
|
| Liabilities | |
Balance at December 31, 2016 |
| $ | 4,868 |
Settlement of contingent consideration liability |
|
| (2,286) |
Contingent consideration adjustment |
|
| (218) |
Accretion on contingent consideration |
|
| 332 |
Balance at September 30, 2017 |
| $ | 2,696 |
The table below presents a reconciliation of the assets to fund deferred compensation liability of which the Company measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the period from December 31, 20162017 to SeptemberJune 30, 2017:2018:
|
|
|
|
|
| Fair Value of | |
|
| Assets to Fund | |
|
| Deferred | |
|
| Compensation | |
|
| Liability | |
Balance at December 31, 2017 |
| $ | 5,185 |
Contributions and fair value adjustments |
|
| 1,544 |
Balance at June 30, 2018 |
| $ | 6,729 |
|
|
|
|
|
| Fair Value of | |
|
| Assets to Fund | |
|
| Deferred | |
|
| Compensation | |
|
| Liability | |
Balance at December 31, 2016 |
| $ | 2,738 |
Contributions and fair value adjustments |
|
| 2,384 |
Balance at September 30, 2017 |
| $ | 5,122 |
|
|
|
|
The asset value was increased due to funding ofcontributions to the plan as well as a gainPlan and immaterial gains on the underlying investment vehicles of $350, which resulted in an asset value as of SeptemberJune 30, 20172018 of $5,122,$6,729, which was included in other non-current assets on the condensed consolidated balance sheets.
26
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
The table below presents a reconciliation of contingent consideration liabilities of which the Company measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the period from December 31, 2017 to June 30, 2018:
|
|
|
|
|
| Fair Value of | |
|
| Contingent | |
|
| Consideration | |
|
| Liabilities | |
Balance at December 31, 2017 |
| $ | 2,781 |
Payment of contingent consideration liability |
|
| (2,193) |
Accretion on contingent consideration |
|
| 119 |
Balance at June 30, 2018 |
| $ | 707 |
The Company assesses the categorization of assets and liabilities by level at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer, in accordance with the Company’s accounting policy regarding the recognition of transfers between levels of the fair value hierarchy. There were no transfers between Levels I, II and III during the ninesix months ended SeptemberJune 30, 2017.2018.
On December 15, 2014, the Company issued $172,500 of Convertible Notes.Notes due 2019. As of SeptemberJune 30, 20172018 and December 31, 2016,2017, the carrying value of the 2019 Convertible Notes due 2019 equaled $157,353162,299 and $152,575,$158,990, respectively, and represents the aggregate principal amount outstanding less the unamortized discount and debt issuance costs. As of SeptemberJune 30, 20172018 and December 31, 2016,2017, the fair value of the Convertible Notes due 2019 was $181,142$182,333 and $164,824,$180,180, respectively. The Company considers the Convertible Notes due 2019 to be Level II liabilities and uses a market approach to calculate the fair value of the Convertible Notes.value. The estimated fair value was determined based on the estimated or actual bids and offers of the Convertible Notes due 2019 in an over-the-counter market on SeptemberJune 30, 20172018 (see Note 14)“Note 12 – Debt”).
AsOn May 25, 2018, the Company issued $345,000 of September 30, 2017 and December 31, 2016, there was $0 and $142,000, respectively, of TermConvertible Notes outstanding. As of December 31, 2016 the outstanding value of our Term Notes approximated fair value as the Term Notes bore interest at variable rates and we believed our credit risk quality was consistent with when the debt originated.due 2023. As of SeptemberJune 30, 2017 and December 31, 2016,2018, the carrying value of the TermConvertible Notes due 2023 equaled $0 and $138,335, respectively,$289,562 and represents the aggregate principal amount outstanding less the unamortized discount and debt issuance costs. As of June 30, 2018, the fair value of the Convertible Notes due 2023 was $356,923. The Company consideredconsiders the TermConvertible Notes as of December 31, 2016due 2023 to be Level II liability (See Note 14)liabilities and uses a market approach to calculate the fair value. The estimated fair value was determined based on the estimated or actual bids and offers of the Convertible Notes due 2023 in an over-the-counter market on June 30, 2018 (see “Note 12 – Debt”).
As of SeptemberJune 30, 20172018 and December 31, 2016,2017, there was $101,168$0 and $0,$81,168, respectively, outstanding on the revolving credit facility under the Second Amended and Restated Credit Agreement. As of September 30, 2017 and December 31, 20162017, the outstanding balance on our revolving credit facility approximated fair value as the revolving credit facility bore interest at variable rates and we believedbelieve our credit risk quality wasis consistent with when the debt originated. The Company consideredconsiders the revolving credit facility as of December 31, 2016 and as of September 30, 2017 to be Level I liability (See Note 14)“Note 12 – Debt”).
17
We consider the recorded value of our other financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable and accounts payable, to approximate the fair value of the respective assets and liabilities at SeptemberJune 30, 20172018 based upon the short-term nature of the assets and liabilities.
11.15.Accrued Expensesand Other LiabilitiesStock-Based Compensation
Accrued expensesThe Company has stock options and other liabilities consistrestricted stock units outstanding under the 2004 Stock Incentive Plan (the “2004 Plan”) and the 2010 Long-Term Incentive Plan (the “2010 Plan”).
As of June 30, 2018, the maximum number of common shares of the following:Company available for future issuance under the Company’s plans is 3,091,345.
27
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Stock-based compensation expense under the Company’s plans was as follows:
|
|
|
|
|
|
|
|
| September 30, |
| December 31, | ||
|
| 2017 |
| 2016 | ||
Accrued investment manager fees |
| $ | 37,344 |
| $ | 31,278 |
Accrued compensation and related taxes |
|
| 37,882 |
|
| 35,287 |
Sales and use tax payable |
|
| 12,914 |
|
| 10,108 |
Accrued professional services |
|
| 4,646 |
|
| 3,213 |
Definite consideration |
|
| 1,250 |
|
| 445 |
Other accrued expenses |
|
| 8,841 |
|
| 7,432 |
|
| $ | 102,877 |
| $ | 87,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
Stock-based compensation expense |
| $ | 10,476 |
| $ | 7,945 |
| $ | 18,971 |
| $ | 15,403 |
Tax effect on stock-based compensation expense |
|
| (2,650) |
|
| (2,983) |
|
| (4,800) |
|
| (5,784) |
Net effect on income |
| $ | 7,826 |
| $ | 4,962 |
| $ | 14,171 |
| $ | 9,619 |
The tax effect on stock-based compensation expense above was calculated using a blended statutory rate of 25.3% for the three and six months ended June 30, 2018. The tax effect on stock-based compensation expense above was calculated using a blended statutory rate of 37.5% for the three and six months ended June 30, 2017. However, due to the valuation allowance recorded on domestic deferreds, there was no tax effect related to stock-based compensation expense for the three and six months ended June 30, 2018.
12. Other Non-Current LiabilitiesStock Options
Other non-current liabilities consistThe following weighted average assumptions were used to value options granted during the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||
|
| June 30, |
|
| June 30, |
| ||||||||
|
| 2018 |
| 2017 |
|
| 2018 |
| 2017 |
| ||||
Grant date fair value of options |
| $ | — |
| $ | — |
|
| $ | — |
| $ | 14.51 |
|
Volatility |
|
| — | % |
| — | % |
|
| — | % |
| 43.8 | % |
Risk-free interest rate |
|
| — | % |
| — | % |
|
| — | % |
| 2.1 | % |
Dividend yield |
|
| — | % |
| — | % |
|
| — | % |
| — | % |
Expected term (in years) |
|
| — |
|
| — |
|
|
| — |
|
| 6.3 |
|
The following table summarizes option activity under the Company’s plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted-Average |
|
|
|
|
|
|
| Weighted- |
| Remaining |
|
|
| |
|
|
|
| Average |
| Contractual Life |
| Aggregate | ||
|
| Options |
| Exercise Price |
| (Years) |
| Intrinsic Value | ||
Outstanding as of December 31, 2017 |
| 2,254,565 |
| $ | 19.23 |
| 4.3 |
| $ | 69,939 |
Exercised |
| (162,857) |
|
| 14.76 |
|
|
|
|
|
Forfeited |
| (1,668) |
|
| 32.46 |
|
|
|
|
|
Outstanding as of March 31, 2018 |
| 2,090,040 |
|
| 19.57 |
| 4.1 |
|
| 78,859 |
Granted |
| — |
|
| — |
|
|
|
|
|
Exercised |
| (12,166) |
|
| 11.42 |
|
|
|
|
|
Forfeited |
| — |
|
| — |
|
|
|
|
|
Outstanding as of June 30, 2018 |
| 2,077,874 |
|
| 19.62 |
| 3.9 |
|
| 73,421 |
Options exercisable |
| 1,975,716 |
|
| 19.17 |
| 3.6 |
| $ | 70,703 |
Exercise prices of stock options outstanding as of June 30, 2018 range from $7.15 to $55.29. At June 30, 2018, there was $1,197 of unrecognized stock-based compensation expense related to unvested stock options, which the Company expects to recognize over a weighted-average period of 1.4 years.
28
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Restricted Stock Units and Restricted Stock Awards
Periodically, the Company grants restricted stock unit awards to employees. The following is a summary of the following:activity for unvested restricted stock units and awards granted under the Company’s plans:
|
|
|
|
|
|
|
|
|
| Weighted- | |
|
|
|
| Average Grant | |
|
| Number of |
| Date Fair Value | |
|
| Shares |
| per Share | |
Outstanding as of December 31, 2017 |
| 1,766,639 |
| $ | 32.48 |
Granted |
| 925,641 |
|
| 55.21 |
Vested |
| (503,668) |
|
| 34.05 |
Forfeited |
| (27,265) |
|
| 30.79 |
Outstanding as of March 31, 2018 |
| 2,161,347 |
|
| 41.59 |
Granted |
| — |
|
| — |
Vested |
| (253,279) |
|
| 31.13 |
Forfeited |
| (27,324) |
|
| 39.78 |
Outstanding as of June 30, 2018 |
| 1,880,744 |
| $ | 43.36 |
|
|
|
|
|
|
At June 30, 2018, there was $73,482 of unrecognized stock-based compensation expense related to unvested restricted stock units and awards, which the Company expects to recognize over a weighted-average period of 2.2 years.
|
|
|
|
|
|
|
|
| September 30, |
| December 31, | ||
|
| 2017 |
| 2016 | ||
Uncertain tax positions |
| $ | 10,379 |
| $ | 7,762 |
Accrued deferred compensation |
|
| 4,006 |
|
| 2,885 |
Accrued purchase liability |
|
| — |
|
| 1,250 |
Other |
|
| 142 |
|
| 1,539 |
|
| $ | 14,527 |
| $ | 13,436 |
During March 2018, the Company granted 26,000 performance-based restricted stock unit awards to certain employees. These performance-based shares vest upon the achievement of certain business and financial metrics. The business and financial metrics governing the vesting of these stock unit awards provide thresholds which dictate the number of shares to vest upon each evaluation date, which range from 50% to 150%. If these metrics are achieved at 100%, as defined in the individual grant terms, these shares would vest over three annual tranches equally.
13.16. Income Taxes
The following table includes the Company’s loss before income tax provision (benefit), income tax provision (benefit) and effective tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||||||||
|
| September 30, |
|
| September 30, |
|
| June 30, |
|
| June 30, |
| ||||||||||||||||
|
| 2017 |
| 2016 |
|
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
|
| 2018 |
| 2017 |
| ||||||||
Income (loss) before income tax provision (benefit) |
| $ | 362 |
| $ | (5,725) |
|
| $ | (10,101) |
| $ | (33,595) |
| ||||||||||||||
Loss before income tax provision (benefit) |
| $ | (5,425) |
| $ | (1,626) |
|
| $ | (11,417) |
| $ | (10,463) |
| ||||||||||||||
Income tax provision (benefit) |
|
| 1,682 |
|
| (1,668) |
|
|
| 10,824 |
|
| (10,602) |
|
|
| 566 |
|
| 4,844 |
|
|
| (13,428) |
|
| 9,142 |
|
Effective tax rate |
|
| 464.6 | % |
| 29.1 | % |
|
| (107.2) | % |
| 31.6 | % |
|
| (10.4) | % |
| (297.9) | % |
|
| 117.6 | % |
| (87.4) | % |
The Company'sFor the three months ended June 30, 2018, our effective tax rate in the three and nine months ended September 30, 2017 differed from the effective taxstatutory rate in the three and nine months ended September 30, 2016, primarily due to the valuation allowance the Company has putplaced on all U.S.US deferreds with the exception of indefinite lived intangibles, additional accruals for uncertain tax positions, the impact of clarifying Base Erosion and Anti Abuse tax positions, as well as differences between the foreign tax rates and statutory US tax rate.
For the three months ended June 30, 2017, our effective tax rate differed from the statutory rate primarily due to the valuation allowance the Company had placed on all US deferreds with the exception of indefinite-lived intangibles and unrepatriated foreign earnings and profits, resulting in no benefit being recognized for the tax loss in the U.S.US.
GrossFor the six months ended June 30, 2018, our effective tax rate differed from the statutory rate primarily due to the release of the Company’s valuation allowance as a result of additional deferred tax liabilities recorded with the acquisition of FolioDynamix, additional accruals for uncertain tax positions as well as differences between the foreign tax rates and statutory US tax rate.
29
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
For the six months ended June 30, 2017, our effective tax rate differed from the statutory rate primarily due to the valuation allowance the Company had placed on all US deferreds with the exception of indefinite-lived intangibles and unrepatriated foreign earnings and profits, resulting in no benefit being recognized for the tax loss in the US.
In December 2017, the Tax Cuts and Jobs Act (“Tax Act”) was enacted into United States law. Beginning in 2018, the Tax Act includes the global intangible low-taxed income (“GILTI”) provision and base erosion anti abuse tax (“BEAT”). We elected to account for GILTI tax in the period in which it is incurred. The GILTI provision requires us to include in our U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. We expect to fully offset any GILTI income with Net Operating Losses (“NOLs”). As a result of our domestic valuation allowance, we do not expect a financial statement impact due to the GILTI provision. Additionally the Tax Act requires us to calculate a minimum tax on our foreign earnings and profits; BEAT. As a result of further research and developing guidance we do not require a BEAT provision to be recorded.
In accordance with Staff Accounting Bulletin 118, we recognized provisional tax impacts related to the deemed repatriated foreign earnings in our consolidated financial statements for the year ended December 31, 2017. The ultimate impact may differ from those provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the Tax Act. During the six months ended June 30, 2018 we did not record any adjustments to our provisional amounts included in our consolidated financial statements for the year ended December 31, 2017. The accounting is expected to be completed when the 2017 U.S. corporate income tax return is filed in October of 2018.
The total gross liability for unrecognized tax benefits, were $17,853exclusive of interest and $16,476penalties, was $18,895 and $18,312 at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively. Of this amount, a portion of the unrecognized tax benefits was recorded as a reduction of deferred tax assets instead of a non-current liability. The portion of the unrecognized tax benefits, exclusive of interest and penalties, recorded as a non-current liability is $4,871 and $4,626 at June 30, 2018 and December 31, 2017, respectively.
At SeptemberJune 30, 2017,2018, the amount of unrecognized tax benefits, including interest and penalties, that would benefit the Company’s effective tax rate, if recognized, was $17,853.$10,827. At this time, the Company estimates that the liability for unrecognized tax benefits will not decrease in the next twelve months as it is not anticipated that reviews by tax authorities will be completed and there will be any expiration of certain statutes of limitations in this time period.
The Company recognizes potential interest and penalties related to unrecognized tax benefits in income tax expense. Income tax expense includes $548 and $890 of potential interest and penalties related to unrecognized tax benefits for the six months ended June 30, 2018 and 2017, respectively. The Company recordedhad accrued interest and penalties of $371$6,566 and $1,261 for the three$6,018 as of June 30, 2018 and nine months period ended September 30,December 31, 2017,
18
respectively. The Company recorded interest and penalties of $334 and $723 for the three and nine months period ended September 30, 2016, respectively.
The Company files a consolidated federal income tax return and separate tax returns with various states. Additionally, foreign subsidiaries of the Company file tax returns in foreign jurisdictions. The Company’s tax returns for the calendar years ended December 31, 2016, 2015, 2014, and 2013 remain open to examination by the Internal Revenue Service in their entirety. With respect to state taxing jurisdictions, the Company’s tax returns for calendar years ended December 31, 2011 through 2016 remain open to examination by various state revenue services.
The Company's Indian subsidiaries are currently under examination by the India Tax Authority for the fiscal years ended March 31, 2006 and forward. Based on the outcome of examinations of our subsidiaries or the result of the expiration of statutes of limitations it is reasonably possible that the related unrecognized tax benefits could change from those recorded in the consolidated balance sheet. It is possible that one or more of these audits may be finalized within the next twelve months however, at this time, we have not been notified by the India Tax Authority of any audit scheduled for finalization within the next twelve months.
14. Debt
The Company’s outstanding debt obligations as of September 30, 2017 and December 31, 2016 were as follows:
|
|
|
|
|
|
|
|
| September 30, |
| December 31, | ||
|
| 2017 |
| 2016 | ||
Convertible Notes |
| $ | 172,500 |
| $ | 172,500 |
Unaccreted discount on Convertible Notes |
|
| (13,075) |
|
| (17,149) |
Unamortized issuance costs on Convertible Notes |
|
| (2,072) |
|
| (2,776) |
Convertible Notes carrying value |
| $ | 157,353 |
| $ | 152,575 |
|
|
|
|
|
|
|
Term Notes |
| $ | — |
| $ | 142,000 |
Unamortized issuance costs on Term Notes |
|
| — |
|
| (3,665) |
Term Notes carrying value |
| $ | — |
| $ | 138,335 |
|
|
|
|
|
|
|
Revolving credit facility balance |
| $ | 101,168 |
| $ | — |
Interest expense was comprised of the following and is included in other expense, net in the condensed consolidated statement of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Coupon interest |
| $ | 755 |
| $ | 754 |
| $ | 2,264 |
| $ | 2,264 |
Amortization of issuance costs |
|
| 483 |
|
| 737 |
|
| 2,529 |
|
| 2,169 |
Accretion of debt discount |
|
| 1,393 |
|
| 1,323 |
|
| 4,074 |
|
| 3,901 |
Interest on credit agreement |
|
| 1,088 |
|
| 1,255 |
|
| 3,543 |
|
| 3,792 |
Undrawn and other fees |
|
| 139 |
|
| 53 |
|
| 261 |
|
| 219 |
|
| $ | 3,858 |
| $ | 4,122 |
| $ | 12,671 |
| $ | 12,345 |
Credit Agreement
On July 18, 2017, the Company and certain of its subsidiaries entered into a Second Amended and Restated Credit Agreement (the “Second Amended and Restated Credit Agreement”) with a group of banks (the “Banks”), for which Bank of Montreal is acting as administrative agent (the “Administrative Agent”). The Second Amended and Restated Credit Agreement amends and restates the Amended and Restated Credit Agreement, dated as of November 19, 2015, as amended, among the Company, the guarantors party thereto, the lenders party thereto and Bank of Montreal, as administrative agent (the “Prior Credit Facility”). Pursuant to the Second Amended and Restated Credit Agreement, the Banks have agreed to provide to the Company revolving credit commitments (the “Revolving Credit Facility”) in the aggregate amount of up to $350,000 which amount may be increased by $50,000. The Second Amended and Restated Credit Agreement also includes a $5,000 subfacility for the issuance of letters of credit.
19
Obligations under the Second Amended and Restated Credit Agreement are guaranteed by substantially all of the Company’s U.S. subsidiaries. In accordance with the terms of the Amended and Restated Security Agreement, dated July 18, 2017 (the “Security Agreement”), among the Company, the Debtors party thereto and the Administrative Agent, obligations under the Second Amended and Restated Credit Agreement are secured by substantially all of the Company’s domestic assets and the Company’s pledge of 66% of the voting equity and 100% of the non-voting equity of certain of its first-tier foreign subsidiaries. Proceeds under the Second Amended and Restated Credit Agreement may be used to finance capital expenditures, working capital, permitted acquisitions and for general corporate purposes.
The Company will pay interest on borrowings made under the Second Amended and Restated Credit Agreement at rates between 1.50 percent and 3.25 percent above LIBOR based on the Company’s total leverage ratio. Borrowings under the Second Amended and Restated Credit Agreement are scheduled to mature on July 18, 2022.
The Second Amended and Restated Credit Agreement contains customary conditions, representations and warranties, affirmative and negative covenants, mandatory prepayment provisions and events of default. The covenants include certain financial covenants requiring the Company to maintain compliance with a maximum senior leverage ratio, a maximum total leverage ratio, a minimum interest coverage ratio and minimum liquidity requirement, and provisions that limit the ability of the Company and its subsidiaries to incur debt, make investments, sell assets, create liens, engage in transactions with affiliates, engage in mergers and acquisitions, pay dividends and other restricted payments, grant negative pledges and change their business activities.
As of September 30, 2017, an amount of $101,168 was outstanding on the Revolving Credit Facility.
The July 18, 2017 amendment to the Prior Credit Facility replaced the Term Notes and related excess cash flow payment obligations with a revolving line of credit. The Company’s condensed consolidated balance sheets reflect these changes as of September 30, 2017 with no portion of debt related to the revolving credit facility being classified as short-term. As of September 30, 2017, the debt issuance costs related to the Second Amended and Restated Credit Agreement and the Prior Credit Facility are presented in other non-current assets and prepaid expenses and other current assets which have outstanding amounts of $3,320 and $855, respectively.
Convertible Notes
On December 15, 2014, the Company issued $172,500 of Convertible Notes. Net proceeds from the offering were $166,967. The Convertible Notes bear interest at a rate of 1.75 percent per annum payable semiannually in arrears on June 15 and December 15 of each year, beginning on June 15, 2015.
The Convertible Notes are general unsecured obligations, subordinated in right of payment to our obligations under our Credit Agreement. The Convertible Notes rank equally in right of payment with all of the Company’s existing and future senior indebtedness and will be senior in right of payment to any of the Company’s future subordinated indebtedness. The Convertible Notes will be structurally subordinated to the indebtedness and other liabilities of any of our subsidiaries, other than to the extent the Convertible Notes are guaranteed in the future by our subsidiaries as described in the indenture and will be effectively subordinated to and future secured indebtedness to the extent of the value of the assets securing such indebtedness. Certain of our subsidiaries guarantee our obligations under our Credit Agreement.
Upon the occurrence of a “fundamental change,” as defined in the indenture, the holders may require the Company to repurchase all or a portion of the Convertible Notes for cash at 100% of the principal amount of the Convertible Notes being purchased, plus any accrued and unpaid interest.
The Convertible Notes are convertible into shares of the Company’s common stock under certain circumstances prior to maturity at a conversion rate of 15.9022 shares per $1 principal amount of the Convertible Notes, which represents a conversion price of $62.88 per share, subject to adjustment under certain conditions. Holders may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding July 1, 2019, only under the following circumstances: (a) during any calendar quarter commencing after the calendar quarter ending on March 31, 2015 (and only during such calendar quarter), if the last reported sale price of our common stock, for at least 20 trading days (whether or not consecutive) in the period of 30 consecutive trading days ending on the last trading day of the calendar quarter immediately preceding the calendar quarter in which the conversion occurs, is more than 130% of the conversion price of the Convertible Notes in effect on each applicable trading day; (b) during the five consecutive business-day period following any five consecutive trading-day period in which the trading price for the Convertible
20
Notes for each such trading day was less than 98% of the last reported sale price of our common stock on such date multiplied by the then-current conversion rate; or (c) upon the occurrence of specified corporate events as defined in the indenture.
Upon conversion, the Company may pay cash, shares of the Company’s common stock or a combination of cash and stock, as determined by the Company in its discretion. The Company’s stated policy is to settle the debt component of the Convertible Notes at least partially or wholly in cash. This policy is based both on the Company’s intent and the Company’s ability to settle these instruments in cash.
The Company has separately accounted for the liability and equity components of the Convertible Notes by allocating the proceeds from issuance of the Convertible Notes between the liability component and the embedded conversion option, or equity component. This allocation was done by first estimating an interest rate at the time of issuance for similar notes that do not include the embedded conversion option. The Company allocated $26,618 to the equity component, net of offering costs of $882. The Company recorded a discount on the Convertible Notes of $27,500 which is being accreted and recorded as additional interest expense over the life of the Convertible Notes. During the three and nine month periods ended September 30, 2017, the Company recognized $1,393 and $4,074, respectively, in accretion related to the discount. During the three and nine month periods ended September 30, 2016, the Company recognized $1,323 and $3,901, respectively, in accretion related to the discount. The effective interest rate of the liability component of the Convertible Notes is equal to the stated interest rate plus the accretion of original issue discount. The effective interest rate on the liability component of the Convertible Notes for the three and nine month periods ended September 30, 2017 was 5.4%. The effective interest rate on the liability component of the Convertible Notes for the three and nine month periods ended September 30, 2016 was 6.0%.
See Note 16 for further discussion of the effect of conversion on net loss per common share.
15.Stock-Based Compensation
The Company has stock options and restricted stock units outstanding under the 2004 Stock Incentive Plan (the “2004 Plan”), the 2010 Long-Term Incentive Plan (the “2010 Plan”) and the Envestnet, Inc. Management Incentive Plan for Envestnet | Tamarac Management Employees (the “2012 Plan”). On July 13, 2017, the shareholders approved the 2010 Long-Term Incentive Plan as Amended. The amendment increased the number of common shares of the Company reserved for delivery under the 2010 Plan by 3,525,000 shares.
In connection with the Yodlee merger, the Company adopted the 2015 Acquisition Equity Award Plan (the “2015 Plan”). The 2015 Plan provides for the grant of restricted common stock units for certain Envestnet | Yodlee employees. The maximum number of shares of stock which may be issued with respect to awards under the 2015 Plan is 1,052,000. These awards vest over a period of 43 months subsequent to the acquisition date of November 19, 2015. As of September 30, 2017, the remaining amount of unrecognized expense totaled $6,070.
As of September 30, 2017, the maximum number of common shares of the Company available for future issuance under the Company’s plans is 3,945,537.
Stock-based compensation expense under the Company’s plans was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Stock-based compensation expense |
| $ | 8,048 |
| $ | 7,554 |
| $ | 23,451 |
| $ | 25,872 |
Tax effect on stock-based compensation expense |
|
| (3,018) |
|
| (3,022) |
|
| (8,794) |
|
| (10,349) |
Net effect on income |
| $ | 5,030 |
| $ | 4,532 |
| $ | 14,657 |
| $ | 15,523 |
The tax effect on stock-based compensation expense above was calculated using a blended statutory rate of 37.5% for the three and nine months ended September 30, 2017. The tax effect on stock-based compensation expense above was calculated using a blended statutory rate of 40.0% for the three and nine months ended September 30, 2016. However, due to the valuation allowance recorded on domestic deferreds, there was no tax effect related to stock-based compensation expense for the three and nine months ended September 30, 2017.
Stock Options
21
The following weighted average assumptions were used to value options granted during the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||
|
| September 30, |
|
| September 30, |
| ||||||||
|
| 2017 |
| 2016 |
|
| 2017 |
| 2016 |
| ||||
Grant date fair value of options |
| $ | — |
| $ | 14.46 |
|
| $ | 14.51 |
| $ | 9.56 |
|
Volatility |
|
| — | % |
| 42.2 | % |
|
| 43.8 | % |
| 42.2 | % |
Risk-free interest rate |
|
| — | % |
| 1.1 | % |
|
| 2.1 | % |
| 1.4 | % |
Dividend yield |
|
| — | % |
| — | % |
|
| — | % |
| — | % |
Expected term (in years) |
|
| — |
|
| 5.0 |
|
|
| 6.3 |
|
| 6.3 |
|
The following table summarizes option activity under the Company’s plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted-Average |
|
|
|
|
|
|
| Weighted- |
| Remaining |
|
|
| |
|
|
|
| Average |
| Contractual Life |
| Aggregate | ||
|
| Options |
| Exercise Price |
| (Years) |
| Intrinsic Value | ||
Outstanding as of December 31, 2016 |
| 3,033,194 |
| $ | 16.33 |
| 4.3 |
| $ | 63,264 |
Granted |
| 75,238 |
|
| 31.70 |
|
|
|
|
|
Exercised |
| (208,334) |
|
| 9.12 |
|
|
|
|
|
Forfeited |
| (9,062) |
|
| 45.81 |
|
|
|
|
|
Outstanding as of March 31, 2017 |
| 2,891,036 |
|
| 17.15 |
| 4.5 |
|
| 50,792 |
Granted |
| — |
|
| — |
|
|
|
|
|
Exercised |
| (84,949) |
|
| 8.46 |
|
|
|
|
|
Forfeited |
| (1,667) |
|
| 32.46 |
|
|
|
|
|
Outstanding as of June 30, 2017 |
| 2,804,420 |
|
| 17.41 |
| 4.3 |
|
| 66,206 |
Granted |
| — |
|
| — |
|
|
|
|
|
Exercised |
| (134,890) |
|
| 13.71 |
|
|
|
|
|
Forfeited |
| (2,201) |
|
| 30.33 |
|
|
|
|
|
Outstanding as of September 30, 2017 |
| 2,667,329 |
|
| 17.58 |
| 4.1 |
|
| 89,739 |
Options exercisable |
| 2,435,815 |
|
| 16.11 |
| 3.7 |
|
| 85,448 |
Exercise prices of stock options outstanding as of September 30, 2017 range from $0.11 to $55.29. At September 30, 2017, there was $2,414 of unrecognized stock-based compensation expense related to unvested stock options, which the Company expects to recognize over a weighted-average period of 1.8 years.
22
Restricted Stock Units and Restricted Stock Awards
Periodically, the Company grants restricted stock unit awards to employees. Beginning with grants issued in February 2016, restricted stock units awards vest one-third on the first anniversary of the grant date and quarterly thereafter. For grants issued prior to February 2016, restricted stock units awards would vest ratably in three annual tranches from the date of grant. The following is a summary of the activity for unvested restricted stock units and awards granted under the Company’s plans:
|
|
|
|
|
|
|
|
|
| Weighted- | |
|
|
|
| Average Grant | |
|
| Number of |
| Date Fair Value | |
|
| Shares |
| per Share | |
Outstanding as of December 31, 2016 |
| 1,894,759 |
| $ | 30.40 |
Granted |
| 872,941 |
|
| 31.89 |
Vested |
| (526,572) |
|
| 31.68 |
Forfeited |
| (20,084) |
|
| 27.52 |
Outstanding as of March 31, 2017 |
| 2,221,044 |
|
| 31.98 |
Granted |
| 47,700 |
|
| 35.05 |
Vested |
| (199,163) |
|
| 30.59 |
Forfeited |
| (45,683) |
|
| 30.11 |
Outstanding as of June 30, 2017 |
| 2,023,898 |
|
| 32.17 |
Granted |
| 29,000 |
|
| 39.10 |
Vested |
| (121,449) |
|
| 32.26 |
Forfeited |
| (30,369) |
|
| 31.61 |
Outstanding as of September 30, 2017 |
| 1,901,080 |
|
| 32.28 |
At September 30, 2017, there was $49,527 of unrecognized stock-based compensation expense related to unvested restricted stock units and awards, which the Company expects to recognize over a weighted-average period of 2.0 years.
16.17.Net LossIncome (Loss) Per Share
Basic lossincome (loss) per common share is computed by dividing net lossincome (loss) available to common stockholders by the weighted average number of shares of common stock outstanding for the period. For the calculation of diluted lossincome (loss) per share, the basic weighted average number of shares is increased by the dilutive effect of stock options, restricted stock awards, restricted stock units and Convertible Notes due 2019 and 2023 (collectively “Convertible Notes”) using the treasury stock method, if dilutive. No items were included in the computation of diluted loss per share in the three and nine months ended SeptemberJune 30, 20162018 and 2017 as well as the six months ended June 30, 2017 because the Company incurred a net loss attributable to Envestnet, Inc. in each of thesethose periods and therefore these items were considered anti-dilutive.
The Company accounts for the effect of the Convertible Notes on diluted earnings per share using the treasury stock method since they may be settled in cash, shares or a combination thereof at the Company’s option. As a result, the Convertible Notes have no effect on diluted earnings per share until the Company’s stock price exceeds the conversion price of $62.88 and $68.31 per share, respectively, or if the trading price of the Convertible Notes meets certain criteria as described(See “Note 12 – Debt” in Note 14 at which point, the effectPart II, Item 8 of the conversion feature would be includedour 2017 Form 10-K and “Note 12 – Debt” in the Company’s calculation of diluted earnings per share.this Form 10-Q). In the period of conversion, the Convertible Notes will have no impact on diluted earnings if the Convertible Notes are settled in cash and will have an impact on dilutive earnings per share if the Convertible Notes are settled in shares upon conversion.
2330
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
The following table provides the numerators and denominators used in computing basic and diluted net lossincome (loss) per share attributable to Envestnet, Inc.:
|
|
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|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Net loss attributable to Envestnet, Inc. |
| $ | (1,320) |
| $ | (4,057) |
| $ | (20,925) |
| $ | (22,993) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic number of weighted-average shares outstanding |
|
| 44,044,527 |
|
| 42,843,103 |
|
| 43,604,869 |
|
| 42,704,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted number of weighted-average shares outstanding |
|
| 44,044,527 |
|
| 42,843,103 |
|
| 43,604,869 |
|
| 42,704,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to Envestnet, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | (0.03) |
| $ | (0.09) |
| $ | (0.48) |
| $ | (0.54) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
| $ | (0.03) |
| $ | (0.09) |
| $ | (0.48) |
| $ | (0.54) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||
Basic income (loss) per share calculation: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Envestnet, Inc. |
| $ | (5,526) |
| $ | (6,470) |
| $ | 2,578 |
| $ | (19,605) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic number of weighted-average shares outstanding |
|
| 45,247,331 |
|
| 43,855,479 |
|
| 44,963,735 |
|
| 43,513,074 |
Basic net income (loss) per share |
| $ | (0.12) |
| $ | (0.15) |
| $ | 0.06 |
| $ | (0.45) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share calculation: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Envestnet, Inc. |
| $ | (5,526) |
| $ | (6,470) |
| $ | 2,578 |
| $ | (19,605) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic number of weighted-average shares outstanding |
|
| 45,247,331 |
|
| 43,855,479 |
|
| 44,963,735 |
|
| 43,513,074 |
Effect of dilutive shares: |
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock |
|
| — |
|
| — |
|
| 1,360,300 |
|
| — |
Unvested restricted stock units |
|
| — |
|
| — |
|
| 832,170 |
|
| — |
Diluted number of weighted-average shares outstanding |
|
| 45,247,331 |
|
| 43,855,479 |
|
| 47,156,205 |
|
| 43,513,074 |
Diluted net income (loss) per share |
| $ | (0.12) |
| $ | (0.15) |
| $ | 0.05 |
| $ | (0.45) |
Securities that were anti-dilutive for the three and ninesix months ended SeptemberJune 30, 20172018 and 20162017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of |
| Three Months Ended |
| Six Months Ended | ||||||
|
| September 30, |
| June 30, |
| June 30, | ||||||
|
| 2017 |
| 2016 |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
Options to purchase common stock |
| 2,667,329 |
| 3,283,331 |
| 2,077,874 |
| 2,804,420 |
| 9,045 |
| 2,804,420 |
Unvested restricted stock awards and units |
| 1,901,080 |
| 1,981,775 |
| 1,880,744 |
| 2,023,898 |
| — |
| 2,023,898 |
Convertible Notes |
| 2,743,321 |
| 2,743,321 |
| 7,793,826 |
| 2,743,321 |
| 7,793,826 |
| 2,743,321 |
Total |
| 7,311,730 |
| 8,008,427 |
| 11,752,444 |
| 7,571,639 |
| 7,802,871 |
| 7,571,639 |
17.Major Customers
One customer accounted for more than 10% of the Company’s total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||
|
| September 30, |
|
| September 30, |
| ||||
|
| 2017 |
| 2016 |
|
| 2017 |
| 2016 |
|
Fidelity |
| 17 | % | 15 | % |
| 17 | % | 15 | % |
18.Commitments18. Commitments and Contingencies
Purchase Obligations and Indemnifications
The Company includes various types of indemnification and guarantee clauses in certain arrangements. These indemnifications and guarantees may include, but are not limited to, infringement claims related to intellectual property, direct or consequential damages and guarantees to certain service providers and service level requirements with certain customers. The type and amount of any potential indemnification or guarantee varies substantially based on the nature of each arrangement. The Company has experienced no previous claims and cannot determine the maximum amount of potential future payments, if any, related to such indemnification and guarantee provisions. The Company believes that it is unlikely it will have to make material payments under these arrangements and therefore has not recorded a contingent liability in the condensed consolidated balance sheets.
The Company enters into unconditional purchase obligations arrangements for certain of its services that it receives in the normal course of business.
LitigationLegal Proceedings
The Company is involved in litigationlegal proceedings arising in the ordinary course of its business. Legal fees and other costs associated with such actions are expensed as incurred. The Company will record a provision for these claims when it is both probable that a liability has been incurred and the amount of the loss, or a range of the potential loss, can be reasonably estimated. These provisions are
2431
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
provisions are reviewed regularly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information or events pertaining to a particular case. LitigationLegal proceedings accruals are recorded when and if it is determined that a loss is both probable and reasonably estimable. For litigation matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but if the matter is material, it is subject to disclosures. The Company believes that liabilities associated with any claims, while possible, are not probable, and therefore has not recorded any accrual for any claims as of SeptemberJune 30, 2017.2018. Further, while any possible range of loss cannot be reasonably estimated at this time, the Company does not believe that the outcome of any of these proceedings, individually or in the aggregate, would, if determined adversely to it, have a material adverse effect on its financial condition or business, although an adverse resolution of litigationlegal proceedings could have a material adverse effect on Envestnet’s results of operations or cash flow in a particular quarter or year.
Contingencies
Certain of the Company’s revenues are subject to sales and use taxes in certain jurisdictions where it conducts business in the United States. As of SeptemberJune 30, 2017,2018, the Company estimated a sales and use tax liability of $12,914.$9,234. This amount is included in accrued expenses and other liabilities on the condensed consolidated balance sheet.sheets. The Company also estimated a sales and use tax receivable of $4,952$3,413 related to estimated recoverability of amounts due from customers. This amount is included in prepaid expenses and other current assets on the condensed consolidated balance sheet.sheets. As a result, a net sales and use tax liability of $7,962$5,830 related to multiple jurisdictions with respect to revenues in the nine month periodthree and six months ended SeptemberJune 30, 20172018 and prior yearsperiods was probable. Additional future information obtained from the applicable jurisdictions may affect the Company’s estimate of its sales and use tax liability, but such change in the estimate cannot currently be made.
Leases
The Company rents office space under leases that expire at various dates through 2030. FutureAs of June 30, 2018, the Company’s future minimum lease commitments under these operating leases as of September 30, 2017, were as follows:
|
|
|
|
Years ending December 31: |
|
|
|
Remainder of 2017 |
| $ | 3,309 |
2018 |
|
| 13,640 |
2019 |
|
| 14,492 |
2020 |
|
| 14,343 |
2021 |
|
| 13,751 |
Thereafter |
|
| 53,538 |
Total |
| $ | 113,073 |
totaled $105,124.
19.Segment Information
Business segments are generally organized around our business services. Our business segments are:
· | Envestnet – a leading provider of unified wealth management software and services to empower financial advisors and institutions. |
· | Envestnet | Yodlee – a leading data aggregation and data |
The information in the following tables is derived from the Company’s internal financial reporting used for corporate management purposes. Nonsegment expenses include salary and benefits for certain corporate employees and officers, certain types of professional service expenses,fees, insurance, acquisition related transaction costs, restructuring charges, and other non-recurring and/or non-operationally related expenses.Inter-segment revenues were not material for the three and six months ended June 30, 2018 and 2017.
2532
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
The following table presents revenue by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
|
| Three Months Ended |
| Six Months Ended | ||||||||||||||||
|
| September 30, |
| September 30, |
|
| June 30, |
| June 30, | ||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Envestnet |
| $ | 135,948 |
| $ | 114,511 |
| $ | 386,638 |
| $ | 328,417 |
|
| $ | 156,928 |
| $ | 129,372 |
| $ | 312,916 |
| $ | 250,690 |
Envestnet | Yodlee |
|
| 39,666 |
|
| 34,644 |
|
| 114,179 |
|
| 94,267 |
|
|
| 44,188 |
|
| 38,045 |
|
| 86,211 |
|
| 74,513 |
Consolidated revenue |
| $ | 175,614 |
| $ | 149,155 |
| $ | 500,817 |
| $ | 422,684 |
|
| $ | 201,116 |
| $ | 167,417 |
| $ | 399,127 |
| $ | 325,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity revenue as a percentage of Envestnet segment revenue: |
|
| 22% |
|
| 19% |
|
| 22% |
|
| 19% |
|
|
| 21% |
|
| 20% |
|
| 21% |
|
| 20% |
No single customer amounts for Envestnet | Yodlee exceeded 10% of the segment total.total for any period presented.
The following table presents a reconciliation from income (loss) from operations by segment to consolidated net lossincome (loss) attributable to Envestnet, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | Three Months Ended |
| Six Months Ended | ||||||||||||||||
| September 30, |
| September 30, | June 30, |
| June 30, | ||||||||||||||||
| 2017 |
| 2016 |
| 2017 |
| 2016 | 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||
Envestnet | $ | 18,955 |
| $ | 12,361 |
| $ | 48,277 |
| $ | 32,425 | $ | 16,359 |
| $ | 15,811 |
| $ | 32,220 |
| $ | 29,322 |
Envestnet | Yodlee |
| (3,364) |
|
| (8,416) |
|
| (16,707) |
|
| (33,728) |
| (3,296) |
|
| (5,635) |
|
| (7,705) |
|
| (13,343) |
Total segment income (loss) from operations |
| 15,591 |
|
| 3,945 |
|
| 31,570 |
|
| (1,303) | |||||||||||
Total segment income from operations |
| 13,063 |
|
| 10,176 |
|
| 24,515 |
|
| 15,979 | |||||||||||
Nonsegment operating expenses |
| (11,243) |
|
| (5,236) |
|
| (27,833) |
|
| (19,078) |
| (13,058) |
|
| (7,433) |
|
| (25,248) |
|
| (16,590) |
Other expense, net |
| (3,986) |
|
| (4,434) |
|
| (13,838) |
|
| (13,214) |
| (5,430) |
|
| (4,369) |
|
| (10,684) |
|
| (9,852) |
Consolidated income (loss) before income taxes (benefit) |
| 362 |
|
| (5,725) |
|
| (10,101) |
|
| (33,595) | |||||||||||
Consolidated loss before income tax provision (benefit) |
| (5,425) |
|
| (1,626) |
|
| (11,417) |
|
| (10,463) | |||||||||||
Income tax provision (benefit) |
| 1,682 |
|
| (1,668) |
|
| 10,824 |
|
| (10,602) |
| 566 |
|
| 4,844 |
|
| (13,428) |
|
| 9,142 |
Consolidated net loss |
| (1,320) |
|
| (4,057) |
|
| (20,925) |
|
| (22,993) | |||||||||||
Consolidated net income (loss) |
| (5,991) |
|
| (6,470) |
|
| 2,011 |
|
| (19,605) | |||||||||||
Add: Net loss attributable to non-controlling interest |
| — |
|
| — |
|
| — |
|
| — |
| 465 |
|
| — |
|
| 567 |
|
| — |
Consolidated net loss attributable to Envestnet, Inc. | $ | (1,320) |
| $ | (4,057) |
| $ | (20,925) |
| $ | (22,993) | |||||||||||
Consolidated net income (loss) attributable to Envestnet, Inc. | $ | (5,526) |
| $ | (6,470) |
| $ | 2,578 |
| $ | (19,605) |
Segment assets consist of cash, accounts receivable, prepaid expenses and other current assets, property, plant and equipment, net, internally developed software, net, goodwill, and other intangibles, net, and other non-current assets. Segment capital expenditures consist of property and equipment and internally developed software expenditures.
A summary of consolidated total assets, consolidated depreciation and amortization and consolidated capital expenditures follows:
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, | June 30, |
| December 31, | ||||
| 2017 |
| 2016 | 2018 |
| 2017 | ||||
Segment assets: |
|
|
|
|
|
|
|
|
|
|
Envestnet | $ | 344,269 |
| $ | 341,602 | $ | 650,363 |
| $ | 353,048 |
Envestnet | Yodlee |
| 517,953 |
|
| 530,799 |
| 504,813 |
|
| 509,004 |
Consolidated total assets | $ | 862,222 |
| $ | 872,401 | $ | 1,155,176 |
| $ | 862,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | Three Months Ended |
| Six Months Ended | ||||||||||||||||
| September 30, |
| September 30, | June 30, |
| June 30, | ||||||||||||||||
| 2017 |
| 2016 |
| 2017 |
| 2016 | 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||
Segment depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Envestnet | $ | 6,414 |
| $ | 6,362 |
| $ | 19,196 |
| $ | 18,786 | $ | 11,026 |
| $ | 6,361 |
| $ | 22,499 |
| $ | 12,782 |
Envestnet | Yodlee |
| 9,078 |
|
| 10,330 |
|
| 27,596 |
|
| 31,086 |
| 8,159 |
|
| 9,104 |
|
| 16,232 |
|
| 18,518 |
Consolidated depreciation and amortization | $ | 15,492 |
| $ | 16,692 |
| $ | 46,792 |
| $ | 49,872 | $ | 19,185 |
| $ | 15,465 |
| $ | 38,731 |
| $ | 31,300 |
2633
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
| Three Months Ended |
| Nine Months Ended | Three Months Ended |
| Six Months Ended | ||||||||||||||||
| September 30, |
| September 30, | June 30, |
| June 30, | ||||||||||||||||
| 2017 |
| 2016 |
| 2017 |
| 2016 | 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||
Segment capital expenditures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Envestnet | $ | 4,406 |
| $ | 7,967 |
| $ | 17,337 |
| $ | 13,130 | $ | 8,344 |
| $ | 7,580 |
| $ | 16,536 |
| $ | 12,931 |
Envestnet | Yodlee |
| 1,404 |
|
| 1,212 |
|
| 3,305 |
|
| 3,926 |
| 2,260 |
|
| 1,154 |
|
| 3,655 |
|
| 1,901 |
Consolidated capital expenditures | $ | 5,810 |
| $ | 9,179 |
| $ | 20,642 |
| $ | 17,056 | $ | 10,604 |
| $ | 8,734 |
| $ | 20,191 |
| $ | 14,832 |
20. Geographical Information
Revenue by geography is based on the billing address of the customer. The following table sets forth revenue by geographic area:
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
| September 30, |
| September 30, | ||||||||
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
United States | $ | 158,750 |
| $ | 135,160 |
| $ | 452,333 |
| $ | 381,628 |
International (1) |
| 16,864 |
|
| 13,995 |
|
| 48,484 |
|
| 41,056 |
Total | $ | 175,614 |
| $ | 149,155 |
| $ | 500,817 |
| $ | 422,684 |
|
|
The following table sets forth property plant, and equipment, net by geographic area:
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, | June 30, |
| December 31, | ||||
| 2017 |
| 2016 | 2018 |
| 2017 | ||||
United States | $ | 29,927 |
| $ | 28,713 | $ | 35,812 |
| $ | 30,647 |
India |
| 4,886 |
|
| 3,596 |
| 4,109 |
|
| 4,907 |
Other |
| 461 |
|
| 691 |
| 476 |
|
| 355 |
Total | $ | 35,274 |
| $ | 33,000 | $ | 40,397 |
| $ | 35,909 |
2734
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless otherwise indicated, the terms “Envestnet,” the “Company,” “we,” “us” and “our” refer to Envestnet, Inc. and its subsidiaries.subsidiaries as a whole.
Unless otherwise indicated, all amounts are in thousands, except share and per share information, numbers of financial advisors and client accounts.
This quarterly report on Form 10-Q contains forward-looking statements regarding future events and our future results within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, in particular, statements about our plans, strategies and prospects under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements are based on our current expectations and projections about future events and are identified by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “expected,” “intend,” “will,” “may,” or “should” or the negative of those terms or variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business and other characteristics of future events or circumstances are forward-looking statements. Forward-looking statements may include, among others, statements relating to:
· | difficulty in sustaining rapid revenue growth, which may place significant demands on our administrative, operational and financial resources, |
· | the concentration of nearly all of our revenues from the delivery of our solutions and services to clients in the financial services industry, |
· | our reliance on a limited number of clients for a material portion of our revenue, |
· | the renegotiation of fee percentages or termination of our services by our clients, |
· | our ability to identify potential acquisition candidates, complete acquisitions |
· | the impact of market and economic conditions on revenues, |
· | our inability to successfully execute the conversion of clients’ assets from their technology platform to our technology platforms in a timely and accurate manner, |
· | our ability to expand our relationships with existing customers, grow the number of customers and derive revenue from new offerings such as our data |
· | compliance failures, |
· | adverse judicial or regulatory proceedings against us, |
· | liabilities associated with potential, perceived or actual breaches of fiduciary duties and/or conflicts of interest, |
· | changes in laws and regulations, including tax laws and regulations, |
· | general economic conditions, political and regulatory conditions, |
· | the impact of fluctuations in market condition and interest rates on the demand for our products and services and the value of assets under management or administration, |
· | the impact of market conditions on our ability to issue debt and equity, |
· | the impact of fluctuations in interest rates on our cost of borrowing, |
· | our financial performance, |
· | the amount of our debt and our ability to service our debt, |
35
· | the results of our investments in research and development, our data center and other infrastructure, |
28
· | our ability to maintain the security and integrity of our systems and facilities and to maintain the privacy of personal information, |
· | failure of our systems to work properly, |
· | our ability to realize operating efficiencies, |
· | the advantages of our solutions as compared to those of others, |
· | the failure to protect our intellectual property rights, |
· | our ability to establish and maintain intellectual property rights, |
· | our ability to retain and hire necessary employees and appropriately staff our operations, and |
· | management’s response to these factors. |
In addition, there may be other factors of which we are presently unaware or that we currently deem immaterial that could cause our actual results to be materially different from the results referenced in the forward‑looking statements. All forward‑looking statements contained in this quarterly report and documents incorporated herein by reference are qualified in their entirety by this cautionary statement. Forward‑looking statements speak only as of the date they are made, and we do not intend to update or otherwise revise the forward‑looking statements to reflect events or circumstances after the date of this quarterly report or to reflect the occurrence of unanticipated events, except as required by applicable law. If we do update one or more forward‑looking statements, no inference should be made that we will make additional updates with respect to those or other forward‑looking statements.
Although we believe that our plans, intentions and expectations are reasonable, we may not achieve our plans, intentions or expectations.
These forward-looking statements involve risks and uncertainties. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this quarterly report are set forth in Part I under “Risk Factors”; accordingly, investors should not place undue reliance upon our forward-looking statements. We undertake no obligation to update any of the forward-looking statements after the date of this report to conform those statements to reflect the occurrence of unanticipated events, except as required by applicable law.
You should read this quarterly report on Form 10-Q and our annual report on Form 10-K for the year ended December 31, 20162017 (the “2016“2017 Form 10-K”) completely and with the understanding that our actual future results, levels of activity, performance and achievements may be different from what we expect and that these differences may be material. We qualify all of our forward-looking statements by these cautionary statements.
The following discussion and analysis should also be read along with our condensed consolidated financial statements and the related notes included elsewhere in this quarterly report and the consolidated financial statements and related notes included in our 20162017 Form 10-K. Except for the historical information contained herein, this discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed below.
Envestnet is a leading provider of intelligent systems for wealth management and financial wellness. Envestnet’s unified technology enhances advisor productivity and strengthens the wealth management process, delivering unparalleled flexibility, accuracy, performance, and value. Envestnet enables a transparent, independent, objective, and fiduciary standard of care, and empowers enterprises and advisors to more fully understand their clients and deliver better outcomes.
More than 2,9003,500 companies, including 1615 of the 20 largest U.S. banks, 3943 of the 50 largest wealth management and brokerage firms, over 500 of the largest registered investment advisers (“RIA”), and hundreds of Internet services companies, leverage Envestnet technology and services. Envestnet solutions enhance knowledge of the client, accelerate client on-boarding, improve client digital experiences, and help drive better outcomes for enterprises, advisors, and their clients.
36
Founded in 1999, Envestnet has been a leader in helping transform wealth management, working towards its goal of building a holistic end-to-end wealth management platformfinancial wellness network that supports advisors and their clients.
29
Through a combination of platform enhancements, partnerships and acquisitions, Envestnet uniquely provides a financial network connecting software, services and data, delivering better intelligence and enabling its customers to drive better outcomes.
Envestnet serves clients from its headquarters based in Chicago, Illinois, as well as other locations throughout the United States, India and internationally, primarily India.other international locations.
Recent Events
Acquisition of FolioDynamix
On September 25, 2017, the Company entered into an agreement and plan of mergerJanuary 2, 2018, Envestnet acquired (the “Merger Agreement”“Acquisition”) with Folio Dynamics Holdings, Inc., a Delaware corporation (“FolioDynamix”), FCD Merger Sub, Inc., through a Delaware corporationmerger of FolioDynamix with and into a wholly owned subsidiary of the Company (“Merger Sub”), and Actua USA Corporation, a Delaware corporation, solely in its capacity as the representativeEnvestnet. The completion of the stockholdersAcquisition on January 2, 2018 followed the receipt of FolioDynamix. Pursuantall necessary regulatory approvals and third party consents.
In connection with the Acquisition, Envestnet paid estimated consideration of $193,484 for FolioDynamix, subject to certain closing and post-closing adjustments. Envestnet funded the Merger Agreement, Merger Sub will mergeAcquisition price with a combination of cash on the Company’s balance sheet, purchase consideration liabilities and into FolioDynamix, with FolioDynamix continuing as the surviving corporation (the “Acquisition”) and a wholly owned subsidiary of the Company. FolioDynamix will be included in the Envestnet segment.borrowings under its revolving credit facility.
FolioDynamix provides financial institutions, registered investment advisors,RIAs, and other wealth management clients with an end-to-end technology solution paired with a suite of advisory tools including model portfolios, research, and overlay management services.
The Company plans to acquireacquisition of FolioDynamix to addadded complementary trading tools as well as commission and brokerage support to Envestnet’s existing suite of offerings. The Company expects to integrate the technology and operations of FolioDynamix into the Company’s wealth management business, enabling the Company to further leverage its operating scale and data analytics capabilities. FolioDynamix is included in the Envestnet segment.
Subject toInvestment in Private Company
On March 16, 2018, the terms and conditionsCompany purchased 4,000 units representing approximately 47% of the Merger Agreement,outstanding membership interests of a private company for cash consideration of $1,333. The Company uses the Company will pay $195,000consolidation method of accounting for this investment. The private company was formed to enable financial advisors to provide insurance and income protection products to their clients.
Private Offering of Convertible Notes due 2023
In May 2018, we issued $345,000 of Convertible Notes maturing June 1, 2023. Net proceeds from the offering were $335,513. The Convertible Notes due 2023 bear interest at a rate of 1.75 percent per annum payable semiannually in cash for all the outstandingarrears on June 1 and December 1 of each year, beginning on December 1, 2018.
The Convertible Notes due 2023 are general unsecured obligations, subordinated in right of payment to our obligations under our Credit Agreement. The Convertible Notes due 2023 are convertible into shares of FolioDynamix,the Company's common stock under certain circumstances prior to maturity at a conversion rate of 14.6381 shares per $1 principal amount of the Convertible Notes due 2023, which represents a conversion price of $68.31 per share, subject to adjustment under certain post-closing adjustments. The Company will fund the Acquisition price with a combination of cashconditions. For more information on the Company’s balance sheet and borrowings under its revolving credit facility. Either the Company or FolioDynamix may terminate the Agreement if the closing does not occur by March 31, 2018.
The applicable antitrust pre-clearance filings were made by the parties on October 10, 2017 and October 11, 2017. The Company is withdrawing its filing and plans to refile it immediately thereafter to allow the Department of Justice additional time to review the filing without having to issue a second request. The Company continues to expect the transaction to closeConvertible Notes due 2023, see “Note 12 – Debt” in the first quarter of 2018, subjectnotes to satisfaction of the closing conditions. The Company and FolioDynamix will continue to operate separately until the transaction closes.these unaudited condensed consolidated financial statements.
Segments
Envestnet is organized around two primary, complementary business segments. Financial information about each business segment is contained in Note“Note 19 – Segment Information” to the notes to condensed consolidated financial statements. Our business segments are as follows:
· | Envestnet – a leading provider of unified wealth management software and services to empower financial advisors and institutions. |
37
· | Envestnet | Yodlee – a leading data aggregation and data intelligence platform powering dynamic, cloud-based innovation for digital financial services. |
Envestnet Segment
Envestnet empowers financial advisors at broker-dealers, banks, and RIAs with all the tools they require to deliver holistic wealth management to their end clients. In addition, the firm provides advisors with practice management support so that they can grow their practices and operate more efficiently. By SeptemberJune 30, 2017,2018, Envestnet’s platform assets grew to approximately $1.3$2.7 trillion in 6.710.2 million accounts overseen by more than 59,000approximately 90 thousand advisors.
Services provided to advisors include: financial planning, risk assessment and selection of investment strategies and solutions, asset allocation models, research and due diligence, portfolio construction, proposal generation and paperwork preparation, model management and account rebalancing, account monitoring, customized fee billing, overlay services covering asset allocation,
30
tax management and socially responsible investing, aggregated multi‑custodian performance reporting and communication tools, plus data analytics. Envestnet has access to a wide range of leading third‑party asset custodians.
We offer these solutions principally through the following product/product and services suites:
· | Envestnet | Enterprise provides an end-to-end open architecture wealth management platform, through which advisors can construct portfolios for clients. It begins with aggregated household data which then leads to a financial plan, asset allocation, investment strategy, portfolio management, rebalancing and performance reporting. Advisors have access to over |
· | Envestnet | TamaracTM provides leading trading, rebalancing, portfolio accounting, performance reporting and client relationship management |
· | Envestnet | Retirement Solutions (“ERS”) offers a comprehensive suite of services for advisor-sold retirement plans. Leveraging integrated technology, ERS addresses the regulatory, data, and investment needs of retirement plans and delivers the information holistically. |
· | Envestnet | PMC® or Portfolio Management Consultants (“PMC”) provides research, due diligence and consulting services to assist advisors in creating investment solutions for their clients. These solutions include |
Key Metrics
Key Metricsmetrics as of June 30, 2018 include impact of the acquisition of FolioDynamix on January 2, 2018, detailed within the following table.
|
|
|
|
|
|
|
|
FolioDynamix |
| Assets |
| Accounts |
| Advisors | |
AUM |
| $ | 8,736 |
| 57,163 |
|
|
AUA |
|
| 33,182 |
| 79,131 |
|
|
AUM/A |
|
| 41,918 |
| 136,294 |
| 3,838 |
Subscription |
|
| 796,545 |
| 2,796,878 |
| 15,308 |
Total Platform |
| $ | 838,463 |
| 2,933,172 |
| 19,146 |
Additionally, beginning March 31, 2018 and for periods thereafter, subscription metrics include assets, accounts and advisors associated with Envestnet | Tamarac performance reporting, where applicable. Previously, Envestnet | Tamarac’s metrics were limited to those associated with its rebalancer solution. Prior period metrics have been conformed to the new definition in the table shown on the next page.
38
The following table provides information regarding the amount of assets utilizing our platforms, financial advisors and investor accounts in the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of |
| As of | ||||||||||||||||||||||||||
|
| September 30, |
| December 31, |
| March 31, |
| June 30, |
| September 30, |
| June 30, |
| September 30, |
| December 31, |
| March 31, |
| June 30, | ||||||||||
|
| 2016 |
| 2016 |
| 2017 |
| 2017 |
| 2017 |
| 2017 |
| 2017 |
| 2017 |
| 2018 |
| 2018 | ||||||||||
|
| (in millions except accounts and advisors data) |
| (in millions except accounts and advisors data) | ||||||||||||||||||||||||||
Platform Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Under Management (AUM) |
| $ | 101,924 |
| $ | 105,178 |
| $ | 113,544 |
| $ | 122,543 |
| $ | 131,809 |
| $ | 122,543 |
| $ | 131,809 |
| $ | 141,518 |
| $ | 143,945 |
| $ | 148,537 |
Assets Under Administration (AUA) |
|
| 231,831 |
|
| 241,682 |
|
| 248,445 |
|
| 271,450 |
|
| 293,963 |
|
| 271,450 |
|
| 293,963 |
|
| 308,480 |
|
| 353,379 |
|
| 360,850 |
Subtotal AUM/A |
|
| 333,755 |
|
| 346,860 |
|
| 361,989 |
|
| 393,993 |
|
| 425,772 | |||||||||||||||
Licensing |
|
| 721,690 |
|
| 748,125 |
|
| 763,372 |
|
| 825,829 |
|
| 867,967 | |||||||||||||||
Total AUM/A |
|
| 393,993 |
|
| 425,772 |
|
| 449,998 |
|
| 497,324 |
|
| 509,387 | |||||||||||||||
Subscription |
|
| 1,099,775 |
|
| 1,161,893 |
|
| 1,253,528 |
|
| 2,076,382 |
|
| 2,167,084 | |||||||||||||||
Total Platform Assets |
| $ | 1,055,445 |
| $ | 1,094,985 |
| $ | 1,125,361 |
| $ | 1,219,822 |
| $ | 1,293,739 |
| $ | 1,493,768 |
| $ | 1,587,665 |
| $ | 1,703,526 |
| $ | 2,573,706 |
| $ | 2,676,471 |
Platform Accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AUM |
|
| 519,717 |
|
| 545,130 |
|
| 574,132 |
|
| 614,973 |
|
| 652,060 |
|
| 614,973 |
|
| 652,060 |
|
| 685,925 |
|
| 724,774 |
|
| 759,926 |
AUA |
|
| 961,590 |
|
| 994,583 |
|
| 986,554 |
|
| 1,083,417 |
|
| 1,145,050 |
|
| 1,083,417 |
|
| 1,145,050 |
|
| 1,217,697 |
|
| 1,389,489 |
|
| 1,417,795 |
Subtotal AUM/A |
|
| 1,481,307 |
|
| 1,539,713 |
|
| 1,560,686 |
|
| 1,698,390 |
|
| 1,797,110 | |||||||||||||||
Licensing |
|
| 4,394,670 |
|
| 4,558,883 |
|
| 4,263,002 |
|
| 4,811,390 |
|
| 4,925,146 | |||||||||||||||
Total AUM/A |
|
| 1,698,390 |
|
| 1,797,110 |
|
| 1,903,622 |
|
| 2,114,263 |
|
| 2,177,721 | |||||||||||||||
Subscription |
|
| 4,846,596 |
|
| 4,944,640 |
|
| 5,054,015 |
|
| 7,985,777 |
|
| 8,042,900 | |||||||||||||||
Total Platform Accounts |
|
| 5,875,977 |
|
| 6,098,596 |
|
| 5,823,688 |
|
| 6,509,780 |
|
| 6,722,256 |
|
| 6,544,986 |
|
| 6,741,750 |
|
| 6,957,637 |
|
| 10,100,040 |
|
| 10,220,621 |
Advisors |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AUM/A |
|
| 35,861 |
|
| 36,483 |
|
| 36,985 |
|
| 38,498 |
|
| 40,379 |
|
| 38,498 |
|
| 40,379 |
|
| 40,485 |
|
| 44,790 |
|
| 44,900 |
Licensing |
|
| 16,191 |
|
| 17,852 |
|
| 18,159 |
|
| 19,007 |
|
| 19,104 | |||||||||||||||
Subscription |
|
| 24,499 |
|
| 24,501 |
|
| 25,566 |
|
| 43,037 |
|
| 43,700 | |||||||||||||||
Total Advisors |
|
| 52,052 |
|
| 54,335 |
|
| 55,144 |
|
| 57,505 |
|
| 59,483 |
|
| 62,997 |
|
| 64,880 |
|
| 66,051 |
|
| 87,827 |
|
| 88,600 |
31
The following table providestables provide information regarding the degree to which gross sales, redemptions, net flows and changes in the market values of assets contributed to changes in AUM or AUA in the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Asset Rollforward - Three Months Ended September 30, 2017 |
| Asset Rollforward - Three Months Ended June 30, 2018 | |||||||||||||||||||||||||||||||||||
|
| As of |
| Gross |
|
|
|
| Net |
| Market |
| As of |
| As of |
| Gross |
|
|
| Net |
| Market |
| Reclass to |
| As of | ||||||||||||
|
| 6/30/2017 |
| Sales |
| Redemptions |
| Flows |
| Impact |
| 9/30/2017 |
| 3/31/2018 |
| Sales |
| Redemptions |
| Flows |
| Impact |
| Subscription |
| 6/30/2018 | |||||||||||||
|
| (in millions except account data) |
| (in millions except account data) | |||||||||||||||||||||||||||||||||||
Assets under Management (AUM) |
| $ | 122,543 |
| $ | 10,585 |
| $ | (5,178) |
| $ | 5,407 |
| $ | 3,859 |
| $ | 131,809 | |||||||||||||||||||||
Assets under Administration (AUA) |
|
| 271,450 |
|
| 24,279 |
|
| (10,873) |
|
| 13,406 |
|
| 9,107 |
|
| 293,963 | |||||||||||||||||||||
AUM |
| $ | 143,945 |
| $ | 13,859 |
| $ | (8,138) |
| $ | 5,721 |
| $ | 987 |
| $ | (2,116) |
| $ | 148,537 | ||||||||||||||||||
AUA |
|
| 353,379 |
|
| 27,015 |
|
| (23,186) |
|
| 3,829 |
|
| 5,022 |
|
| (1,380) |
|
| 360,850 | ||||||||||||||||||
Total AUM/A |
| $ | 393,993 |
| $ | 34,864 |
| $ | (16,051) |
| $ | 18,813 |
| $ | 12,966 |
| $ | 425,772 |
| $ | 497,324 |
| $ | 40,874 |
| $ | (31,324) |
| $ | 9,550 |
| $ | 6,009 |
| $ | (3,496) |
| $ | 509,387 |
Fee-Based Accounts |
|
| 1,698,390 |
|
|
|
|
|
|
|
| 98,720 |
|
|
|
|
| 1,797,110 |
|
| 2,114,263 |
|
|
|
|
|
|
|
| 65,515 |
|
|
|
|
| (2,057) |
|
| 2,177,721 |
The above AUM/A gross sales figures include $9.7$5.1 billion in new client conversions. The Company onboarded an additional $12.4$31.0 billion in licensingsubscription conversions during the three months ended SeptemberJune 30, 2017,2018, bringing total conversions for the quarter to $22.1$36.1 billion.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
| Asset Rollforward - Nine Months Ended September 30, 2017 |
| Asset Rollforward - Six Months Ended June 30, 2018 | |||||||||||||||||||||||||||||||||||||||||
|
| As of |
| Gross |
|
|
|
| Net |
| Market |
| Reclass to |
| As of |
| As of |
|
|
|
| Gross |
|
|
|
| Net |
| Market |
| Reclass to |
| As of | ||||||||||||
|
| 12/31/2016 |
| Sales |
| Redemptions |
| Flows |
| Impact |
| Licensing |
| 9/30/2017 |
| 12/31/2017 |
| FolioDynamix |
| Sales |
| Redemptions |
| Flows |
| Impact |
| Subscription |
| 6/30/2018 | |||||||||||||||
|
| (in millions except account data) |
| (in millions except account data) | |||||||||||||||||||||||||||||||||||||||||
Assets under Management (AUM) |
| $ | 105,178 |
| $ | 36,113 |
| $ | (19,889) |
| $ | 16,224 |
| $ | 10,407 |
| $ | — |
| $ | 131,809 | ||||||||||||||||||||||||
Assets under Administration (AUA) |
|
| 241,682 |
|
| 74,044 |
|
| (40,258) |
|
| 33,786 |
|
| 23,386 |
|
| (4,891) |
|
| 293,963 | ||||||||||||||||||||||||
AUM |
| $ | 141,518 |
| $ | 8,736 |
| $ | 29,634 |
| $ | (28,114) |
| $ | 1,520 |
| $ | (1,121) |
| $ | (2,116) |
| $ | 148,537 | |||||||||||||||||||||
AUA |
|
| 308,480 |
|
| 33,182 |
|
| 70,888 |
|
| (51,409) |
|
| 19,479 |
|
| 1,089 |
|
| (1,380) |
|
| 360,850 | |||||||||||||||||||||
Total AUM/A |
| $ | 346,860 |
| $ | 110,157 |
| $ | (60,147) |
| $ | 50,010 |
| $ | 33,793 |
| $ | (4,891) |
| $ | 425,772 |
| $ | 449,998 |
| $ | 41,918 |
| $ | 100,522 |
| $ | (79,523) |
| $ | 20,999 |
| $ | (32) |
| $ | (3,496) |
| $ | 509,387 |
Fee-Based Accounts |
|
| 1,539,713 |
|
|
|
|
|
|
|
| 280,161 |
|
|
|
|
| (22,764) |
|
| 1,797,110 |
|
| 1,903,622 |
|
| 136,294 |
|
|
|
|
|
|
|
| 139,862 |
|
|
|
|
| (2,057) |
|
| 2,177,721 |
The above AUM/A gross sales figures on the previous page include $20.9$28.5 billion in new client conversions. The Company onboarded an additional $34.7$41.6 billion in licensingsubscription conversions during the ninesix months ended SeptemberJune 30, 2017,2018, bringing total conversions for the three quartersquarter to $55.6$70.1 billion.
The mix
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
|
| December 31, |
|
| March 31, |
|
| June 30, |
|
| September 30, |
|
| 2016 |
|
| 2016 |
|
| 2017 |
|
| 2017 |
|
| 2017 |
|
Assets under management (AUM) | 31 | % |
| 30 | % |
| 31 | % |
| 31 | % |
| 31 | % |
Assets under administration (AUA) | 69 | % |
| 70 | % |
| 69 | % |
| 69 | % |
| 69 | % |
| 100 | % |
| 100 | % |
| 100 | % |
| 100 | % |
| 100 | % |
Envestnet | Yodlee Segment
Envestnet | Yodlee is a leading data aggregation and data intelligenceanalytics platform. As a “big data” specialist, Envestnet | Yodlee gathers, refines and aggregates a massive set of end-user permissioned transaction level data, which it then provides to customers as de-identified data analytics solutions and market research services.
More than 1,0001,100 financial institutions, financial technology innovators and financial advisory firms, including 13 of the 20 largest U.S. banks, subscribe to the Envestnet | Yodlee platform to underpin personalized financial apps and services for over 2122 million paid subscribers.
Yodlee serves two main customer groups: financial institutions (“FI”) and financial technology innovators, which we refer to as Yodlee Interactive (“YI”) customers.
