Amortization expense was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
| | (in thousands) |
Amortization expense | | $ | 18,649 | | | $ | 17,390 | | | $ | 53,814 | | | $ | 51,370 | |
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Future amortization expense of the Company's intangible assets as of September 30, 2022,2023, is expected to be as follows:follows (in thousands):
| | | | | | | | |
Years ending December 31, | | (in thousands) |
Remainder of 2022 | | $ | 18,087 | |
2023 | | 60,087 | |
2024 | | 53,240 | |
2025 | | 49,900 | |
2026 | | 41,997 | |
Thereafter | | 174,771 | |
Total | | $ | 398,082 | |
| | | | | | | | |
| | |
Remainder of 2023 | | $ | 15,012 | |
2024 | | 55,968 | |
2025 | | 52,573 | |
2026 | | 45,048 | |
2027 | | 36,283 | |
Thereafter | | 141,327 | |
Total | | $ | 346,211 | |
8.Accrued ExpensesDepreciation and Other LiabilitiesAmortization Expense
Accrued expensesDepreciation and other liabilitiesamortization expense consisted of the following:
| | | | | | | | | | | | | | |
| | September 30, | | December 31, |
| | 2022 | | 2021 |
| | | | |
| | (in thousands) |
Accrued investment manager fees | | $ | 104,165 | | | $ | 95,858 | |
Accrued compensation and related taxes | | 70,252 | | | 97,523 | |
| | | | |
Accrued professional services | | 9,112 | | | 7,746 | |
Accrued technology | | 5,563 | | | 8,951 | |
Non-income tax payables | | 2,789 | | | 4,907 | |
| | | | |
Other accrued expenses | | 15,144 | | | 10,174 | |
Total accrued expenses and other liabilities | | $ | 207,025 | | | $ | 225,159 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | | |
| | (in thousands) |
Intangible asset amortization | | $ | 15,124 | | | $ | 18,649 | | | $ | 47,784 | | | $ | 53,814 | |
Internally developed software amortization | | 13,500 | | | 9,441 | | | 36,988 | | | 27,022 | |
Property and equipment depreciation | | 5,687 | | | 5,318 | | | 16,286 | | | 16,372 | |
Total depreciation and amortization | | $ | 34,311 | | | $ | 33,408 | | | $ | 101,058 | | | $ | 97,208 | |
9.DebtGoodwill
The Company’s outstanding debt obligations as of September 30, 2022 and December 31, 2021 were as follows:
| | | | | | | | | | | | | | |
| | September 30, | | December 31, |
| | 2022 | | 2021 |
| | | | |
| | (in thousands) |
Revolving credit facility balance | | $ | — | | | $ | — | |
| | | | |
Convertible Notes due 2023 | | $ | 345,000 | | | $ | 345,000 | |
Unamortized issuance costs on Convertible Notes due 2023 | | (1,419) | | | (2,979) | |
| | | | |
Convertible Notes due 2023 carrying value | | $ | 343,581 | | | $ | 342,021 | |
| | | | |
Convertible Notes due 2025 | | $ | 517,500 | | | $ | 517,500 | |
Unamortized issuance costs on Convertible Notes due 2025 | | (8,494) | | | (10,659) | |
| | | | |
Convertible Notes due 2025 carrying value | | $ | 509,006 | | | $ | 506,841 | |
Third Credit AgreementChanges in the carrying amount of goodwill by reportable segment were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Envestnet Wealth Solutions | | Envestnet Data & Analytics | | Total |
| | | | | | |
| | (in thousands) |
Balance as of December 31, 2022 | | $ | 679,739 | | | $ | 318,675 | | | $ | 998,414 | |
| | | | | | |
| | | | | | |
| | | | | | |
Foreign currency translation | | — | | | (33) | | | (33) | |
Balance as of September 30, 2023 | $ | 679,739 | | | $ | 318,642 | | | $ | 998,381 | |
As part of the annual goodwill impairment analysis, the Company will perform a quantitative goodwill impairment evaluation for each reporting unit as of October 31, 2023. As a result of the segment change described in Note 18—Segment Information and a corresponding adjustment to the composition of reporting units, as well as lower revenue and profits in 2023 compared to prior years in the Envestnet Data & Analytics segment, the Envestnet Data & Analytics reporting unit's goodwill balance may be considered at risk for future impairment. Based on the results of this assessment, if the carrying value of the reporting unit exceeds its fair value, it could result in the recognition of an impairment of goodwill in the fourth quarter of 2023, and such impairment could be material.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
10.Other Assets
On February 4, 2022,January 31, 2023, the Company entered into a Third Amended and Restated Credit Agreement (the “Third Credit Agreement”)Convertible Promissory Note with a groupcustomer of banks (the “Banks”), for which Bank of Montreal is acting as administrative agent. The Third Credit Agreement amends and restates, in its entirety, the Company's prior credit agreement. In connection with entering into the Third Credit Agreement,business, a privately held company, whereby the Company capitalized an additional $1.9was issued a convertible promissory note with a principal amount of $20.0 million and a stated interest rate of deferred8.0% per annum. The Convertible Promissory Note has a maturity date of January 31, 2026 and is convertible into common stock or preferred stock of the privately held company upon qualified financing chargesevents or corporate transactions. During the three and nine months ended September 30, 2023, interest income related to Other non-current assets on the condensed consolidated balance sheets and wrote off $0.6 million of pre-existing finance charges toConvertible Promissory Note included in other expense, net onin the condensed consolidated statements of operations.operations was $0.4 million and $1.1 million, respectively.
In connection with the Convertible Promissory Note, the Company concurrently entered into a call option agreement with the privately held company, which provides the Company an option to acquire the privately held company at a predetermined price as of the earlier of July 2024 or upon satisfaction of certain financial metrics. The financial metrics were met during the three months ended September 30, 2023, however, the Company did not exercise the call option.
The Company accounts for this Convertible Promissory Note as a loan receivable in accordance with ASC 310 - Receivables as it is not a security and includes it in other assets in the condensed consolidated balance sheets. Credit impairment is measured as the difference between this loan receivable’s amortized cost and its estimated recoverable value, which is the present value of its expected future cash flows discounted at the effective interest rate. There was no impairment for this investment during the nine months ended September 30, 2023.
11.Accounts Payable, Accrued Expensesand Other Current Liabilities
Accounts payable, accrued expenses and other current liabilities consisted of the following:
| | | | | | | | | | | | | | |
| | September 30, | | December 31, |
| | 2023 | | 2022 |
| | | | |
| | (in thousands) |
Accrued investment manager fees | | $ | 110,496 | | | $ | 99,851 | |
Accrued compensation and related taxes | | 69,943 | | | 77,939 | |
Accounts payable | | 16,594 | | | 11,271 | |
Accrued professional services | | 9,779 | | | 10,762 | |
Accrued interest | | 5,654 | | | 3,091 | |
Accrued technology | | 5,285 | | | 6,393 | |
| | | | |
| | | | |
| | | | |
Accrued treasury stock purchases | | — | | | 9,289 | |
| | | | |
Other accrued expenses | | 6,634 | | | 15,270 | |
Total accounts payable, accrued expenses and other current liabilities | | $ | 224,385 | | | $ | 233,866 | |
During the nine months ended September 30, 2023, as part of a reduction in force initiative, the Company entered into separation agreements with a number of employees. In connection with this reduction in force initiative that began in the first quarter of 2023, as well as a fourth quarter 2022 organizational realignment, the Company incurred $11.5 million and $25.9 million in total severance expense in the three and nine months ended September 30, 2023, respectively.
As of September 30, 2023 the Company had an ending liability balance of $13.4 million related to these efforts, of which the Company anticipates approximately $10.1 million to be paid during the remainder of 2023, $2.7 million to be paid throughout 2024, with the remaining balance paid through 2030.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
PursuantThe following table presents a reconciliation of the beginning and ending liability balance related to these efforts, which is primarily included within "Accrued compensation and related taxes" in the Third Credit Agreement, the Banks have agreed to provide the Company with a revolving credit facility of $500.0 million (the “Revolving Credit Facility”). The Third Credit Agreement also includes a $20.0 million sub-facility for the issuances of letters of credit. As of September 30, 2022 and December 31, 2021, there were no amounts outstanding under the Revolving Credit Facility.table above.
Obligations under the Third Credit Agreement are guaranteed by substantially all of Envestnet’s U.S. subsidiaries and are secured by a first-priority lien on substantially all of the personal property (other than intellectual property) of Envestnet and the guarantors, subject to certain exclusions. Proceeds under the Third Credit Agreement may be used to finance capital expenditures and permitted acquisitions and for working capital and general corporate purposes. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Envestnet Wealth Solutions | | Envestnet Data & Analytics | | Nonsegment | | