L ike a lot of its clients, Envestnet is building financial muscle as the stock market keeps up its strong momentum.Envestnet ( ENV ) provides integrated wealth management software and services to financial advisors.
The company's cloud-based, integrated platform of technology tools and software provides a wide range of applications for things like financial planning and risk profiling, asset allocation, research and due diligence, portfolio diagnostics, and billing and account administration.
Envestnet works with both Independent Registered Investment Advisors and those affiliated with financial institutions.
As of Dec. 31, roughly 40,000 advisors were using its technology platforms, supporting about $713 billion of assets in 2.9 million investor accounts.
Envestnet has been on a roll, adding more advisors to its roster as more of them have gone independent from firms and adopted its services. The company has also benefited from the strength of the stock market, which has helped lift the assets managed by advisors using its platform.
Managing High Profit
Envestnet has logged eight straight quarters of double-digit earnings growth. Analysts polled by Thomson Reuters expect the company will keep up the double-digit pace when it reports first-quarter results May 7 after the close.
Why the strong gains?
"The primary engine of our growth is the growth in the advisors' practices that have fully adopted our solutions," CEO Jud Bergman told IBD. "In any given year about 15% of our top-line growth is the organic growth from the advisors using our technology."
The majority of Envestnet's revenue is asset-based, meaning it's from fees charged as a percentage of the assets that are managed or administered on its technology platforms by financial advisors, according to a company filing with the Securities and Exchange Commission. Asset-based fees accounted for about 84% of revenue in 2014.
"Because they generate about 80% of their revenue as a percentage of the investment assets financial advisors place on their platform, the fact that the stock market has (gone up) for almost four years in a row has provided an important tailwind to their asset base," Avondale Partners analyst Peter Heckmann told IBD. "Their revenue model is similar to that of a mutual fund provider. If the market goes up, their asset base goes up. The fee rate stays the same -- but the higher asset balances generate more revenue."
Envestnet is also seeing organic growth by signing up new advisors and new enterprises, says Bergman. Many times that's done through "conversions" of an existing book of business to Envestnet's platform.
Fourth-quarter adjusted net income per share rose 53% from a year earlier to 23 cents. That represents net income before deferred revenue fair value adjustment, noncash interest expense, noncash compensation expense, restructuring charges and transaction costs and other expenses, Envestnet notes.
Adjusted revenue rose 30% to $96.8 million.
Analysts polled by Thomson Reuters expect the company to report a 29% rise in first-quarter adjusted net income per share to 22 cents. They see revenue rising 23.8% to $97.24 million.
The full-year analyst forecast calls for adjusted net earnings per share to rise 30% and go up 39% in 2017.
"I'm predicting they had a strong (first) quarter in excess of 20% total revenue growth," said Heckmann.
Organic revenue growth is running in the mid-to-high teens, he says. Heckmann expects margins to be up "materially from higher revenue leveraging the relatively fixed costs of the platform."
Why Advisors Use Envestnet
What is Envestnet's value proposition for advisors?
"By unifying the disparate applications for financial advisors, the outcomes, we believe, are better for their end clients," said Bergman. "Advisors that use a fully integrated solution like ours grow their fee-based practices at two to two-and a-half times the rate of average advisors.
"There are a lot of companies that are good at doing one thing well. We don't believe there are any other companies that do all of the necessary things (for financial advisors) well in a completely integrated manner. I don't believe we have very much competition in this way."
Heckmann says the company's main strength is offering a "more flexible option" for advisors.
"Prior to Envestnet, an advisor could go to a third party vendor and get a fixed combination of back-office technology and investment management systems," he said. But typically they required advisors to use all their services and they couldn't "pick and choose."
What Envestnet provides instead "is an open architecture, flexible back-office system," he said. "A lot of financial advisors want to operate their business differently and they don't want to be forced to use a turnkey solution."
Heckmann says another growth driver for Envestnet is "the multi-year dynamic of advisors leaving the big wire-house brokerage firms and going independent, where they immediately need back-office systems to automate their business."
Envestnet has made a handful of acquisitions the past few years. Among them was the February purchase of Upside, a technology company providing digital advice solutions to financial advisors.
Bergman says acquisitions are "an important accelerator" of growth.
"Most of our acquisition activity has been in the area of consolidating acquisitions as opposed to strategic acquisitions," he said.
A consolidating acquisition is one where Envestnet acquires a company that is already doing much of the same things Envestnet is doing, he adds.
"When we acquire companies in the same space, we are able to leverage our core competency of large-scale conversions," he said. "We expect to do more of these over time, and we expect to do more strategic transactions as well."
Envestnet is a part of IBD's Financial Services-Specialty industry group. It leads the group with a Composite Rating of 96 out of a possible 99. Highly rated sizable firms in the group includeEquifax ( EFX ), which holds a Composite Rating of 94, andMSCI ( MSCI ), which has a 90.