· | The Financial Institutions group provides customers with secure access to open application programming interfaces (“APIs”), end-user facing applications powered by our platform and APIs (“FinApps”), and also reports. Customers receive end user-permissioned transaction data elements that we aggregate and cleanse. Envestnet | Yodlee also enables customers to develop their own applications through its open APIs, which deliver secure data, money movement solutions, and other functionality. FinApps can be subscribed to individually or in combinations that include personal financial management, wealth management, card, payments and small-medium business solutions. They are targeted at the retail financial, wealth management, small business, card, lenders, and other financial services sectors. These FinApps help consumers and small businesses simplify and manage their finances, review their financial accounts, track their spending, calculate their net worth, |
32
and perform a variety of other activities. For example, Yodlee’s Expense FinApp helps consumers track their spending, and a Payroll FinApp from a third party helps small businesses process their payroll. The suite of reports is designed to supplement traditional credit reports by utilizing consumer permissioned aggregated data from over |
· | The Yodlee Interactive group enables customers to develop new applications and enhance existing solutions. These customers operate in a number of sub-vertical markets, including wealth management, personal financial management, small business accounting, small business lending and authentication. They use the Envestnet | Yodlee platform to build solutions that leverage our open APIs and access to a large end user base. In addition to aggregated transaction-level account data elements, we provide YI customers with secure access to account verification, money movement and risk assessment tools via our APIs. We play a critical role in transferring innovation from financial technology innovators to financial institutions. For example, YI customers use Yodlee applications to provide working capital to small businesses online; personalized financial management, planning and advisory services; e-commerce payment solutions; and online accounting systems for small businesses. We provide access to our solutions across multiple channels, including web, tablet and mobile. |
Both FI and YI groupschannels benefit customers by improving end-user satisfaction and retention, accelerating speed to market, creating technology savings and enhancing their data analytics solutions and market research capabilities. End users receive better access to their financial information and more control over their finances, leading to more informed and personalized decision making. For customers who are members of the developer community, Envestnet | Yodlee solutions provide access to critical data and payments solutions, faster speed to market and enhanced distribution.
We believe that our brand leadership, innovative technology and intellectual property, large customer base, and unique data gathering and enrichment provide us with competitive advantages that have enabled us to generate strong growth.
· | Envestnet Analytics provides data analytics, mobile sales solutions, and online education tools to financial advisors, asset managers and enterprises. These tools empower financial services firms to extract key business insights to run their business better and provide timely and focused support to advisors. |
We believeOur dashboards deliver segmentation analytics, multi-dimensional benchmarking, and practice pattern analyses that our brand leadership, innovative technology and intellectual property, large customer base, and unique data gathering and enrichment provide us with competitive advantages that have enabled usmission-critical insights to generate strong growth.
We believe that our business model results in a high degree of recurring and predictable financial results.clients.
Operational Highlights
RevenuesAsset-based recurring revenues increased 19% from assets under management (“AUM”) or assets under administration (“AUA”) or collectively (“AUM/A”) increased 18% from $90,042$98,959 in the three months ended SeptemberJune 30, 20162017 to $106,147$118,111 in the three months ended SeptemberJune 30, 2017. Subscription and licensing revenues2018. Subscription-based recurring revenue increased 21%20% from $51,959$59,802 in the three months ended SeptemberJune 30, 20162017 to $62,963$71,779 in the three months ended SeptemberJune 30, 2017.2018. Total revenues, which include professional serviceservices and other fees, revenues,
40
increased 18%20% from $149,155$167,417 in the three months ended SeptemberJune 30, 20162017 to $175,614$201,116 in the three months ended SeptemberJune 30, 2017.2018. The increase in total revenues was primarily a result of an increase of $17,346 related to the acquisition of FolioDynamix. The Envestnet segment total revenue excluding Folio increased $10,210 primarily due to the positive effects of new account growth and positive net flows of AUM/A as well as an increase in subscription and licensingsubscription-based revenues related toof $3,140. The Envestnet | Yodlee and Envestnet | Enterprise segmentssegment total revenue increased by $6,143 primarily due to an increase in subscription-based revenue of $6,190 and $4,814, respectively.$4,425.
RevenuesAsset-based recurring revenues increased 24% from assets AUM/A increased 16% from $258,969$193,121 in the ninesix months ended SeptemberJune 30, 20162017 to $299,268$239,264 in the ninesix months ended SeptemberJune 30, 2017. Subscription and licensing revenues2018. Subscription-based recurring revenue increased 27%20% from $142,303$117,712 in the ninesix months ended SeptemberJune 30, 20162017 to $180,675$141,474 in the ninesix months ended SeptemberJune 30, 2017.2018. Total revenues, which include professional serviceservices and other fees,revenues, increased 18%23% from $422,684$325,203 in the ninesix months ended SeptemberJune 30, 20162017 to $500,817$399,127 in the ninesix months ended SeptemberJune 30, 2017.2018. The increase in total revenues was primarily a result of an increase of $34,800 related to the acquisition of FolioDynamix. The Envestnet segment total revenue excluding Folio increased $27,426 primarily due to the positive effects of new account growth and positive net flows of AUM/A as well as an increase in subscription and licensingsubscription-based revenues related toof $5,930. The Envestnet | Yodlee and Envestnet | Enterprise segmentssegment total revenue increased by $11,698 primarily due to an increase in subscription-based revenue of $20,953 and $17,419, respectively.$8,862.
The net loss attributable to Envestnet, Inc. for the three months ended SeptemberJune 30, 20172018 was $1,320,$5,526, or $0.03$0.12 per diluted share, compared to a net loss attributable to Envestnet, Inc. of $4,057$6,470 or $0.09$0.15 per diluted share for the three months ended SeptemberJune 30, 2016.2017. The net lossincome attributable to Envestnet, Inc. for the ninesix months ended SeptemberJune 30, 20172018 was $20,925,$2,578, or $0.48$0.05 per diluted share, compared to a net loss attributable to Envestnet, Inc. of $22,993$19,605 or $0.54$0.45 per diluted share for the ninesix months ended SeptemberJune 30, 2016.2017.
Adjusted revenues for the three months ended SeptemberJune 30, 20172018 was $175,629,$201,178, an increase of 17%20% from $149,486$167,469 in the prior year period. Adjusted EBITDA for the three months ended SeptemberJune 30, 20172018 was $34,789,$34,759, an increase of 26%18% from $27,505$29,525 in the
33
prior year period. Adjusted net income for the three months ended SeptemberJune 30, 20172018 was $17,283,$19,277, or $0.37$0.41 per diluted share, compared to adjusted net income of $12,463,$13,148, or $0.28$0.29 per diluted share in the prior year period.
Adjusted revenues for the ninesix months ended SeptemberJune 30, 20172018 was $500,937,$399,193, an increase of 18%23% from $423,465$325,308 in the prior year period. Adjusted EBITDA for the ninesix months ended SeptemberJune 30, 20172018 was $90,152,$67,512, an increase of 30%22% from $69,126$55,363 in the prior year period. Adjusted net income for the ninesix months ended SeptemberJune 30, 20172018 was $41,948,$36,931, or $0.91$0.78 per diluted share, compared to adjusted net income of $29,498,$24,665, or $0.67$0.54 per diluted share in the prior year period.
Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share are non-GAAP financial measures. See “Non-GAAP Financial Measures” for a discussion of non-GAAP measures and a reconciliation of such measures to the most directly comparable GAAP measures.
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
|
|
| Nine Months Ended |
|
|
| ||||||||
| September 30, |
|
|
|
| September 30, |
|
|
| ||||||||
| 2017 |
| 2016 |
| Percent Change |
| 2017 |
| 2016 |
| Percent Change | ||||||
| (in thousands) |
|
|
|
| (in thousands) |
|
|
| ||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets under management or administration | $ | 106,147 |
| $ | 90,042 |
| 18 | % |
| $ | 299,268 |
| $ | 258,969 |
| 16 | % |
Subscription and licensing |
| 62,963 |
|
| 51,959 |
| 21 | % |
|
| 180,675 |
|
| 142,303 |
| 27 | % |
Professional services and other |
| 6,504 |
|
| 7,154 |
| (9) | % |
|
| 20,874 |
|
| 21,412 |
| (3) | % |
Total revenues |
| 175,614 |
|
| 149,155 |
| 18 | % |
|
| 500,817 |
|
| 422,684 |
| 18 | % |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
| 56,070 |
|
| 47,259 |
| 19 | % |
|
| 161,031 |
|
| 132,319 |
| 22 | % |
Compensation and benefits |
| 68,551 |
|
| 60,345 |
| 14 | % |
|
| 199,079 |
|
| 180,625 |
| 10 | % |
General and administration |
| 31,153 |
|
| 26,150 |
| 19 | % |
|
| 90,178 |
|
| 80,249 |
| 12 | % |
Depreciation and amortization |
| 15,492 |
|
| 16,692 |
| (7) | % |
|
| 46,792 |
|
| 49,872 |
| (6) | % |
Total operating expenses |
| 171,266 |
|
| 150,446 |
| 14 | % |
|
| 497,080 |
|
| 443,065 |
| 12 | % |
Income (loss) from operations |
| 4,348 |
|
| (1,291) |
| * | % |
|
| 3,737 |
|
| (20,381) |
| (118) | % |
Other expense, net |
| (3,986) |
|
| (4,434) |
| (10) | % |
|
| (13,838) |
|
| (13,214) |
| 5 | % |
Loss before income tax provision (benefit) |
| 362 |
|
| (5,725) |
| (106) | % |
|
| (10,101) |
|
| (33,595) |
| (70) | % |
Income tax provision (benefit) |
| 1,682 |
|
| (1,668) |
| (201) |
|
|
| 10,824 |
|
| (10,602) |
| (202) | % |
Net loss |
| (1,320) |
|
| (4,057) |
| (67) | % |
|
| (20,925) |
|
| (22,993) |
| (9) | % |
Add: Net loss attributable to non-controlling interest |
| — |
|
| — |
| — | % |
|
| — |
|
| — |
| — | % |
Net loss attributable to Envestnet, Inc. | $ | (1,320) |
| $ | (4,057) |
| (67) | % |
| $ | (20,925) |
| $ | (22,993) |
| (9) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
|
|
| Six Months Ended |
|
|
| ||||||||
| June 30, |
|
|
|
| June 30, |
|
|
| ||||||||
| 2018 |
| 2017 |
| Percent Change |
| 2018 |
| 2017 |
| Percent Change | ||||||
| (in thousands) |
|
|
|
| (in thousands) |
|
|
| ||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-based | $ | 118,111 |
| $ | 98,959 |
| 19 | % |
| $ | 239,264 |
| $ | 193,121 |
| 24 | % |
Subscription-based |
| 71,779 |
|
| 59,802 |
| 20 | % |
|
| 141,474 |
|
| 117,712 |
| 20 | % |
Total recurring revenues |
| 189,890 |
|
| 158,761 |
| 20 | % |
|
| 380,738 |
|
| 310,833 |
| 22 | % |
Professional services and other revenues |
| 11,226 |
|
| 8,656 |
| 30 | % |
|
| 18,389 |
|
| 14,370 |
| 28 | % |
Total revenues |
| 201,116 |
|
| 167,417 |
| 20 | % |
|
| 399,127 |
|
| 325,203 |
| 23 | % |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
| 67,627 |
|
| 55,735 |
| 21 | % |
|
| 130,561 |
|
| 104,961 |
| 24 | % |
Compensation and benefits |
| 80,210 |
|
| 64,996 |
| 23 | % |
|
| 163,750 |
|
| 130,528 |
| 25 | % |
General and administration |
| 34,089 |
|
| 28,478 |
| 20 | % |
|
| 66,818 |
|
| 59,025 |
| 13 | % |
Depreciation and amortization |
| 19,185 |
|
| 15,465 |
| 24 | % |
|
| 38,731 |
|
| 31,300 |
| 24 | % |
Total operating expenses |
| 201,111 |
|
| 164,674 |
| 22 | % |
|
| 399,860 |
|
| 325,814 |
| 23 | % |
Income (loss) from operations |
| 5 |
|
| 2,743 |
| * |
|
|
| (733) |
|
| (611) |
| 20 | % |
Other expense, net |
| (5,430) |
|
| (4,369) |
| 24 | % |
|
| (10,684) |
|
| (9,852) |
| 8 | % |
Loss before income tax provision (benefit) |
| (5,425) |
|
| (1,626) |
| * |
|
|
| (11,417) |
|
| (10,463) |
| 9 | % |
Income tax provision (benefit) |
| 566 |
|
| 4,844 |
| (88) | % |
|
| (13,428) |
|
| 9,142 |
| * |
|
Net income (loss) |
| (5,991) |
|
| (6,470) |
| (7) | % |
|
| 2,011 |
|
| (19,605) |
| (110) | % |
Add: Net loss attributable to non-controlling interest |
| 465 |
|
| — |
| * |
|
|
| 567 |
|
| — |
| * |
|
Net income (loss) attributable to Envestnet, Inc. | $ | (5,526) |
| $ | (6,470) |
| (15) | % |
| $ | 2,578 |
| $ | (19,605) |
| (113) | % |
*Not meaningful.
Three months ended SeptemberJune 30, 20172018 compared to three months SeptemberJune 30, 20162017
Revenues
Total revenues increased 18%20% from $149,155$167,417 in the three months ended SeptemberJune 30, 20162017 to $175,614$201,116 in the three months ended SeptemberJune 30, 2017.2018. The increase was primarily due to an increase in revenues from AUM/Aasset-based recurring and subscriptionsubscription-based recurring revenues of $19,152 and licensing of $16,105 and $11,004,$11,977, respectively. Revenues from AUM/A remained consistent as a percentageAsset-based revenue was 59% of total revenues at 60%revenue in the three months ended SeptemberJune 30, 20162017 and 2017.2018.
Assets under management or administrationAsset-based recurring revenues
Revenues earnedAsset-based recurring revenues increased 19% from AUM/A increased 18% from $90,042 in$98,959 the three months ended SeptemberJune 30, 20162017 to $106,147$118,111 in the three months ended SeptemberJune 30, 2017.2018. The increase was primarily due to the 2018 acquisition of FolioDynamix which comprised $12,639 of the increase as well as an increase in asset values applicable to our quarterly billing cycle in 2017,2018, relative to the corresponding period in 2016.2017. In the thirdsecond quarter of 2017,2018, revenues were also positively affected by new account growth and positive net flows of AUM/A during the first and second quarters of 2017.
34
A.
The number of financial advisors with AUM/Aasset-based revenue on our technology platforms increased from 35,86138,498 as of SeptemberJune 30, 20162017 to 40,37944,900 as of SeptemberJune 30, 20172018 and the number of AUM/A client accounts increased from approximately 1,500,0001,700,000 as of SeptemberJune 30, 20162017 to approximately 1,800,0002,200,000 as of SeptemberJune 30, 2017.2018.
Subscription and licensingSubscription-based recurring revenues
Subscription and licensing revenuesSubscription-based recurring revenue increased 21%20% from $51,959$59,802 in the three months ended SeptemberJune 30, 20162017 to $62,963$71,779 in the three months ended SeptemberJune 30, 2017.2018. This increase was primarily due to anthe 2018 acquisition of FolioDynamix which comprised $4,412 of the total $7,552 Envestnet segment increase in Envestnet related revenue of $2,051, an increase in Envestnet | Tamarac related revenue of $2,763 and Envestnet | Yodlee contributing an additional $6,190.$4,425. The increase in Envestnet and Envestnet | Tamarac
42
segment revenue is a result of Envestnet and Envestnet | Tamarac continuing to add clients and selling additional services to existing clients. The increase in Envestnet | Yodlee revenue is primarily dueto an increasebroad increases in revenue from new and existing customers of $6,190.Approximately $4.8 million or 77% of this increase was attributed to our data analytics channel while the reminder was mainly driven by increases in our FI and YI groups.customers.
Professional services and other revenues
Professional services and other revenues decreased 9%increased 30% from $7,154$8,656 in the three months ended SeptemberJune 30, 20162017 to $6,504$11,226 in the three months ended SeptemberJune 30, 2017,2018, primarily due to Envestnet | Yodlee recognizing one-time onboardingtiming of new data analyticanalytics customer deployments and upgrades of existing data analytics customers, in the three months ended September 30, 2016 that did not repeat in the three months ended September 30, 2017, offset by an overall increase in existing customer revenue attributable to the Envestnet | Tamarac.segment.
Cost of revenues
Cost of revenues increased 19%21% from $47,259$55,735 in the three months ended SeptemberJune 30, 20162017 to $56,070$67,627 in the three months ended SeptemberJune 30, 2017,2018, primarily due to a corresponding increase in asset-based recurring revenues, from AUM/A, the mix of such revenues, from AUM/A, andwhich is partially attributable to FolioDynamix, an increase in cost of revenues associated with subscription and licensing revenues.subscription-based recurring revenues, as well as an increase in Advisor Summit related costs. As a percentage of total revenues, cost of revenues remained consistent at 32%increased from 33% in the three months ended SeptemberJune 30, 2016 and 2017.2017 to 34% in the three months ended June 30, 2018.
Compensation and benefits
Compensation and benefits increased 14%23% from $60,345$64,996 in the three months ended SeptemberJune 30, 20162017 to $68,551$80,210 in the three months ended SeptemberJune 30, 2017,2018, primarily due to an increase in salaries, benefits and related payroll taxes of $4,678,$8,407, primarily a result of the 2018 FolioDynamix acquisition as well as an increase in headcount to support organic growth. Also contributing to the growth in compensation and benefits were increases in incentive compensation of $2,624,$3,395, non-cash compensation of $2,531, contract labor costs of $1,134 and severance expense of $539$711, and stock-based compensation of $494.various other immaterial cost increases. As a percentage of total revenues, compensation and benefits decreasedincreased from 39% in the three months ended June 30, 2017 and to 40% in the three months ended SeptemberJune 30, 2016 to 39% in the three months ended September 30, 2017.2018.
General and administration
General and administration expenses increased 19%20% from $26,150$28,478 in the three months ended SeptemberJune 30, 20162017 to $31,153$34,089 in the three months ended SeptemberJune 30, 2017,2018, primarily due to increases in acquisition costs of $2,360, audit and related fees of $520, website and systems costs of $868, non-income tax expense adjustments of $571, professional$1,920, restructuring and legal fees of $508, occupancytransaction costs of $493,$1,096, external data and research services of $483$839, marketing costs of $562, and marketing expensesoccupancy costs of $380,$549, partially offset by decreases in litigation relatedforeign currency charges of $461 and non-income tax expense of $2,097 and fair market value adjustments on contingent consideration of $349.$387. As a percentage of total revenues, general and administration expenses remained consistent at 18%17% in the three months ended SeptemberJune 30, 20162017 and 2017.2018.
Depreciation and amortization
Depreciation and amortization expense decreased 7%increased 24% from $16,692$15,465 in the three months ended SeptemberJune 30, 20162017 to $15,492$19,185 in the three months ended SeptemberJune 30, 2017,2018, primarily due to a decreaseincreases in intangible asset amortization of $1,658, offset by an increase in$3,048, mainly attributable to the 2018 acquisition of FolioDynamix, and amortization of internally developed software of $474.$605 driven by continued investment in our platforms. As a percentage of total revenues, depreciation and amortization expense decreasedincreased from 11% in the three months ended September 30, 2016 to 9% in the three months ended SeptemberJune 30, 2017.
Other expense, net
Other expense, net decreased2017 to 10% from $4,434 in the three months ended SeptemberJune 30, 2016 to $3,986 in the three months ended September 30, 2017, primarily due to a decrease in interest expense of $264 and foreign exchange impact of $283. Other income primarily consists of interest expense as well as impacts related to investments in private companies and foreign currency exchange.2018.
3543
Income tax provision (benefit)
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| ||||
|
| September 30, |
| ||||
|
| 2017 |
| 2016 |
| ||
Income (loss) before income tax provision (benefit) |
| $ | 362 |
| $ | (5,725) |
|
Income tax provision (benefit) |
|
| 1,682 |
|
| (1,668) |
|
Effective tax rate |
|
| 464.6 | % |
| 29.1 | % |
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| ||||
|
| June 30, |
| ||||
|
| 2018 |
| 2017 |
| ||
Loss before income tax provision |
| $ | (5,425) |
| $ | (1,626) |
|
Income tax provision |
|
| 566 |
|
| 4,844 |
|
Effective tax rate |
|
| (10.4) | % |
| (297.9) | % |
For the three months ended SeptemberJune 30, 2017,2018, our effective tax rate differsdiffered from the statutory rate primarily due to the book loss with no resulting benefit from net operating loss generation as a result of the valuation allowance the Company has placed on all domesticUS deferreds compared to the book loss in 2016 with the absenceexception of a valuation allowance.indefinite lived intangibles, the impact of clarifying Base Erosion and Anti Abuse tax positions, additional accruals for uncertain tax positions as well as differences between the foreign tax rates and statutory US tax rate.
For the three months ended SeptemberJune 30, 2016,2017, our effective tax rate differsdiffered from the statutory rate primarily due to various permanent items, accrualthe valuation allowance the Company had placed on all US deferreds with the exception of indefinite-lived intangibles and unrepatriated foreign earnings and profits, resulting in no benefit being recognized for reserves for uncertainthe tax positions and estimated research and development tax credit generation.loss in the US.
NineSix months ended SeptemberJune 30, 20172018 compared to ninesix months SeptemberJune 30, 20162017
Revenues
Total revenues increased 18%23% from $422,684$325,203 in the ninesix months ended SeptemberJune 30, 20162017 to $500,817$399,127 in the ninesix months ended SeptemberJune 30, 2017.2018. The increase was primarily due to an increase in revenues from AUM/Aasset-based recurring and subscriptionsubscription-based recurring revenues of $46,143 and licensing of $40,299$23,762, respectively. Asset-based revenue was 59% and $38,372, respectively. Revenues from AUM/A decreased as a percentage60% of total revenues from 61% to 60%revenue in the ninesix months ended SeptemberJune 30, 20162017 and 2017, respectively, primarily because the growth in subscription and licensing revenue exceeded the growth in AUM/A.2018, respectively.
Assets under management or administrationAsset-based recurring revenues
Revenues earnedAsset-based recurring revenues increased 24% from AUM/AUA increased 16% from $258,969$193,121 the six months ended June 30, 2017 to $239,264 in the ninesix months ended SeptemberJune 30, 2016 to $299,268 in the nine months ended September 30, 2017.2018. The increase was primarily due to the 2018 acquisition of FolioDynamix which comprised $25,433 of the increase as well as an increase in asset values applicable to our quarterly billing cycle in 2017,2018, relative to the corresponding period in 2016.2017. In the first threetwo quarters of 2017,2018, revenues were also positively affected by new account growth and positive net flows of AUM/A during 2016 and the first and second quarters of 2017.A.
The number of financial advisors with AUM/Aasset-based revenue on our technology platforms increased from 35,86138,498 as of SeptemberJune 30, 20162017 to 40,37944,900 as of SeptemberJune 30, 20172018 and the number of AUM/A client accounts increased from approximately 1,500,0001,700,000 as of SeptemberJune 30, 20162017 to approximately 1,800,0002,200,000 as of SeptemberJune 30, 2017.2018.
Subscription and licensingSubscription-based recurring revenues
Subscription and licensing revenuesSubscription-based recurring revenue increased 27%20% from $142,303$117,712 in the ninesix months ended SeptemberJune 30, 20162017 to $180,675$141,474 in the ninesix months ended SeptemberJune 30, 2017.2018. This increase was primarily due to anthe 2018 acquisition of FolioDynamix which comprised $8,970 of the total $14,900 Envestnet segment increase in Envestnet related revenue of $8,632, an increase in Envestnet | Tamarac related revenue of $8,787 and Envestnet | Yodlee contributing an additional $20,953.$8,862. The increase in the Envestnet and Envestnet | Tamaracsegment revenue is a result of Envestnet and Envestnet | Tamarac continuing to add clients and selling additional services to existing clients. The increase in Envestnet | Yodlee revenue is primarily dueto an increasebroad increases in revenue from new and existing customers of $20,953.Approximately $16.1 million or 77% of this increase was attributed to our data analytics channel while the reminder was mainly driven by increases in our FI and YI groups.customers.
Professional services and other revenues
Professional services and other revenues decreased 3%increased 28% from $21,412$14,370 in the ninesix months ended SeptemberJune 30, 20162017 to $20,874$18,389 in the ninesix months ended SeptemberJune 30, 2017,2018, primarily due to Envestnet | Yodlee recognizing one-time onboardingand the timing of new data analyticanalytics customer deployments and upgrades of existing data analytics customers in the nine months ended September 30, 2016 that did not repeat in the nine months ended September 30, 2017, offset byas well as an overall increase in existing customer revenue attributable to Envestnet | Tamarac.segment.
3644
Cost of revenues
Cost of revenues increased 22%24% from $132,319$104,961 in the ninesix months ended SeptemberJune 30, 20162017 to $161,031$130,561 in the ninesix months ended SeptemberJune 30, 2017,2018, primarily due to a corresponding increase in asset-based recurring revenues, from AUM or AUA, the mix of such revenues, from AUM or AUA, andwhich is partially attributable to FolioDynamix, an increase in cost of revenues associated with subscription and licensing revenues.subscription-based recurring revenues, as well as an increase in Advisor Summit related costs. As a percentage of total revenues, cost of revenues increased from 31% in the nine months ended September 30, 2016 to 32% in the ninesix months ended SeptemberJune 30, 2017.2017 to 33% in the six months ended June 30, 2018. This increase is primarily attributable to a lower margin on revenues for FolioDynamix.
Compensation and benefits
Compensation and benefits increased 10%25% from $180,625$130,528 in the ninesix months ended SeptemberJune 30, 20162017 to $199,079$163,750 in the ninesix months ended SeptemberJune 30, 2017,2018, primarily due to an increase in salaries, benefits and related payroll taxes of $16,859,$17,713, primarily a result of the 2018 FolioDynamix acquisition as well as an increase in headcount to support organic growth. Also contributing to the growth in compensation and benefits were increases in incentive compensation of $3,320 and short-term variable$7,050, severance expense of $3,198, non-cash compensation of $1,799, offset by decreases in stock-based compensation$3,568, contract labor costs of $2,421$2,090 and severance of $844.various other immaterial cost increases. As a percentage of total revenues, compensation and benefits decreasedincreased from 43% in the nine months ended September 30, 2016 to 40% in the ninesix months ended SeptemberJune 30, 2017. The decrease2017 to 41% in the compensation and benefits as a percentage of total revenues is primarily due to a higher revenue increase compared to a lower compensation and benefit increase.six months ended June 30, 2018.
General and administration
General and administration expenses increased 12%13% from $80,249$59,025 in the ninesix months ended SeptemberJune 30, 20162017 to $90,178$66,818 in the ninesix months ended SeptemberJune 30, 2017,2018, primarily due to increases in audit and related fees of $3,308, acquisition relatedsystems costs of $2,127,$3,228, external data and research services of $2,681, occupancy costs of $2,110, marketing of $1,788, non-income tax expense adjustments of $1,734,$1,862, professional and legal fees of $1,583$1,020, and travel and entertainment expense of $828,$714, partially offset by decreases in non-income tax expense of $1,264 and litigation related expense of $3,032 and fair market value adjustments on contingent consideration of $838.$1,033. As a percentage of total revenues, general and administration expenses decreased from 19% in the nine months ended September 30, 2016 to 18% in the ninesix months ended SeptemberJune 30, 2017. 2017 to 17% in the six months ended June 30, 2018.
Depreciation and amortization
Depreciation and amortization expense decreased 6%increased 24% from $49,872$31,300 in the ninesix months ended SeptemberJune 30, 20162017 to $46,792$38,731 in the ninesix months ended SeptemberJune 30, 2017,2018, primarily due to a decreaseincreases in intangible asset amortization of $4,823, offset by an increase in$6,398, mainly attributable to the 2018 acquisition of FolioDynamix, and amortization of internally developed software of $1,222 and depreciation of fixed assets of $521.$1,139 driven by continued investment in our platforms. As a percentage of total revenues, depreciation and amortization expense decreased from 12%remained consistent at 10% in the ninesix months ended September 30, 2016 to 9% in the nine months ended September 30, 2017.
Other expense, net
Other expense, net increased 5% from $13,214 in the nine months ended September 30, 2016 to $13,838 in the nine months ended SeptemberJune 30, 2017 due to an increase in interest expense of $326 primarily as a result of an increase in debt issuance cost amortization and debt discount accretion as well as foreign currency exchange impact of $284. Other income primarily consists of interest expense as well as impacts related to investments in private companies and foreign currency exchange.2018.
Income tax provision (benefit)
|
|
|
|
|
|
|
|
|
| Six Months Ended |
| ||||
|
| June 30, |
| ||||
|
| 2018 |
| 2017 |
| ||
Loss before income tax provision (benefit) |
| $ | (11,417) |
| $ | (10,463) |
|
Income tax provision (benefit) |
|
| (13,428) |
|
| 9,142 |
|
Effective tax rate |
|
| 117.6 | % |
| (87.4) | % |
For the six months ended June 30, 2018, our effective tax rate differed from the statutory rate primarily due to the release of the Company’s valuation allowance as a result of additional deferred tax liabilities recorded with the acquisition of FolioDynamix, additional accruals for uncertain tax positions as well as differences between the foreign tax rates and statutory US tax rate.
|
|
|
|
|
|
|
|
|
| Nine Months Ended |
| ||||
|
| September 30, |
| ||||
|
| 2017 |
| 2016 |
| ||
Loss before income tax provision (benefit) |
| $ | (10,101) |
| $ | (33,595) |
|
Income tax provision (benefit) |
|
| 10,824 |
|
| (10,602) |
|
Effective tax rate |
|
| (107.2) | % |
| 31.6 | % |
For the six months ended June 30, 2017, our effective tax rate differed from the statutory rate primarily due to the valuation allowance the Company had placed on all US deferreds with the exception of indefinite-lived intangibles and unrepatriated foreign earnings and profits, resulting in no benefit being recognized for the tax loss in the US.
3745
For the nine months ended September 30, 2017, our effective tax rate differs from the statutory rate primarily due to the book loss with no resulting benefit from net operating loss generation as a result of the valuation allowance on all domestic deferreds, compared to the book loss in 2016 with the absence of a valuation allowance.
For the nine months ended September 30, 2016, our effective tax rate differs from the statutory rate primarily due to various permanent items, accrual for reserves for uncertain tax positions and estimated research and development tax credit generation.
Segments
Business segments are generally organized around our service offerings. Financial information about each of our two business segments is contained in Note“Note 19 to the notes– Segment Information” to the condensed consolidated financial statements. Our business segments are as follows:
· | Envestnet – a leading provider of unified wealth management software and services to empower financial advisors and institutions. |
· | Envestnet | Yodlee – a leading data aggregation and data |
38
The following table presentsreconciles income (loss) from operations by segment:segment to consolidate net income (loss) attributable to Envestnet, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | Three Months Ended |
| Six Months Ended | ||||||||||||||||
| September 30, |
| September 30, | June 30, |
| June 30, | ||||||||||||||||
| 2017 |
| 2016 |
| 2017 |
| 2016 | 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||
Envestnet | $ | 18,955 |
| $ | 12,361 |
| $ | 48,277 |
| $ | 32,425 | $ | 16,359 |
| $ | 15,811 |
| $ | 32,220 |
| $ | 29,322 |
Envestnet | Yodlee |
| (3,364) |
|
| (8,416) |
|
| (16,707) |
|
| (33,728) |
| (3,296) |
|
| (5,635) |
|
| (7,705) |
|
| (13,343) |
Total segment income (loss) from operations |
| 15,591 |
|
| 3,945 |
|
| 31,570 |
|
| (1,303) | |||||||||||
Total segment income from operations |
| 13,063 |
|
| 10,176 |
|
| 24,515 |
|
| 15,979 | |||||||||||
Nonsegment operating expenses |
| (11,243) |
|
| (5,236) |
|
| (27,833) |
|
| (19,078) |
| (13,058) |
|
| (7,433) |
|
| (25,248) |
|
| (16,590) |
Other expense, net |
| (3,986) |
|
| (4,434) |
|
| (13,838) |
|
| (13,214) |
| (5,430) |
|
| (4,369) |
|
| (10,684) |
|
| (9,852) |
Consolidated income (loss) before income taxes (benefit) |
| 362 |
|
| (5,725) |
|
| (10,101) |
|
| (33,595) | |||||||||||
Consolidated loss before income tax provision (benefit) |
| (5,425) |
|
| (1,626) |
|
| (11,417) |
|
| (10,463) | |||||||||||
Income tax provision (benefit) |
| 1,682 |
|
| (1,668) |
|
| 10,824 |
|
| (10,602) |
| 566 |
|
| 4,844 |
|
| (13,428) |
|
| 9,142 |
Consolidated net loss |
| (1,320) |
|
| (4,057) |
|
| (20,925) |
|
| (22,993) | |||||||||||
Consolidated net income (loss) |
| (5,991) |
|
| (6,470) |
|
| 2,011 |
|
| (19,605) | |||||||||||
Add: Net loss attributable to non-controlling interest |
| — |
|
| — |
|
| — |
|
| — |
| 465 |
|
| — |
|
| 567 |
|
| — |
Consolidated net loss attributable to Envestnet, Inc. | $ | (1,320) |
| $ | (4,057) |
| $ | (20,925) |
| $ | (22,993) | |||||||||||
Consolidated net income (loss) attributable to Envestnet, Inc. | $ | (5,526) |
| $ | (6,470) |
| $ | 2,578 |
| $ | (19,605) |
Envestnet
The following table presents income from operations for the Envestnet segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
|
|
| Nine Months Ended |
|
|
|
| Three Months Ended |
|
|
|
| Six Months Ended |
|
|
| ||||||||||||||||
|
| September 30, |
|
|
|
| September 30, |
|
|
|
| June 30, |
| Percent |
| June 30, |
| Percent | ||||||||||||||||||
|
| 2017 |
| 2016 |
| Percent |
| 2017 |
| 2016 |
| Percent |
| 2018 |
| 2017 |
| Change |
| 2018 |
| 2017 |
| Change | ||||||||||||
|
| (in thousands) |
|
|
|
| (in thousands) |
|
|
|
| (in thousands) |
|
|
|
| (in thousands) |
|
|
| ||||||||||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets under management or administration |
| $ | 106,147 |
| $ | 90,042 |
| 18 | % |
| $ | 299,268 |
| $ | 258,969 |
| 16 | % | ||||||||||||||||||
Subscription and licensing |
|
| 27,012 |
|
| 22,198 |
| 22 | % |
|
| 77,720 |
|
| 60,301 |
| 29 | % | ||||||||||||||||||
Professional services and other |
|
| 2,789 |
|
| 2,271 |
| 23 | % |
|
| 9,650 |
|
| 9,147 |
| 5 | % | ||||||||||||||||||
Asset-based |
| $ | 118,111 |
| $ | 98,959 |
| 19 | % |
| $ | 239,264 |
| $ | 193,121 |
| 24 | % | ||||||||||||||||||
Subscription-based |
|
| 33,023 |
|
| 25,471 |
| 30 | % |
|
| 65,608 |
|
| 50,708 |
| 29 | % | ||||||||||||||||||
Total recurring revenues |
|
| 151,134 |
|
| 124,430 |
| 21 | % |
|
| 304,872 |
|
| 243,829 |
| 25 | % | ||||||||||||||||||
Professional services and other revenues |
|
| 5,794 |
|
| 4,942 |
| 17 | % |
|
| 8,044 |
|
| 6,861 |
| 17 | % | ||||||||||||||||||
Total revenues |
|
| 135,948 |
|
| 114,511 |
| 19 | % |
|
| 386,638 |
|
| 328,417 |
| 18 | % |
|
| 156,928 |
|
| 129,372 |
| 21 | % |
|
| 312,916 |
|
| 250,690 |
| 25 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
| 52,957 |
|
| 43,806 |
| 21 | % |
|
| 151,430 |
|
| 124,649 |
| 21 | % |
|
| 62,914 |
|
| 52,402 |
| 20 | % |
|
| 121,937 |
|
| 98,473 |
| 24 | % |
Compensation and benefits |
|
| 41,158 |
|
| 37,067 |
| 11 | % |
|
| 119,378 |
|
| 106,648 |
| 12 | % |
|
| 48,026 |
|
| 38,742 |
| 24 | % |
|
| 99,937 |
|
| 78,220 |
| 28 | % |
General and administration |
|
| 16,464 |
|
| 14,915 |
| 10 | % |
|
| 48,357 |
|
| 45,909 |
| 5 | % |
|
| 18,603 |
|
| 16,056 |
| 16 | % |
|
| 36,323 |
|
| 31,893 |
| 14 | % |
Depreciation and amortization |
|
| 6,414 |
|
| 6,362 |
| — | % |
|
| 19,196 |
|
| 18,786 |
| 2 | % |
|
| 11,026 |
|
| 6,361 |
| 73 | % |
|
| 22,499 |
|
| 12,782 |
| 76 | % |
Total operating expenses |
|
| 116,993 |
|
| 102,150 |
| 15 | % |
|
| 338,361 |
|
| 295,992 |
| 14 | % |
|
| 140,569 |
|
| 113,561 |
| 24 | % |
|
| 280,696 |
|
| 221,368 |
| 27 | % |
Income from operations |
| $ | 18,955 |
| $ | 12,361 |
| 53 | % |
| $ | 48,277 |
| $ | 32,425 |
| 49 | % |
| $ | 16,359 |
| $ | 15,811 |
| 3 | % |
| $ | 32,220 |
| $ | 29,322 |
| 10 | % |
46
Three months ended SeptemberJune 30, 20172018 compared to three months SeptemberJune 30, 20162017 for the Envestnet segment
Revenues
Total revenues increased 19%21% from $114,511$129,372 in the three months ended SeptemberJune 30, 20162017 to $135,948$156,928 in the three months ended SeptemberJune 30, 2017.2018. The increase was primarily due to an increase in asset-based revenues from AUM/A of $16,105$19,152 and an increase in subscription-based revenues from subscription and licensing of $4,814.$7,552. Revenues from AUM/A were 79% and 78%asset-based revenues decreased from 76% of total revenues in the three months ended SeptemberJune 30, 2016 and 2017 respectively.
Assets under management or administration
Revenues earned from AUM/AUA increased 18% from $90,042to 75% of total revenues in the three months ended SeptemberJune 30, 2016 to $106,1472018.
Asset-based recurring revenues
Asset-based recurring revenues increased 19% from $98,959 in the three months ended SeptemberJune 30, 2017.2017 to $118,111 in the three months ended June 30, 2018. The increase was primarily due to the 2018 acquisition of FolioDynamix which comprised $12,639 of the increase as well as an increase in asset values applicable to our quarterly billing cycle in 2017,2018, relative to the corresponding period in 2016.2017. In the thirdsecond quarter of 2017,2018, revenues were also positively affected by new account growth and positive net flows of AUM or AUA during the first and second quarters of 2017.
39
AUM/A.
The number of financial advisors with AUM or AUAasset-based revenue on our technology platforms increased from 35,86138,498 as of SeptemberJune 30, 20162017 to 40,37944,900 as of SeptemberJune 30, 20172018 and the number of AUM or AUAAUM/A client accounts increased from approximately 1,500,0001,700,000 as of SeptemberJune 30, 20162017 to approximately 1,800,0002,200,000 as of SeptemberJune 30, 2017.2018.
Subscription and licensingSubscription-based recurring revenues
Subscription and licensingSubscription-based recurring revenues increased 22%30% from $22,198$25,471 in the three months ended SeptemberJune 30, 20162017 to $27,012$33,023 in the three months ended SeptemberJune 30, 2017,2018, primarily due to anthe 2018 acquisition of FolioDynamix which comprised $4,412 of the increase in Envestnet | Enterprise related revenue of $2,051 and an increase in Envestnet | Tamarac related revenue of $2,763.The increase in Envestnet | Enterprise and Envestnet | Tamarac revenue is a result of Envestnet | Enterprise and Envestnet | Tamaracas well as continuing to add clients and selling additional services to existing clients.
Professional services and other revenues
Professional services and other revenues increased 23%17% from $2,271$4,942 in the three months ended SeptemberJune 30, 20162017 to $2,789$5,794 in the three months ended SeptemberJune 30, 2017,2018, primarily due to an overall increase in existing customer revenue attributable to Envestnet | Tamarac.Enterprise.
Cost of revenues
Cost of revenues increased 21%20% from $43,806$52,402 in the three months ended SeptemberJune 30, 20162017 to $52,957$62,914 in the three months ended SeptemberJune 30, 2017,2018, primarily due to the corresponding increase in asset-based recurring revenues, from AUM or AUA, and the mix of such revenues.revenues, which is partially attributable to FolioDynamix as well as an increase in Advisor Summit related costs. As a percentage of total revenues, cost of revenues increaseddecreased from 38%41% in the three months ended SeptemberJune 30, 20162017 to 39%40% in the three months ended SeptemberJune 30, 2017.2018.
Compensation and benefits
Compensation and benefits increased 11%24% from $37,067$38,742 in the three months ended SeptemberJune 30, 20162017 to $41,158$48,026 in the three months ended SeptemberJune 30, 2017,2018, primarily due to an increase in salaries, benefits and related payroll taxes of $1,663,$5,659, primarily a result of the 2018 acquisition of FolioDynamix and an increase in headcount to support organic growth. An increase in incentive compensation of $1,796$1,343, contract labor costs of $954, non-cash compensation of $862 and severance of $529$742 also contributed to the increase in compensation and benefits. As a percentage of total revenues, compensation and benefits decreasedincreased from 32% in the three months ended September 30, 2016 to 30% in the three months ended SeptemberJune 30, 2017.2017 to 31% in the three months ended June 30, 2018.
General and administration
General and administration expenses increased 10%16% from $14,915$16,056 in the three months ended SeptemberJune 30, 20162017 to $16,464$18,603 in the three months ended SeptemberJune 30, 2017,2018, primarily due to increases in systems development costs of $1,141 and external data and research services expenses of $913,$1,095, marketing costs of $496 and occupancy costs of $441, partially offset by decreases in restructuring charges and transaction costs of $412 and non-income tax expense adjustments of $571 and marketing of $309.$387. As a percentage of total revenues, general and administration expenses decreased from 13% in the three months ended September 30, 2016 toremained consistent at 12% in the three months ended SeptemberJune 30, 2017.2017 and 2018.
47
Depreciation and amortization
Depreciation and amortization expense increased 73% from $6,362$6,361 in the three months ended SeptemberJune 30, 20162017 to $6,414$11,026 in the three months ended SeptemberJune 30, 2017.2018. The increase was primarily due to the addition of intangible assets related to the 2018 FolioDynamix acquisition. As a percentage of total revenues, depreciation and amortization expense decreasedincreased from 6% in the three months ended September 30, 2016 to 5% in the three months ended SeptemberJune 30, 2017.2017 to 7% in the three months ended June 30, 2018. The increase in depreciation and amortization expense as a percentage of total revenues is primarily due to the intangible asset amortization related to the acquisition of FolioDynamix.
NineSix months ended SeptemberJune 30, 20172018 compared to ninesix months SeptemberJune 30, 20162017 for the Envestnet segment
Revenues
Total revenues increased 18%25% from $328,417$250,690 in the ninesix months ended SeptemberJune 30, 20162017 to $386,638$312,916 in the ninesix months ended SeptemberJune 30, 2017.2018. The increase was primarily due to an increase in asset-based revenues from AUM/A of $40,299$46,143 and an increase in subscription-based revenues from subscription and licensing of $17,419.$14,900. Revenues from AUM/A were 79% andasset-based revenues decreased from 77% of total revenues in the ninesix months ended SeptemberJune 30, 2016 and 2017 respectively.to 76% in the six months ended June 30, 2018.
40
Assets under management or administrationAsset-based recurring revenues
Revenues earnedAsset-based recurring revenues increased 24% from AUM/AUA increased 16% from $258,969$193,121 in the ninesix months ended SeptemberJune 30, 20162017 to $299,268$239,264 in the ninesix months ended SeptemberJune 30, 2017.2018. The increase was primarily due to the 2018 acquisition of FolioDynamix which comprised $25,433 of the increase as well as an increase in asset values applicable to our quarterly billing cycle in 2017,2018, relative to the corresponding period in 2016.2017. In the first threetwo quarters of 2017,2018, revenues were also positively affected by new account growth and positive net flows of AUM or AUA during 2016 and the first and second quarters of 2017.AUM/A.
The number of financial advisors with AUM or AUAasset-based revenue on our technology platforms increased from 35,86138,498 as of SeptemberJune 30, 20162017 to 40,37944,900 as of SeptemberJune 30, 20172018 and the number of AUM or AUAAUM/A client accounts increased from approximately 1,500,0001,700,000 as of SeptemberJune 30, 20162017 to approximately 1,800,0002,200,000 as of SeptemberJune 30, 2017.2018.
Subscription and licensingSubscription-based recurring revenues
Subscription and licensingSubscription-based recurring revenues increased 29% from $60,301$50,708 in the ninesix months ended SeptemberJune 30, 20162017 to $77,720$65,608 in the ninesix months ended SeptemberJune 30, 2017,2018, primarily due to anthe 2018 acquisition of FolioDynamix which comprised $8,970 of the Envestnet segment increase in Envestnet | Enterprise related revenue of $8,632 and an increase in Envestnet | Tamarac related revenue of $8,787.as well as The increase in Envestnet | Enterprise and Envestnet | Tamarac revenue is a result of Envestnet | Enterprise and Envestnet | Tamarac continuing to add clients and selling additional services to existing clients.
Professional services and other revenues
Professional services and other revenues increased 5%17% from $9,147$6,861 in the ninesix months ended SeptemberJune 30, 20162017 to $9,650$8,044 in the ninesix months ended SeptemberJune 30, 2017, primarily due to an overall increase in existing customer revenue attributable to Envestnet | Tamarac.customers.
Cost of revenues
Cost of revenues increased 21%24% from $124,649$98,473 in the ninesix months ended SeptemberJune 30, 20162017 to $151,430$121,937 in the ninesix months ended SeptemberJune 30, 2017,2018, primarily due to the corresponding increase in asset-based recurring revenues, from AUM or AUA, and the mix of such revenues.revenues, which is partially attributable to FolioDynamix, as well as an increase in Advisor Summit related costs. As a percentage of total revenues, cost of revenues increased from 38% in the nine months ended September 30, 2016 toremained consistent at 39% in the ninesix months ended SeptemberJune 30, 2017.2017 and 2018.
Compensation and benefits
Compensation and benefits increased 12%28% from $106,648$78,220 in the ninesix months ended SeptemberJune 30, 20162017 to $119,378$99,937 in the ninesix months ended SeptemberJune 30, 2017,2018, primarily due to an increase in salaries, benefits and related payroll taxes of $7,066,$12,452, primarily a result of the 2018 acquisition of FolioDynamix and an increase in headcount to support organic growth. IncreasesAn increase in non-cash compensation expenseseverance of $2,420,$3,055, incentive compensation of $1,996$2,958, contract labor costs of $1,766, and short-term variablenon-cash compensation of $1,224$1,242 also contributed to the growth.increase in compensation and benefits. As a percentage of total revenues, compensation and benefits decreasedincreased from 31% in the six months ended June 30, 2017 to 32% in the ninesix months ended SeptemberJune 30, 2016 to 31% in the nine months ended September 30, 2017.2018.
48
General and administration
General and administration expenses increased 5%14% from $45,909$31,893 in the ninesix months ended SeptemberJune 30, 20162017 to $48,357$36,323 in the ninesix months ended SeptemberJune 30, 2017,2018, primarily due to increases in external data and research services expenses of $1,791, non-income tax expense adjustments$2,688, systems development costs of $1,734, marketing expenses of $779,$1,919, and occupancy costs of $695, miscellaneous general and administrative expense of $364 and accretion of $265,$1,505, partially offset by decreases in website and systems costsnon-income tax expense of $2,543 and legal fees of $226.$1,264. As a percentage of total revenues, general and administration expenses decreased from 14% in the nine months ended September 30, 2016 to 13% in the ninesix months ended SeptemberJune 30, 2017.2017 to 12% in the six months ended June 30, 2018.
Depreciation and amortization
Depreciation and amortization expense increased 2%76% from $18,786$12,782 in the ninesix months ended SeptemberJune 30, 20162017 to $19,196$22,499 in the ninesix months ended SeptemberJune 30, 2017,2018. The increase was primarily due to an increase in depreciation on fixedthe addition of intangible assets and internally developed software of $2,461, offset by a decrease in amortization of intangibles of $2,051.related to the 2018 FolioDynamix acquisition. As a percentage of total revenues, depreciation and amortization expense decreasedincreased from 6% in the nine months ended September 30, 2016 to 5% in the ninesix months ended SeptemberJune 30, 2017.
41
total revenues is primarily due to the intangible asset amortization related to the acquisition of FolioDynamix.
Envestnet | Yodlee
The following table presents loss from operations for the Envestnet | Yodlee segment:
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| September 30, |
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| June 30, |
| Percent |
| June 30, |
| Percent | ||||||||||||||||||
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| 2017 |
| 2016 |
| Percent |
| 2017 |
| 2016 |
| Percent |
| 2018 |
| 2017 |
| Change |
| 2018 |
| 2017 |
| Change | ||||||||||||
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Revenues: |
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Subscription and licensing |
| $ | 35,951 |
| $ | 29,761 |
| 21 | % |
| $ | 102,955 |
| $ | 82,002 |
| 26 | % | ||||||||||||||||||
Professional services and other |
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| 3,715 |
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| 4,883 |
| (24) | % |
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| 11,224 |
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| 12,265 |
| (8) | % | ||||||||||||||||||
Subscription-based |
| $ | 38,756 |
| $ | 34,331 |
| 13 | % |
| $ | 75,866 |
| $ | 67,004 |
| 13 | % | ||||||||||||||||||
Professional services and other revenues |
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| 5,432 |
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| 3,714 |
| 46 | % |
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| 10,345 |
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| 7,509 |
| 38 | % | ||||||||||||||||||
Total revenues |
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| 39,666 |
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| 34,644 |
| 14 | % |
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| 114,179 |
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| 94,267 |
| 21 | % |
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| 44,188 |
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| 38,045 |
| 16 | % |
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| 86,211 |
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| 74,513 |
| 16 | % |
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Operating expenses: |
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Cost of revenues |
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| 3,113 |
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| 3,453 |
| (10) | % |
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| 9,601 |
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| 7,670 |
| 25 | % |
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| 4,713 |
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| 3,333 |
| 41 | % |
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| 8,624 |
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| 6,488 |
| 33 | % |
Compensation and benefits |
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| 23,463 |
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| 20,936 |
| 12 | % |
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| 70,055 |
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| 65,386 |
| 7 | % |
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| 25,848 |
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| 23,342 |
| 11 | % |
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| 52,006 |
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| 46,592 |
| 12 | % |
General and administration |
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| 7,376 |
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| 8,341 |
| (12) | % |
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| 23,634 |
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| 23,853 |
| (1) | % |
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| 8,764 |
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| 7,901 |
| 11 | % |
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| 17,054 |
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| 16,258 |
| 5 | % |
Depreciation and amortization |
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| 9,078 |
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| 10,330 |
| (12) | % |
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| 27,596 |
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| 31,086 |
| (11) | % |
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| 8,159 |
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| 9,104 |
| (10) | % |
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| 16,232 |
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| 18,518 |
| (12) | % |
Total operating expenses |
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| 43,030 |
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| 43,060 |
| — | % |
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| 130,886 |
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| 127,995 |
| 2 | % |
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| 47,484 |
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| 43,680 |
| 9 | % |
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| 93,916 |
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| 87,856 |
| 7 | % |
Loss from operations |
| $ | (3,364) |
| $ | (8,416) |
| (60) | % |
| $ | (16,707) |
| $ | (33,728) |
| (50) | % |
| $ | (3,296) |
| $ | (5,635) |
| (42) | % |
| $ | (7,705) |
| $ | (13,343) |
| (42) | % |
Three months ended SeptemberJune 30, 20172018 compared to three months ended SeptemberJune 30, 20162017 for the Envestnet | Yodlee segment
Revenues
Total revenues increased 14%16% from $34,644$38,045 in the three months ended SeptemberJune 30, 20162017 to $39,666$44,188 in the three months ended SeptemberJune 30, 2017.2018. The increase was primarily due to an increase in revenues from subscription and licensingsubscription-based recurring revenues of $6,190, offset by a decrease in professional services and other revenue of $1,168.$4,425. Revenues from professional services and other were 14% and 9% of totalincreased by $1,718.
Subscription-based recurring revenues
Subscription-based recurring revenues increased 13% from $34,331 in the three months ended SeptemberJune 30, 2016 and 2017 respectively.
Subscription and licensing
Subscription and licensing revenues increased 21% from $29,761to $38,756 in the three months ended SeptemberJune 30, 2016 to $35,951 in the three months ended September 30, 2017,2018, primarily due to an increasebroad increases in revenue from new and existing customers of $6,190.customers. Of this increase, approximately $4.8 million or 77% was attributed to our data analytics channel while the reminder primarily derived from our FI and YI groups.
Professional services and other revenues
Professional services and other revenues decreased 24%increased 46% from $4,883$3,714 in the three months ended SeptemberJune 30, 20162017 to $3,715$5,432 in the three months ended SeptemberJune 30, 2017,2018, primarily due to timing of new data analytics customer deployments.
Costdeployments and upgrades of revenues
Cost of revenues decreased 10% from $3,453 in the three months ended September 30, 2016 to $3,113 in the three months ended September 30, 2017, primarily due to decrease in third party consulting and professional services of $469 that was primarily associated with newexisting data analytic customer deployments, offset by an increase in hosting and payment processing services of $181 to support our overall revenue growth.As a percentage of total revenues, cost of revenues decreased from 10% in the three months ended September 30, 2016 to 8% in the three months ended September 30, 2017.analytics customers.
4249
Cost of revenues
Cost of revenues increased 41% from $3,333 in the three months ended June 30, 2017 to $4,713 in the three months ended June 30, 2018, primarily driven by higher professional services and support revenues. Third party consulting and related services increased $612 due to new data analytics customer deployments. We also experienced an increase of $768 in hosting and payment processing services to support our overall revenue growth. As a percentage of total revenues, cost of revenues increased from 9% in the three months ended June 30, 2017 to 11% in the three months ended June 30, 2018. The increase in cost of revenues as a percentage of total revenues is primarily due to a higher increase in expense compared to lower growth in quarterly revenues.
Compensation and benefits
Compensation and benefits increased 12%11% from $20,936$23,342 in the three months ended SeptemberJune 30, 20162017 to $23,463$25,848 in the three months ended SeptemberJune 30, 2017,2018, primarily due to an increase in salaries, benefits and related payroll taxes of $2,258,$1,727, as a result of increased headcount to support organic growth, and an increase related to the Wheelhouse acquisition, and an increase in incentive compensation of $724,$1,012 and non-cash compensation expense of $215. These costs were partially offset by a decrease in non-cashshort-term variable compensation expense of $262.$550. As a percentage of total revenues, compensation and benefits decreased from 60%61% in the three months ended SeptemberJune 30, 20162017 to 59%58% in the three months ended SeptemberJune 30, 2017.2018. The decrease in compensation and benefits as a percentage of total revenues is primarily due to a higher revenue increase compared to lower growth in compensation and benefit expenses.
General and administration
General and administration expenses decreased 12%increased 11% from $8,341$7,901 in the three months ended SeptemberJune 30, 20162017 to $7,376$8,764 in the three months ended SeptemberJune 30, 2017,2018, primarily due to a decreaseincreases in legal expenserestructuring charges and transaction costs of $2,093, partially offset by increases in$403 marketing and promotional expenses of $300, and software purchase and maintenance of $647$288, partially offset by lower communications and occupancy costresearch expenses of $505.$261. As a percentage of total revenues, general and administration expenses decreased from 21% in the three months ended June 30, 2017 to 20% in the three months ended June 30, 2018.
Depreciation and amortization
Depreciation and amortization expense decreased 10% from $9,104 in the three months ended June 30, 2017 to $8,159 in the three months ended June 30, 2018, primarily due to a decrease in intangible asset amortization of $1,026 compared to the same period last year. As a percentage of total revenues, depreciation and amortization expense decreased from 24% in the three months ended SeptemberJune 30, 20162017 to 19%18% in the three months ended SeptemberJune 30, 2018. The decrease in depreciation and amortization as a percentage of total revenues is primarily due to a higher revenue increase and a decrease in amortization expense.
Six months ended June 30, 2018 compared to six months ended June 30, 2017 for the Envestnet | Yodlee segment
Revenues
Total revenues increased 16% from $74,513 in the six months ended June 30, 2017 to $86,211 in the six months ended June 30, 2018. The increase was primarily due to an increase in revenues from subscription-based recurring revenues of $8,862. Revenues from professional services and other increased from 10% of total revenues in the six months ended June 30, 2017 to 12% in the six months ended June 30, 2018.
Subscription-based recurring revenues
Subscription-based recurring revenues increased 13% from $67,004 in the six months ended June 30, 2017 to $75,866 in the six months ended June 30, 2018, primarily due to broad increases in revenue from existing customers.
Professional services and other revenues
Professional services and other revenues increased 38% from $7,509 in the six months ended June 30, 2017 to $10,345 in the six months ended June 30, 2018, primarily due to timing of new data analytics customer deployments and upgrades of existing data analytics customers.
50
Cost of revenues
Cost of revenues increased 33% from $6,488 in the six months ended June 30, 2017 to $8,624 in the six months ended June 30, 2018, primarily due to increases in third party consulting and related services of $642 due to new data analytics customer deployments as well as hosting and payment processing services of $1,494 in support of our overall revenue growth. As a percentage of total revenues, cost of revenues increased from 9% in the six months ended June 30, 2017 to 10% in the six months ended June 30, 2018.
Compensation and benefits
Compensation and benefits increased 12% from $46,592 in the six months ended June 30, 2017 to $52,006 in the six months ended June 30, 2018, primarily due to an increase in salaries, benefits and related payroll taxes of $3,137, as a result of increased headcount to support organic growth, an increase in incentive and variable compensation of $2,090, and third party contract, employee training and recruiting costs totaling $277. As a percentage of total revenues, compensation and benefits decreased from 63% in the six months ended June 30, 2017 to 60% in the six months ended June 30, 2018. The decrease in compensation and benefits as a percentage of total revenues is primarily due to a higher revenue increase compared to lower growth in compensation and benefit expenses.
General and administration
General and administration expenses increased 5% from $16,258 in the six months ended June 30, 2017 to $17,054 in the six months ended June 30, 2018, primarily due to increases in restructuring charges and transaction costs of $603, systems development costs of $518, occupancy costs of $358, partially offset by a decrease in non-recurring legal and related expense of $1,033. As a percentage of total revenues, general and administration expenses decreased from 22% in the six months ended June 30, 2017 to 20% in the six months ended June 30, 2017. The decrease in general and administration as a percentage of total revenues is primarily due to a higher revenue increase compared to lower growth in general and administration expenses.
Depreciation and amortization
Depreciation and amortization expense decreased 12% from $10,330$18,518 in the threesix months ended SeptemberJune 30, 20162017 to $9,078$16,232 in the threesix months ended SeptemberJune 30, 2017,2018, primarily due to a decrease in intangible asset amortization of $1,122 related$2,254 compared to purchase accounting adjustments recorded in the prior year to the fair values of certain intangible assets from the Yodlee acquisition and a decrease in depreciation of $50 related to the Yodlee acquisition recorded in the same period last year. TheThis decrease was partially offset by an increase of $210$31 in intangible asset amortization as a result ofdepreciation expense compared to the Wheelhouse acquisition.same period last year. As a percentage of total revenues, depreciation and amortization expense decreased from 30%25% in the threesix months ended SeptemberJune 30, 20162017 to 23%19% in the threesix months ended SeptemberJune 30, 2017.2018. The decrease in depreciation and amortization as a percentage of total revenues is primarily due to a higher revenue increase and a decrease in depreciation and amortization.
Nine months ended September 30, 2017 compared to nine months ended September 30, 2016 for the Envestnet | Yodlee segment
Revenues
Total revenues increased 21% from $94,267 in the nine months ended September 30, 2016 to $114,179 in the nine months ended September 30, 2017. The increase was primarily due to an increase in revenues from subscription and licensing of $20,953. Revenues from professional services and other were 13% and 10% of total revenues in the nine months ended September 30, 2016 and 2017, respectively.
Subscription and licensing
Subscription and licensing revenues increased 26% from $82,002 in the nine months ended September 30, 2016 to $102,955 in the nine months ended September 30, 2017, primarily due to an increase in revenue from new and existing customers of $20,953. Of this increase, approximately $16.1 million or 77% was attributed to our data analytics channel while the reminder primarily derived from our FI and YI groups.
Professional services and other
Professional services and other revenues decreased 8% from $12,265 in the nine months ended September 30, 2016 to $11,224 in the nine months ended September 30, 2017, primarily due to timing of new data analytics customer deployments.
Cost of revenues
Cost of revenues increased 25% from $7,670 in the nine months ended September 30, 2016 to $9,601 in the nine months ended September 30, 2017, primarily due to an increase in third party consulting and professional services of $802 and hosting and payment processing services of $1,213 to support our overall revenue growth. As a percentage of total revenues, cost of revenues remained consistent at 8% in the nine months ended September 30, 2016 and 2017.
43
Compensation and benefits
Compensation and benefits increased 7% from $65,386 in the nine months ended September 30, 2016 to $70,055 in the nine months ended September 30, 2017, primarily due to an increase in salaries, benefits and related payroll taxes of $7,976, as a result of increased headcount to support organicgrowth and an increase related to the Wheelhouse acquisition. Also contributing to the growth was an increase in incentive compensation of $1,292, offset by a decrease in non-cash compensation expense of $4,049 and severance of $444. As a percentage of total revenues, compensation and benefits decreased from 69% in the nine months ended September 30, 2016 to 61% in the nine months ended September 30, 2017.
General and administration
General and administration expenses decreased 1% from $23,853 in the nine months ended September 30, 2016 to $23,634 in the nine months ended September 30, 2017, primarily due to decreases in legal expense of $2,802 and realized losses on designated hedges of $486, offset by increases in software purchase and maintenance of $1,733 and occupancy cost of $1,416. As a percentage of total revenues, general and administration expenses decreased from 25% in the nine months ended September 30, 2016 to 21% in the nine months ended September 30, 2017. The decrease in general and administration as a percentage of total revenues is primarily due to a higher revenue increase compared to lower growth in general and administration expenses.
Depreciation and amortization
Depreciation and amortization expense decreased 11% from $31,086 in the nine months ended September 30, 2016 to $27,596 in the nine months ended September 30, 2017, primarily due to a decrease in intangible asset amortization of $3,365 related to purchase accounting adjustments recorded in the prior year to the fair values of certain intangible assets from the Yodlee acquisition and a decrease in depreciation of $635 related to the Yodlee acquisition recorded in the same period last year. The decrease was offset by an increase of $592 in intangible asset amortization as a result of the Wheelhouse acquisition. As a percentage of total revenues, depreciation and amortization expense decreased from 33% in the nine months ended September 30, 2016 to 24% in the nine months ended September 30, 2017. The decrease in depreciation and amortization as a percentage of total revenues is primarily due to a higher revenue increase and a decrease in depreciation and amortization.expense.
Nonsegment
The following table presents nonsegment loss from operations:operating expenses:
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| 2017 |
| 2016 |
| Percent Change |
| 2017 |
| 2016 |
| Percent Change |
| 2018 |
| 2017 |
| Change |
| 2018 |
| 2017 |
| Change | ||||||||||||
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Operating expenses: |
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Compensation and benefits |
| $ | 3,930 |
| $ | 2,342 |
| 68 | % |
| $ | 9,646 |
| $ | 8,591 |
| 12 | % |
| $ | 6,336 |
| $ | 2,912 |
| 118 | % |
| $ | 11,807 |
| $ | 5,716 |
| 107 | % |
General and administration |
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| 7,313 |
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| 2,894 |
| 153 | % |
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| 18,187 |
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| 10,487 |
| 73 | % |
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| 6,722 |
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| 4,521 |
| 49 | % |
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| 13,441 |
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| 10,874 |
| 24 | % |
Total operating expenses |
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| 11,243 |
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| 5,236 |
| 115 | % |
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| 27,833 |
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| 19,078 |
| 46 | % | ||||||||||||||||||
Loss from operations |
| $ | (11,243) |
| $ | (5,236) |
| 115 | % |
| $ | (27,833) |
| $ | (19,078) |
| 46 | % | ||||||||||||||||||
Nonsegment operating expenses |
| $ | 13,058 |
| $ | 7,433 |
| 76 | % |
| $ | 25,248 |
| $ | 16,590 |
| 52 | % |
Three months ended SeptemberJune 30, 20172018 compared to three months ended SeptemberJune 30, 20162017 for nonsegmentNonsegment
Compensation and benefits
Compensation and benefits increased 68%118% from $2,342$2,912 in the three months ended SeptemberJune 30, 20162017 to $3,930$6,336 in the three months ended SeptemberJune 30, 2017,2018, primarily due to an increaseincreases in non-cash compensation of $1,454, incentive compensation of $1,039 and salaries, benefits and related payroll taxes of $756 and non-cash compensation expense of $642.$1,021.
4451
General and administration
General and administration expenses increased 153%49% from $2,894$4,521 in the three months ended SeptemberJune 30, 20162017 to $7,313$6,722 in the three months ended SeptemberJune 30, 2017,2018, primarily due to an increaseincreases in acquisitionrestructuring charges and transaction costs of $1,992, audit and related fees$1,105, systems development costs of $520 and$490, professional and legal fees of $680, offset by a decrease in fair market value adjustments on contingent consideration of $349.$376.
NineSix months ended SeptemberJune 30, 2018 compared to six months ended June 30, 2017 compared to nine months ended September 30, 2016 for nonsegmentNonsegment
Compensation and benefits
Compensation and benefits increased 12%107% from $8,591$5,716 in the ninesix months ended SeptemberJune 30, 20162017 to $9,646$11,807 in the ninesix months ended SeptemberJune 30, 2017,2018, primarily due to an increaseincreases in non-cash compensation expense of $2,388, salaries, benefits and related payroll taxes of $1,816, offset by decreases in non-cash$2,332, and incentive compensation expense of $792 and severance of $322.$1,490.
General and administration
General and administration expenses increased 73%24% from $10,487$10,874 in the ninesix months ended SeptemberJune 30, 20162017 to $18,187$13,441 in the ninesix months ended SeptemberJune 30, 2017,2018, primarily due to increases in audit and related fees of $2,837, acquisition costs of $1,435, professional and legal fees of $1,782$1,088 and marketing expensesystems development costs of $509, offset by a decrease in fair market value adjustments on contingent consideration of $838.
$790.
Non-GAAP Financial Measures
In addition to reporting results according to U.S. GAAP, we also disclose certain non-GAAP financial measures to enhance the understanding of our operating performance. Those measures include “adjusted revenues”, “adjusted EBITDA”, “adjusted net income”, and “adjusted net income per share”.
“Adjusted revenues” excludes the effect of purchase accounting on the fair value of acquired deferred revenue. Under U.S. GAAP, we record at fair value the acquired deferred revenue for contracts in effect at the time the entities were acquired. Consequently, revenue related to acquired entities for periods subsequent to the acquisition does not reflect the full amount of revenue that would have been recorded by these entities had they remained stand‑stand‑alone entities.
“Adjusted EBITDA” represents net lossincome (loss) before deferred revenue fair value adjustment, interest income, interest expense, accretion on contingent consideration and purchase liability, income tax provision (benefit), depreciation and amortization, non‑cash compensation expense, restructuring charges and transaction costs, severance, fair market value adjustment on contingent consideration, litigation related expense, foreign currency, and related hedging activity, non-income tax expense adjustment, loss allocation from equity method investment and loss attributable to non‑controlling interest.
“Adjusted net income” represents net lossincome (loss) before deferred revenue fair value adjustment, accretion on contingent consideration and purchase liability, non‑cash interest expense, non‑cash compensation expense, restructuring charges and transaction costs, severance, amortization of acquired intangibles, fair‑market value adjustment on contingent consideration, litigation related expense, foreign currency, and related hedging activity, non-income tax expense adjustment, loss allocation from equity method investment and loss attributable to non‑controlling interest. Reconciling items are presented gross of tax, and a normalized tax rate is applied to the total of all reconciling items to arrive at adjusted net income.
“Adjusted net income per share” represents adjusted net income attributable to common stockholders divided by the diluted number of weighted‑average shares outstanding.
Our Board of Directors and our management use adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share:
· | As measures of operating performance; |
· | For planning purposes, including the preparation of annual budgets; |
· | To allocate resources to enhance the financial performance of our business; |
45
· | To evaluate the effectiveness of our business strategies; and |
52
· | In communications with our Board of Directors concerning our financial performance. |
Our Compensation Committee, Board of Directors and our management may also consider adjusted EBITDA, among other factors, when determining management’s incentive compensation.
We also present adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share as supplemental performance measures because we believe that they provide our Board of Directors, management and investors with additional information to assess our performance. Adjusted revenues provide comparisons from period to period by excluding the effect of purchase accounting on the fair value of acquired deferred revenue. Adjusted EBITDA provideprovides comparisons from period to period by excluding potential differences caused by variations in the age and book depreciation of fixed assets affecting relative depreciation expense and amortization of internally developed software, amortization of acquired intangible assets, income tax provision (benefit), non-income tax expense, restructuring charges and transaction costs, accretion on contingent consideration fair market value adjustments on contingent consideration,and purchase liability, severance, litigation related expense, pre-tax loss attributable to non-controlling interest, and changes in interest expense and interest income that are influenced by capital structure decisions and capital market conditions. Our management also believes it is useful to exclude non-cash stock-based compensation expense from adjusted EBITDA and adjusted net income because non-cash equity grants made at a certain price and point in time do not necessarily reflect how our business is performing at any particular time.
We believe adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share are useful to investors in evaluating our operating performance because securities analysts use adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share as supplemental measures to evaluate the overall performance of companies, and we anticipate that our investor and analyst presentations will include adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share.
Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share are not measurements of our financial performance under U.S. GAAP and should not be considered as an alternative to revenues, net income, operating income or any other performance measures derived in accordance with U.S. GAAP, or as an alternative to cash flows from operating activities as a measure of our profitability or liquidity.
We understand that, although adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share are frequently used by securities analysts and others in their evaluation of companies, these measures have limitations as an analytical tool, and you should not consider them in isolation, or as a substitute for an analysis of our results as reported under U.S. GAAP. In particular you should consider:
· | Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments; |
· | Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share do not reflect changes in, or cash requirements for, our working capital needs; |
· | Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share do not reflect non-cash components of employee compensation; |
· | Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements; |
· | Due to either net losses before income tax expense or the use of federal and state net operating loss carryforwards we had net cash paid |
· | Other companies in our industry may calculate adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share differently than we do, limiting their usefulness as a comparative measure. |
Management compensates for the inherent limitations associated with using adjusted revenues, adjusted EBITDA, adjusted operating income, adjusted net income and adjusted net income per share through disclosure of such limitations, presentation of our financial statements in accordance with U.S. GAAP and reconciliation of adjusted revenues to revenues, the most directly comparable
46
U.S. GAAP measure and adjusted EBITDA, adjusted net income and adjusted net income per share to net income and net income per share, the most directly comparable U.S. GAAP measure. Further, our management also reviews U.S. GAAP measures and evaluates
53
individual measures that are not included in some or all of our non-U.S. GAAP financial measures, such as our level of capital expenditures and interest income, among other measures.
The following table sets forth a reconciliation of total revenues to adjusted revenues based on our historical results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| Three Months Ended |
| Six Months Ended | ||||||||||||||||
|
| September 30, |
| September 30, |
| June 30, |
| June 30, | ||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||
|
| (in thousands) |
| (in thousands) |
| (in thousands) |
| (in thousands) | ||||||||||||||||
Total revenues |
| $ | 175,614 |
| $ | 149,155 |
| $ | 500,817 |
| $ | 422,684 |
| $ | 201,116 |
| $ | 167,417 |
| $ | 399,127 |
| $ | 325,203 |
Deferred revenue fair value adjustment |
|
| 15 |
|
| 331 |
|
| 120 |
|
| 781 |
|
| 62 |
|
| 52 |
|
| 66 |
|
| 105 |
Adjusted revenues |
| $ | 175,629 |
| $ | 149,486 |
| $ | 500,937 |
| $ | 423,465 |
| $ | 201,178 |
| $ | 167,469 |
| $ | 399,193 |
| $ | 325,308 |
The following table sets forth a reconciliation of net lossincome (loss) to adjusted EBITDA based on our historical results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
|
| Three Months Ended |
| Six Months Ended | ||||||||||||||||
|
| September 30, |
| September 30, |
|
| June 30, |
| June 30, | ||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||
|
| (in thousands) |
| (in thousands) |
|
| (in thousands) |
| (in thousands) | ||||||||||||||||
Net income (loss) |
| $ | (1,320) |
| $ | (4,057) |
| $ | (20,925) |
| $ | (22,993) |
|
| $ | (5,991) |
| $ | (6,470) |
| $ | 2,011 |
| $ | (19,605) |
Add (deduct): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue fair value adjustment |
|
| 15 |
|
| 331 |
|
| 120 |
|
| 781 |
|
|
| 62 |
|
| 52 |
|
| 66 |
|
| 105 |
Interest income |
|
| (58) |
|
| (6) |
|
| (108) |
|
| (28) |
|
|
| (374) |
|
| (29) |
|
| (784) |
|
| (50) |
Interest expense |
|
| 3,858 |
|
| 4,122 |
|
| 12,671 |
|
| 12,345 |
|
|
| 5,992 |
|
| 3,877 |
|
| 11,228 |
|
| 8,813 |
Accretion on contingent consideration and purchase liability |
|
| 104 |
|
| 23 |
|
| 408 |
|
| 143 |
|
|
| 95 |
|
| 148 |
|
| 196 |
|
| 304 |
Income tax provision (benefit) |
|
| 1,682 |
|
| (1,668) |
|
| 10,824 |
|
| (10,602) |
|
|
| 566 |
|
| 4,844 |
|
| (13,428) |
|
| 9,142 |
Depreciation and amortization |
|
| 15,492 |
|
| 16,692 |
|
| 46,792 |
|
| 49,872 |
|
|
| 19,185 |
|
| 15,465 |
|
| 38,731 |
|
| 31,300 |
Non-cash compensation expense |
|
| 8,048 |
|
| 7,554 |
|
| 23,451 |
|
| 25,872 |
|
|
| 10,476 |
|
| 7,945 |
|
| 18,971 |
|
| 15,403 |
Restructuring charges and transaction costs |
|
| 4,608 |
|
| 998 |
|
| 10,235 |
|
| 4,484 |
|
|
| 3,345 |
|
| 2,249 |
|
| 5,937 |
|
| 5,627 |
Severance |
|
| 1,597 |
|
| 1,058 |
|
| 2,260 |
|
| 3,104 |
|
|
| 1,049 |
|
| 338 |
|
| 3,861 |
|
| 663 |
Fair market value adjustment on contingent consideration |
|
| — |
|
| 349 |
|
| — |
|
| 838 |
| ||||||||||||
Litigation related expense |
|
| — |
|
| 2,097 |
|
| 1,033 |
|
| 4,065 |
|
|
| — |
|
| 52 |
|
| — |
|
| 1,033 |
Foreign currency and related hedging activity |
|
| (116) |
|
| (383) |
|
| 296 |
|
| (672) |
| ||||||||||||
Foreign currency |
|
| (339) |
|
| 122 |
|
| (571) |
|
| 412 | |||||||||||||
Non-income tax expense adjustment |
|
| 571 |
|
| — |
|
| 1,734 |
|
| — |
|
|
| 27 |
|
| 414 |
|
| (101) |
|
| 1,163 |
Loss allocation from equity method investment |
|
| 282 |
|
| 250 |
|
| 984 |
|
| 1,130 |
|
|
| 151 |
|
| 417 |
|
| 811 |
|
| 702 |
Loss attributable to non-controlling interest |
|
| 26 |
|
| 145 |
|
| 377 |
|
| 787 |
|
|
| 515 |
|
| 101 |
|
| 584 |
|
| 351 |
Adjusted EBITDA |
| $ | 34,789 |
| $ | 27,505 |
| $ | 90,152 |
| $ | 69,126 |
|
| $ | 34,759 |
| $ | 29,525 |
| $ | 67,512 |
| $ | 55,363 |
4754
The following table sets forth the reconciliation of net lossincome (loss) to adjusted net income and adjusted net income per diluted share based on our historical results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
|
| Three Months Ended |
| Six Months Ended | ||||||||||||||||
|
| September 30, |
| September 30, |
|
| June 30, |
| June 30, | ||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| 2018 |
| 2017 |
| 2018 |
| 2017 | ||||||||
|
| (in thousands) |
| (in thousands) |
|
| (in thousands) |
| (in thousands) | ||||||||||||||||
Net income (loss) |
| $ | (1,320) |
| $ | (4,057) |
| $ | (20,925) |
| $ | (22,993) |
|
| $ | (5,991) |
| $ | (6,470) |
| $ | 2,011 |
| $ | (19,605) |
Income tax provision (benefit) (1) |
|
| 1,682 |
|
| (1,668) |
|
| 10,824 |
|
| (10,602) |
|
|
| 566 |
|
| 4,844 |
|
| (13,428) |
|
| 9,142 |
Income (loss) before income tax provision (benefit) |
|
| 362 |
|
| (5,725) |
|
| (10,101) |
|
| (33,595) |
| ||||||||||||
Loss before income tax provision (benefit) |
|
| (5,425) |
|
| (1,626) |
|
| (11,417) |
|
| (10,463) | |||||||||||||
Add (deduct): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue fair value adjustment |
|
| 15 |
|
| 331 |
|
| 120 |
|
| 781 |
|
|
| 62 |
|
| 52 |
|
| 66 |
|
| 105 |
Accretion on contingent consideration and purchase liability |
|
| 104 |
|
| 23 |
|
| 408 |
|
| 143 |
|
|
| 95 |
|
| 148 |
|
| 196 |
|
| 304 |
Non-cash interest expense |
|
| 2,931 |
|
| 2,039 |
|
| 7,784 |
|
| 6,070 |
|
|
| 3,032 |
|
| 1,331 |
|
| 4,900 |
|
| 4,853 |
Non-cash compensation expense |
|
| 8,048 |
|
| 7,554 |
|
| 23,451 |
|
| 25,872 |
|
|
| 10,476 |
|
| 7,945 |
|
| 18,971 |
|
| 15,403 |
Restructuring charges and transaction costs |
|
| 4,608 |
|
| 998 |
|
| 10,235 |
|
| 4,484 |
|
|
| 3,345 |
|
| 2,249 |
|
| 5,937 |
|
| 5,627 |
Severance |
|
| 1,597 |
|
| 1,058 |
|
| 2,260 |
|
| 3,104 |
|
|
| 1,049 |
|
| 338 |
|
| 3,861 |
|
| 663 |
Amortization of acquired intangibles |
|
| 10,377 |
|
| 12,035 |
|
| 31,333 |
|
| 36,156 |
|
|
| 13,419 |
|
| 10,371 |
|
| 27,354 |
|
| 20,956 |
Fair market value adjustment on contingent consideration |
|
| — |
|
| 349 |
|
| — |
|
| 838 |
| ||||||||||||
Litigation related expense |
|
| — |
|
| 2,097 |
|
| 1,033 |
|
| 4,065 |
|
|
| — |
|
| 52 |
|
| — |
|
| 1,033 |
Foreign currency and related hedging activity |
|
| (116) |
|
| (383) |
|
| 296 |
|
| (672) |
| ||||||||||||
Foreign currency |
|
| (339) |
|
| 122 |
|
| (571) |
|
| 412 | |||||||||||||
Non-income tax expense adjustment |
|
| 571 |
|
| — |
|
| 1,734 |
|
| — |
|
|
| 27 |
|
| 414 |
|
| (101) |
|
| 1,163 |
Loss allocation from equity method investment |
|
| 282 |
|
| 250 |
|
| 984 |
|
| 1,130 |
|
|
| 151 |
|
| 417 |
|
| 811 |
|
| 702 |
Loss attributable to non-controlling interest |
|
| 26 |
|
| 145 |
|
| 377 |
|
| 787 |
|
|
| 515 |
|
| 101 |
|
| 584 |
|
| 351 |
Adjusted net income before income tax effect |
|
| 28,805 |
|
| 20,771 |
|
| 69,914 |
|
| 49,163 |
|
|
| 26,407 |
|
| 21,914 |
|
| 50,591 |
|
| 41,109 |
Income tax effect (2) |
|
| (11,522) |
|
| (8,308) |
|
| (27,966) |
|
| (19,665) |
|
|
| (7,130) |
|
| (8,766) |
|
| (13,660) |
|
| (16,444) |
Adjusted net income |
| $ | 17,283 |
| $ | 12,463 |
| $ | 41,948 |
| $ | 29,498 |
|
| $ | 19,277 |
| $ | 13,148 |
| $ | 36,931 |
| $ | 24,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic number of weighted-average shares outstanding |
|
| 44,044,527 |
|
| 42,843,103 |
|
| 43,604,869 |
|
| 42,704,383 |
|
|
| 45,247,331 |
|
| 43,855,479 |
|
| 44,963,735 |
|
| 43,513,074 |
Effect of dilutive shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock |
|
| 1,664,351 |
|
| 1,331,256 |
|
| 1,669,092 |
|
| 1,286,968 |
|
|
| 1,325,947 |
|
| 1,597,746 |
|
| 1,360,300 |
|
| 1,670,493 |
Unvested restricted stock units |
|
| 736,657 |
|
| 350,169 |
|
| 637,580 |
|
| 272,205 |
|
|
| 643,319 |
|
| 473,892 |
|
| 832,170 |
|
| 551,227 |
Diluted number of weighted-average shares outstanding |
|
| 46,445,535 |
|
| 44,524,528 |
|
| 45,911,541 |
|
| 44,263,556 |
|
|
| 47,216,597 |
|
| 45,927,117 |
|
| 47,156,205 |
|
| 45,734,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Adjusted net income per share - diluted |
| $ | 0.37 |
| $ | 0.28 |
| $ | 0.91 |
| $ | 0.67 |
|
| $ | 0.41 |
| $ | 0.29 |
| $ | 0.78 |
| $ | 0.54 |
(1) | For the three months ended |
(2) |
|
Note on Income Taxes: As of September 30,December 31, 2017 the Company had net operating loss carryforwards of $261,475$249,653 and $164,397$143,775 for federal and state income tax purposes, respectively, available to reduce future income subject to income taxes. As a result, the amount of actual cash taxes the Company pays for federal, state and foreign income taxes differs significantly from the effective income tax rate computed in accordance with U.S. GAAP, and from the normalized rate shown above.
4855
The following tables set forth the reconciliation of revenues to adjusted revenues and income (loss) from operations to adjusted EBITDA based on our historical results for each segment for the three and ninesix months ended SeptemberJune 30, 20172018 and 2016:2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Three Months Ended September 30, 2017 | Three Months Ended June 30, 2018 | ||||||||||||||||||||
|
| Envestnet |
|
| Envestnet | Yodlee |
|
| Nonsegment |
|
| Total |
| Envestnet |
|
| Envestnet | Yodlee |
|
| Nonsegment |
|
| Total |
| (in thousands) | (in thousands) | ||||||||||||||||||||
Revenues | $ | 135,948 |
| $ | 39,666 |
| $ | — |
| $ | 175,614 | $ | 156,928 |
| $ | 44,188 |
| $ | — |
| $ | 201,116 |
Deferred revenue fair value adjustment |
| — |
|
| 15 |
|
| — |
|
| 15 |
| 60 |
|
| 2 |
|
| — |
|
| 62 |
Adjusted revenues | $ | 135,948 |
| $ | 39,681 |
| $ | — |
| $ | 175,629 | $ | 156,988 |
| $ | 44,190 |
| $ | — |
| $ | 201,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income (loss) from operations | $ | 18,955 |
| $ | (3,364) |
| $ | (11,243) |
| $ | 4,348 | $ | 16,359 |
| $ | (3,296) |
| $ | (13,058) |
| $ | 5 |
Add (deduct): |
|
|
|
|
|
|
|
| ||||||||||||||
Add: |
|
|
|
|
|
|
|
| ||||||||||||||
Deferred revenue fair value adjustment |
| — |
| 15 |
| — |
| 15 |
| 60 |
| 2 |
| — |
| 62 | ||||||
Accretion on contingent consideration and purchase liability |
| 104 |
| — |
| — |
| 104 |
| 95 |
| — |
| — |
| 95 | ||||||
Depreciation and amortization |
| 6,414 |
| 9,078 |
| — |
| 15,492 |
| 11,026 |
| 8,159 |
| — |
| 19,185 | ||||||
Non-cash compensation expense |
| 3,679 |
| 2,675 |
| 1,694 |
| 8,048 |
| 5,080 |
| 2,936 |
| 2,460 |
| 10,476 | ||||||
Restructuring charges and transaction costs |
| 73 |
| — |
| 4,535 |
| 4,608 |
| 188 |
| 403 |
| 2,754 |
| 3,345 | ||||||
Non-income tax expense adjustment |
| 571 |
| — |
| — |
| 571 |
| 27 |
| — |
| — |
| 27 | ||||||
Severance |
| 1,519 |
| 78 |
| — |
| 1,597 |
| 1,049 |
| — |
| — |
| 1,049 | ||||||
Litigation related expense |
| — |
| — |
| — |
| — | ||||||||||||||
Other gain |
| — |
| — |
| (20) |
| (20) | ||||||||||||||
Loss attributable to non-controlling interest |
| 26 |
|
| — |
|
| — |
|
| 26 |
| 515 |
|
| — |
|
| — |
|
| 515 |
Adjusted EBITDA | $ | 31,341 |
| $ | 8,482 |
| $ | (5,034) |
| $ | 34,789 | $ | 34,399 |
| $ | 8,204 |
| $ | (7,844) |
| $ | 34,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Three Months Ended September 30, 2016 | Three Months Ended June 30, 2017 | ||||||||||||||||||||
|
| Envestnet |
|
| Envestnet | Yodlee |
|
| Nonsegment |
|
| Total |
| Envestnet |
|
| Envestnet | Yodlee |
|
| Nonsegment |
|
| Total |
| (in thousands) | (in thousands) | ||||||||||||||||||||
Revenues | $ | 114,511 |
| $ | 34,644 |
| $ | — |
| $ | 149,155 | $ | 129,372 |
| $ | 38,045 |
| $ | — |
| $ | 167,417 |
Deferred revenue fair value adjustment |
| 109 |
|
| 222 |
|
| — |
|
| 331 |
| 7 |
|
| 45 |
|
| — |
|
| 52 |
Adjusted revenues | $ | 114,620 |
| $ | 34,866 |
| $ | — |
| $ | 149,486 | $ | 129,379 |
| $ | 38,090 |
| $ | — |
| $ | 167,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income (loss) from operations | $ | 12,361 |
| $ | (8,416) |
| $ | (5,236) |
| $ | (1,291) | $ | 15,811 |
| $ | (5,635) |
| $ | (7,433) |
| $ | 2,743 |
Add (deduct): |
|
|
|
|
|
|
|
| ||||||||||||||
Add: |
|
|
|
|
|
|
|
| ||||||||||||||
Deferred revenue fair value adjustment |
| 109 |
| 222 |
| — |
| 331 |
| 7 |
| 45 |
| — |
| 52 | ||||||
Accretion on contingent consideration and purchase liability |
| 23 |
| — |
| — |
| 23 |
| 148 |
| — |
| — |
| 148 | ||||||
Depreciation and amortization |
| 6,362 |
| 10,330 |
| — |
| 16,692 |
| 6,361 |
| 9,104 |
| — |
| 15,465 | ||||||
Non-cash compensation expense |
| 3,565 |
| 2,937 |
| 1,052 |
| 7,554 |
| 4,218 |
| 2,721 |
| 1,006 |
| 7,945 | ||||||
Restructuring charges and transaction costs |
| 34 |
| 3 |
| 961 |
| 998 |
| 600 |
| — |
| 1,649 |
| 2,249 | ||||||
Non-income tax expense adjustment |
| 414 |
| — |
| — |
| 414 | ||||||||||||||
Severance |
| 990 |
| 68 |
| — |
| 1,058 |
| 307 |
| 15 |
| 16 |
| 338 | ||||||
Fair market value adjustment on contingent consideration |
| — |
| — |
| 349 |
| 349 | ||||||||||||||
Litigation related expense |
| — |
| 2,086 |
| 11 |
| 2,097 |
| — |
| 52 |
| — |
| 52 | ||||||
Foreign currency and related hedging activity |
| — |
| (462) |
| — |
| (462) | ||||||||||||||
Other loss |
| — |
| — |
| 11 |
| 11 |
| — |
| — |
| 18 |
| 18 | ||||||
Loss attributable to non-controlling interest |
| 145 |
|
| — |
|
| — |
|
| 145 |
| 101 |
|
| — |
|
| — |
|
| 101 |
Adjusted EBITDA | $ | 23,589 |
| $ | 6,768 |
| $ | (2,852) |
| $ | 27,505 | $ | 27,967 |
| $ | 6,302 |
| $ | (4,744) |
| $ | 29,525 |
4956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Nine Months Ended September 30, 2017 | Six Months Ended June 30, 2018 | ||||||||||||||||||||
|
| Envestnet |
|
| Envestnet | Yodlee |
|
| Nonsegment |
|
| Total |
| Envestnet |
|
| Envestnet | Yodlee |
|
| Nonsegment |
|
| Total |
| (in thousands) | (in thousands) | ||||||||||||||||||||
Revenues | $ | 386,638 |
| $ | 114,179 |
| $ | — |
| $ | 500,817 | $ | 312,916 |
| $ | 86,211 |
| $ | — |
| $ | 399,127 |
Deferred revenue fair value adjustment |
| 36 |
|
| 84 |
|
| — |
|
| 120 |
| 58 |
|
| 8 |
|
| — |
|
| 66 |
Adjusted revenues | $ | 386,674 |
| $ | 114,263 |
| $ | — |
| $ | 500,937 | $ | 312,974 |
| $ | 86,219 |
| $ | — |
| $ | 399,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income (loss) from operations | $ | 48,277 |
| $ | (16,707) |
| $ | (27,833) |
| $ | 3,737 | $ | 32,220 |
| $ | (7,705) |
| $ | (25,248) |
| $ | (733) |
Add: |
|
|
|
|
|
|
|
| ||||||||||||||
Add (deduct): |
|
|
|
|
|
|
|
| ||||||||||||||
Deferred revenue fair value adjustment |
| 36 |
| 84 |
| — |
| 120 |
| 58 |
| 8 |
| — |
| 66 | ||||||
Accretion on contingent consideration and purchase liability |
| 408 |
| — |
| — |
| 408 |
| 196 |
| — |
| — |
| 196 | ||||||
Depreciation and amortization |
| 19,196 |
| 27,596 |
| — |
| 46,792 |
| 22,499 |
| 16,232 |
| — |
| 38,731 | ||||||
Non-cash compensation expense |
| 11,571 |
| 8,137 |
| 3,743 |
| 23,451 |
| 9,134 |
| 5,400 |
| 4,437 |
| 18,971 | ||||||
Restructuring charges and transaction costs |
| 768 |
| — |
| 9,467 |
| 10,235 |
| 225 |
| 603 |
| 5,109 |
| 5,937 | ||||||
Non-income tax expense adjustment |
| 1,734 |
| — |
| — |
| 1,734 |
| (101) |
| — |
| — |
| (101) | ||||||
Severance |
| 1,942 |
| 302 |
| 16 |
| 2,260 |
| 3,478 |
| 383 |
| — |
| 3,861 | ||||||
Litigation related expense |
| — |
| 1,033 |
| — |
| 1,033 | ||||||||||||||
Other loss |
| — |
| — |
| 5 |
| 5 | ||||||||||||||
Loss attributable to non-controlling interest |
| 377 |
|
| — |
|
| — |
|
| 377 |
| 584 |
|
| — |
|
| — |
|
| 584 |
Adjusted EBITDA | $ | 84,309 |
| $ | 20,445 |
| $ | (14,602) |
| $ | 90,152 | $ | 68,293 |
| $ | 14,921 |
| $ | (15,702) |
| $ | 67,512 |
|
|
|
| �� |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
| Nine Months Ended September 30, 2016 | Six Months Ended June 30, 2017 | ||||||||||||||||||||
|
| Envestnet |
|
| Envestnet | Yodlee |
|
| Nonsegment |
|
| Total |
| Envestnet |
|
| Envestnet | Yodlee |
|
| Nonsegment |
|
| Total |
| (in thousands) | (in thousands) | ||||||||||||||||||||
Revenues | $ | 328,417 |
| $ | 94,267 |
| $ | — |
| $ | 422,684 | $ | 250,690 |
| $ | 74,513 |
| $ | — |
| $ | 325,203 |
Deferred revenue fair value adjustment |
| 114 |
|
| 667 |
|
| — |
|
| 781 |
| 36 |
|
| 69 |
|
| — |
|
| 105 |
Adjusted revenues | $ | 328,531 |
| $ | 94,934 |
| $ | — |
| $ | 423,465 | $ | 250,726 |
| $ | 74,582 |
| $ | — |
| $ | 325,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income (loss) from operations | $ | 32,425 |
| $ | (33,728) |
| $ | (19,078) |
| $ | (20,381) | $ | 29,322 |
| $ | (13,343) |
| $ | (16,590) |
| $ | (611) |
Add (deduct): |
|
|
|
|
|
|
|
| ||||||||||||||
Add: |
|
|
|
|
|
|
|
| ||||||||||||||
Deferred revenue fair value adjustment |
| 114 |
| 667 |
| — |
| 781 |
| 36 |
| 69 |
| — |
| 105 | ||||||
Accretion on contingent consideration and purchase liability |
| 143 |
| — |
| — |
| 143 |
| 304 |
| — |
| — |
| 304 | ||||||
Depreciation and amortization |
| 18,786 |
| 31,086 |
| — |
| 49,872 |
| 12,782 |
| 18,518 |
| — |
| 31,300 | ||||||
Non-cash compensation expense |
| 9,151 |
| 12,186 |
| 4,535 |
| 25,872 |
| 7,892 |
| 5,462 |
| 2,049 |
| 15,403 | ||||||
Restructuring charges and transaction costs |
| 361 |
| 34 |
| 4,089 |
| 4,484 |
| 695 |
| — |
| 4,932 |
| 5,627 | ||||||
Non-income tax expense adjustment |
| 1,163 |
| — |
| — |
| 1,163 | ||||||||||||||
Severance |
| 2,019 |
| 747 |
| 338 |
| 3,104 |
| 423 |
| 224 |
| 16 |
| 663 | ||||||
Fair market value adjustment on contingent consideration |
| — |
| — |
| 838 |
| 838 | ||||||||||||||
Litigation related expense |
| — |
| 3,824 |
| 241 |
| 4,065 |
| — |
| 1,033 |
| — |
| 1,033 | ||||||
Foreign currency and related hedging activity |
| — |
| (462) |
| — |
| (462) | ||||||||||||||
Other loss |
| — |
| — |
| 23 |
| 23 |
| — |
| — |
| 25 |
| 25 | ||||||
Loss attributable to non-controlling interest |
| 787 |
|
| — |
|
| — |
|
| 787 |
| 351 |
|
| — |
|
| — |
|
| 351 |
Adjusted EBITDA | $ | 63,786 |
| $ | 14,354 |
| $ | (9,014) |
| $ | 69,126 | $ | 52,968 |
| $ | 11,963 |
| $ | (9,568) |
| $ | 55,363 |
Liquidity and Capital Resources
As of SeptemberJune 30, 2017,2018, we had total cash and cash equivalents of $48,704$134,032 compared to $52,592$60,115 as of December 31, 2016.2017. We plan to use existing cash as of SeptemberJune 30, 20172018 and cash generated in the ongoing operations of our business to fund our current operations, capital expenditures repay debt and for possible acquisitions or other strategic activity.activity, and to meet our debt service obligations. If the cash generated in the ongoing operations of our business is insufficient to fund these requirements, we may be required to borrow under our bankrevolving credit agreementfacility to fund our ongoing operations or to fund potential acquisitions or other strategic activities. The Company will fundfunded the FolioDynamix acquisition with a combination of cash on the Company’s balance sheet, purchase consideration liabilities and borrowings under its revolving credit facility.
5057
Credit Agreement
On July 18, 2017, the Company and certain of its subsidiaries entered into a Second Amended and Restated Credit Agreement (the “Second Amended and Restated Credit Agreement”) with a group of banks (the “Banks”), for which Bank of Montreal is acting as administrative agent (the “Administrative Agent”). The Second Amended and Restated Credit Agreement amends and restates the Amended and Restated Credit Agreement, dated as of November 19, 2015, as amended, among the Company, the guarantors party thereto, the lenders party thereto and Bank of Montreal, as administrative agent (the “Prior Credit Facility”). Pursuant to the Second Amended and Restated Credit Agreement, the Banks have agreed to provide to the Company revolving credit commitments (the “Revolving Credit Facility”) in the aggregate amount of up to $350,000 which amount may be increased by $50,000. The Second Amended and Restated Credit Agreement also includes a $5,000 subfacility for the issuance of letters of credit.
Obligations under the Second Amended and Restated Credit Agreement are guaranteed by substantially all of the Company’s U.S. subsidiaries. In accordance with the terms of the Amended and Restated Security Agreement, dated July 18, 2017 (the “Security Agreement”), among the Company, the Debtors party thereto and the Administrative Agent, obligations under the Second Amended and Restated Credit Agreement are secured by substantially all of the Company’s domestic assets and the Company’s pledge of 66% of the voting equity and 100% of the non-voting equity of certain of its first-tier foreign subsidiaries. Proceeds under the Second Amended and Restated Credit Agreement may be used to finance capital expenditures, working capital, permitted acquisitions and for general corporate purposes.
The Company will pay interest on borrowings made under the Second Amended and Restated Credit Agreement at rates between 1.50 percent and 3.25 percent above LIBOR based on the Company’s total leverage ratio. Borrowings under the Second Amended and Restated Credit Agreement are scheduled to mature on July 18, 2022.
The Second Amended and Restated Credit Agreement contains customary conditions, representations and warranties, affirmative and negative covenants, mandatory prepayment provisions and events of default. The covenants include certain financial covenants requiring the Company to maintain compliance with a maximum senior leverage ratio, a maximum total leverage ratio, a minimum interest coverage ratio and minimum liquidity requirement, and provisions that limit the ability of the Company and its subsidiaries to incur debt, make investments, sell assets, create liens, engage in transactions with affiliates, engage in mergers and acquisitions, pay dividends and other restricted payments, grant negative pledges and change their business activities.
As of September 30, 2017, an amount of $101,168 was outstanding on the Revolving Credit Facility.
The July 18, 2017 amendment to the Prior Credit Facility replaced the Term Notes and related excess cash flow payment obligations with a revolving line of credit. The Company’s condensed consolidated balance sheets reflect these changes as of September 30, 2017 with no resulting portion of debt related to the revolving credit facility being classified as short-term, in accordance with the term of the amended and restated Credit Agreement.
Cash Flows
The following table presents information regarding our cash flows and cash, and cash equivalents and restricted cash for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Nine Months Ended |
| Six Months Ended | |||||||||
|
| September 30, |
| June 30, | |||||||||
|
| 2017 |
| 2016 |
| 2018 |
| 2017 | |||||
|
| (in thousands) |
| (in thousands) | |||||||||
Net cash provided by operating activities |
| $ | 71,603 |
| $ | 53,350 |
| $ | 40,954 |
| $ | 35,187 | |
Net cash used in investing activities |
|
| (22,092) |
|
| (37,688) |
|
| (208,536) |
|
| (14,832) | |
Net cash used in financing activities |
|
| (53,569) |
|
| (16,718) | |||||||
Net cash provided by (used in) financing activities |
|
| 240,299 |
|
| (45,500) | |||||||
Effect of exchange rate on changes on cash |
|
|
| 170 |
|
| — |
|
| (572) |
|
| 283 |
Net decrease in cash and cash equivalents |
|
| (3,888) |
|
| (1,056) |
|
| 72,145 |
|
| (24,862) | |
Cash and cash equivalents, end of period |
|
| 48,704 |
|
| 50,662 | |||||||
Cash, cash equivalents and restricted cash, end of period |
|
| 134,260 |
|
| 29,730 |
Operating Activities
Net cash provided by operating activities for the ninesix months ended SeptemberJune 30, 2017 increased2018 was $40,954 as compared to net cash provided by $18,253 compared tooperating activities of $35,187 for the same period in 2016,2017. The increase was primarily due to increasesnet income of $2,011 in the six months ended June 30, 2018 compared to a net loss of $19,605 for the six months ended June 30, 2017, an increase in depreciation and amortization of $7,431, an increase in stock based compensation of $3,568, partially offset by the change in deferred income taxes of $16,919, changes$23,617 and a net decrease in the change in operating assets and liabilities of $2,389 and net income of $2,068, offset by decreases in depreciation and amortization of $3,080 and stock-based compensation expense of $2,421.$5,376.
51
Investing Activities
Net cash used in investing activities for the ninesix months ended SeptemberJune 30, 2017 decreased by $15,5962018 was $208,536 compared to net cash used in investing activities of $14,832 for the same period in 2016.2017. The decrease ischange was primarily a result of a decreasean increase in cash disbursements for acquisitions of $18,394, offset by increases$188,345 combined with an increase in capitalization of internally developed software of $2,993.$4,971.
Financing Activities
Net cash provided by financing activities for the six months ended June 30, 2018 was $240,299 compared to net cash used in financing activities of $45,500 for the nine months ended September 30, 2017 increased $36,851 compared to the same period in 2016.2017. The change was primarily the result of increases in payments on Termproceeds from issuance of the Convertible Notes due 2023 of $29,862$345,000 and payments on the revolving credit facility of $17,500, offset by an increase in proceeds from borrowings on the revolving credit facility of $10,000.$170,000, partially offset by increases in payments on the revolving credit facility of $251,168, and debt issuance costs paid of $9,488.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Condensed Consolidated Financial Statementscondensed consolidated financial statements and accompanying notes. Note“Note 2 – Summary of Significant Accounting Policies,Policies” to the Consolidated Financial Statementsconsolidated financial statements in our most recent Form 10-K describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements.consolidated financial statements and “Note 4 – Revenue” to the condensed consolidated financial statements in this accompanying Form 10-Q describes the updated accounting policies for revenue recognition, fees receivable including unbilled accounts receivable and deferred sales incentive compensation that were updated as a result of adopting ASC 606. Our critical accounting estimates, identified in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our most recent Form 10-K and “Note 4 – Revenue” to the condensed consolidated financial statements in this accompanying Form 10-Q include, but not limited to, the discussion of estimates used for recognition of revenues,the determination of the period of benefit for deferred sales incentive commissions, purchase accounting, internally developed software, non-cash stock-based compensation expense,impairment of goodwill and acquired intangible assets and income taxes. Such accounting policies and estimates require significant judgments and assumptions to be used in the preparation of the Condensed Consolidated Financial Statements,condensed consolidated financial statements, and actual results could differ materially from the amounts reported.
58
Commitments and Off-Balance Sheet Arrangements
Purchase Obligations and Indemnifications
The Company includes various types of indemnification and guarantee clauses in certain arrangements. These indemnifications and guarantees may include, but are not limited to, infringement claims related to intellectual property, direct or consequential damages and guarantees to certain service providers and service level requirements with certain customers. The type and amount of any potential indemnification or guarantee varies substantially based on the nature of each arrangement. The Company has experienced no previous claims and cannot determine the maximum amount of potential future payments, if any, related to such indemnification and guarantee provisions. The Company believes that it is unlikely it will have to make material payments under these arrangements and therefore has not recorded a contingent liability in the condensed consolidated balance sheets.
The Company enters into unconditional purchase obligations arrangements for certain of its services that it receives in the normal course of business.
Litigation
In December 2014, Yodlee filed a complaint in the United States District Court for the District of Delaware alleging that Plaid Technologies Inc. (“Plaid”) had and was continuing to infringe on seven of Yodlee’s U.S. patents. The complaint sought unspecified monetary damages, enhanced damages, interest, fees, expenses, costs and injunctive relief against Plaid. In May 2016, Plaid filed its answer to Yodlee’s complaint as well as counterclaims seeking declaratory judgment that Yodlee’s patents were not infringed and were invalid and unenforceable. In addition, Plaid’s counterclaims also alleged, among other things, violation of federal antitrust and false advertising laws and unfair competition under California state law and common law. The counterclaims sought unspecified monetary damages, enhanced damages, interest, fees, expenses, costs and injunctive relief against Yodlee. During the course of the litigation, Plaid also filed petitions for review before the Patent Office’s Board of Patent Trials and Appeals against the seven Yodlee patents that were the subject of the lawsuit as well as a petition for reexamination against one of the patents.
On January 31, 2017, Yodlee and Plaid agreed to resolve the lawsuit brought by Yodlee, the counterclaims brought by Plaid and the review petitions brought by Plaid before the Patent Office. Plaid also agreed not to participate further in the reexamination proceedings which the Patent Office may elect to continue without Plaid’s participation. As part of the resolution of the lawsuit, Plaid will license Envestnet’s worldwide patent portfolio.Legal Proceedings
The Company is involved in litigationlegal proceedings arising in the ordinary course of its business. Legal fees and other costs associated with such actions are expensed as incurred. The Company will record a provision for these claims when it is both probable that a liability
52
has been incurred and the amount of the loss, or a range of the potential loss, can be reasonably estimated. These provisions are reviewed regularly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information or events pertaining to a particular case. LitigationLegal proceedings accruals are recorded when and if it is determined that a loss is both probable and reasonably estimable. For litigation matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but if the matter is material, it is subject to disclosures. The Company believes that liabilities associated with any claims, while possible, are not probable, and therefore has not recorded any accrual for any claims as of SeptemberJune 30, 2017.2018. Further, while any possible range of loss cannot be reasonably estimated at this time, the Company does not believe that the outcome of any of these proceedings, individually or in the aggregate, would, if determined adversely to it, have a material adverse effect on its financial condition or business, although an adverse resolution of litigationlegal proceedings could have a material adverse effect on Envestnet’s results of operations or cash flow in a particular quarter or year.
Leases
The Company rents office space under leases that expire at various dates through 2030. FutureAs of June 30, 2018, the Company’s future minimum lease commitments under these operating leases as of September 30, 2017, were as follows:totaled $105,124.
|
|
|
|
Years ending December 31: |
|
|
|
Remainder of 2017 |
| $ | 3,309 |
2018 |
|
| 13,640 |
2019 |
|
| 14,492 |
2020 |
|
| 14,343 |
2021 |
|
| 13,751 |
Thereafter |
|
| 53,538 |
Total |
| $ | 113,073 |
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Market risk
Our exposure to market risk is directly related to asset-based recurring revenues from asset management or administration services earned based upon a contractual percentage of AUM or AUA. In the three and ninesix months ended SeptemberJune 30, 2017,2018, 59% and 60%, respectively, of our revenues were derived from revenues based on the market value of AUM or AUA. We expect this percentage to vary over time. A decrease in the aggregate value of AUM or AUA may cause our revenue to decline and our net lossincome to increase.decrease.
Foreign currency risk
The expenses of our India subsidiary, which primarily consist of expenditures related to compensation and benefits, are paid using the Indian Rupee. We are directly exposed to changes in foreign currency exchange rates through the translation of these monthly expenditures into U.S. dollars. For the three and ninesix months ended SeptemberJune 30, 2017,2018, we estimate that a hypothetical 10% increase in the value of the Indian Rupee to the U.S. dollar would result in a decrease of $991$1,184 and $2,101,$2,363, respectively, to pre‑tax earnings and a hypothetical 10% decrease in the value of the Indian Rupee to the U.S. dollar would result in an increase of $811$969 and $1,719,$1,934, respectively, to pre‑tax earnings.
A portion of our revenues are billed in various foreign currencies. We are directly exposed to changes in foreign currency exchange rates through the translation of these monthly revenues into U.S. dollars. For the three and ninesix months ended SeptemberJune 30, 2017, 2018,
59
we estimate that a hypothetical 10% increasechange in the value of various foreign currencies to the U.S. dollar would result in a corresponding increase or decrease of $742$335 and $2,121, respectively, to pre‑tax earnings. For the three and nine months ended September 30, 2017, we estimate that a hypothetical 10% decrease in the value of various foreign currencies to the U.S. dollar would result in a corresponding increase or decrease of $724 and $2,065,$1,068, respectively, to pre‑tax earnings.
Interest rate risk
We are subject to market risk from changes in interest rates. The Company has a revolving credit facility that bears interest at LIBOR plus an applicable margin between 1.50 percent and 3.25 percent. As the LIBOR rates fluctuate, so too will the interest expense on amounts borrowed under the Amended and Restated Credit Agreement. Interest charged on the revolving credit facility for
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the majority of the thirdsecond quarter of 20172018 was 3.6%approximately 4.5%. As of SeptemberJune 30, 2017,2018, there was $101,168$0 of revolving credit amounts outstanding under the Amended and Restated Credit Agreement. The Company incurred interest expense of $3,795$1,561 and $5,368$4,174 for the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively, related to the Amended and Restated Credit Agreement. A sensitivity analysis performed on the interest expense indicated that a hypothetical 0.25% increase or decrease in our interest rate would increase or decrease interest expense on an annual basis by approximately $286.$448.
Item 4.Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of SeptemberJune 30, 2017.2018. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our management is responsible for establishingBased on their evaluation of our disclosure controls and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. Management concluded there were material weaknesses as identified below in internal control over financial reportingprocedures as of SeptemberJune 30, 2017. The control deficiencies identified below were previously identified by management as of December 31, 2016.
The following control deficiencies were identified as material weaknesses:
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These control deficiencies create a reasonable possibility that a material misstatement to the condensed consolidated financial statements will not be prevented or detected on a timely basis. Due to the material weaknesses described above, our management, including2018, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective as of September 30, 2017.
Remediation Plans
Management, under the supervision of our Audit Committee, is committed to remediating these material weaknesses in a timely fashion. We have begun executing remediation plans that address the material weaknesses in internal control over financial reporting. Specifically, we have hired and continue to actively recruit additional resources including personnel dedicated to providing additional management oversight over the documentation of non-routine accounting matters and accounting for acquisitions and to enhance our expertise in determining the appropriate accounting and reporting in these areas.
In addition, management’s planned actions to further address the material weaknesses include:
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The Audit Committee has directed management to develop a detailed plan and timetable for the implementation of the foregoing remedial measures and will monitor their implementation. In addition, under the direction of the Audit Committee, management will continue to review and make necessary changes to the overall design of our internal control environment, as well as policies and procedures to improve the overall effectiveness of internal control over financial reporting.
Management believes the measures described above and others that may be implemented will remediate the control deficiencies identified and will strengthen our internal control over financial reporting. Management is committed to continuous improvement of our internal control processes and will continue to diligently review our financial reporting controls and procedures. As management continues to evaluate and work to improve internal control over financial reporting, we may take additional measures to address control deficiencies or determine to modify, or in appropriate circumstances not to complete, certain of the remediation measures described above. Subject to the foregoing, we expect these remedial actions and or other remedial actions related to these material weaknesses will be completed in 2017.
If the remedial measures described above are insufficient to address the identified material weaknesses or are not implemented effectively, or additional deficiencies arise in the future, material misstatements in our interim or annual consolidated financial statements may occur in the future. Among other things, any unremediated material weakness could result in material post-closing adjustments in future financial statements. Furthermore, any such unremediated material weakness could have the effects described in “Risk Factors” in Part I, Item 1A of our 2016 Form 10-K that was filed with the Securities and Exchange Commission on March 24, 2017.effective.
Changes in Internal Control Over Financial Reporting
DuringThere were no changes to our internal control over financial reporting during the ninethree months ended SeptemberJune 30, 2017, improvements to the processes of financial reporting have been implemented which include enhanced disclosure preparation and review controls, a condensed financial close process providing an increased time frame to prepare and review financial reporting documents, as well as streamlined financial data aggregation which increases reliance on system driven reports, thereby decreasing the likelihood of human error. In addition, management has reorganized the accounting department as well as increased its overall staffing levels.2018.
During the remainder of the year, the Company will test the design and operating effectiveness of controls designed to remediate certain material weaknesses as discussed above in an effort to remediate the material weaknesses prior to the filing of the 2017 Form 10-K.
During the nine months ended September 30, 2017, the material weakness related to the ineffective design and operation of management review controls over certain assumptions used to measure the fair value of intangible assets purchased in acquisitions has been remediated and the impacted controls were effective at September 30, 2017.
The remedial actions that management undertook in the nine months ended September 30, 2017 to address this material weakness included the following:
•Revised existing controls over certain assumptions used to measure the fair value of intangible assets purchased in acquisitions
•Added specific controls over certain assumptions used to measure the fair value of intangible assets purchased in acquisitions.
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The Company is involved in litigationlegal proceedings arising in the ordinary course of its business. Legal fees and other costs associated with such actions are expensed as incurred. The Company will record a provision for these claims when it is both probable that a liability has been incurred and the amount of the loss, or a range of the potential loss, can be reasonably estimated. These provisions are reviewed regularly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information or events pertaining to a particular case. LitigationLegal proceedings accruals are recorded when and if it is determined that a loss is both probable and reasonably estimable. For litigationlegal proceedings matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but if the matter is material, it is subject to disclosures. The Company believes that liabilities associated with any claims, while possible, are not probable, and therefore has not recorded any accrual for any claims as of SeptemberJune 30, 2017.2018. Further, while any possible range of loss cannot be reasonably estimated at this time, the Company does not believe that the outcome of any of these proceedings, individually or in the aggregate, would, if determined adversely to it, have a material adverse effect on its financial condition or business, although an adverse resolution of litigationlegal proceedings could have a material adverse effect on Envestnet’s results of operations or cash flow in a particular quarter or year.
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Investment in our securities involves risk. An investor or potential investor should consider the risks summarized under the caption “Risk Factors” in Part I, Item 1A of our 20162017 Form 10-K, when making investment decisions regarding our securities. The risk factors that were disclosed in our 20162017 Form 10-K have not materially changed since the date our 20162017 Form 10-K was filed.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Equity Securities
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| that may yet be |
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| of shares |
| price paid |
| announced plans |
| purchased under the |
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| purchased |
| per share |
| or programs |
| plans or programs |
July 1, 2017 through July 31, 2017 |
| 2,531 | $ | 39.16 |
| — |
| 1,956,390 |
August 1, 2017 through August 31, 2017 |
| 29,134 |
| 40.99 |
| — |
| 1,956,390 |
September 1, 2017 through September 30, 2017 |
| 9,022 |
| 43.94 |
| — |
| 1,956,390 |
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| value) of shares |
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| Total number |
| Average |
| as part of publically |
| that may yet be |
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| of shares |
| price paid |
| announced plans |
| purchased under the |
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| purchased |
| per share |
| or programs |
| plans or programs |
April 1, 2018 through April 30, 2018 |
| 5,219 | $ | 53.60 |
| — |
| 1,956,390 |
May 1, 2018 through May 31, 2018 |
| 56,931 |
| 55.23 |
| — |
| 1,956,390 |
June 1, 2018 through June 30, 2018 |
| 28,650 |
| 57.14 |
| — |
| 1,956,390 |
On February 25, 2016, the Company announced that its Board of Directors had authorized a share repurchase program under which the Company may repurchase up to 2,000,000 shares of its common stock. The timing and volume of share repurchases will be determined by the Company’s management based on its ongoing assessments of the capital needs of the business, the market price of its common stock and general market conditions. No time limit has been set for the completion of the repurchase program, and the program may be suspended or discontinued at any time. The repurchase program authorizes the Company to purchase its common stock from time to time in the open market (including pursuant to a “Rule 10b5-1 plan”), in block transactions, in privately negotiated transactions, through accelerated stock repurchase programs, through option or other forward transactions or otherwise, all in compliance with applicable laws and other restrictions. As of SeptemberJune 30, 2017,2018, 1,956,390 of shares could still be purchased under this program.
Item 3.Defaults Upon Senior Securities
None.
Item 4.Mine Safety Disclosures
Not applicable.
None.
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Exhibit |
| Description |
31.1 |
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 |
| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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101.INS |
| XBRL Instance Document * |
101.SCH |
| XBRL Taxonomy Extension Schema Document * |
101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document * |
101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document * |
101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document * |
101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document * |
(1) | The material contained in Exhibit 32.1 and 32.2 is not deemed “filed” with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing, except to the extent that the registrant specifically incorporates it by reference. |
*Attached as Exhibit 101 to this Quarterly Report on Form 10-Q are the following materials, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets as of SeptemberJune 30, 20172018 and December 31, 2016;2017; (ii) the Condensed Consolidated Statements of Operations for the three and ninesix months ended SeptemberJune 30, 20172018 and 2016;2017; (iii) the Condensed Consolidated Statement of Comprehensive LossIncome (Loss) for the three and ninesix months ended SeptemberJune 30, 20172018 and 2016;2017; (iv) the Condensed Consolidated Statement of Equity for the ninesix months ended SeptemberJune 30, 2017;2018; (v) the Condensed Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20172018 and 2016;2017; (vi) Notes to Condensed Consolidated Financial Statements tagged as blocks of text.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on November 9, 2017.August 8, 2018.
| ENVESTNET, INC. | |
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| By: | /s/ Judson Bergman |
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| Judson Bergman |
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| Chairman and Chief Executive Officer |
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| Principal Executive Officer |
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| By: | /s/ Peter H. D’Arrigo |
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| Peter H. D’Arrigo |
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| Chief Financial Officer |
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| Principal Financial Officer |
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| By: | /s/ Matthew J. Majoros |
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| Matthew J. Majoros |
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| Senior Vice President, Financial Reporting |
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| Principal Accounting Officer |
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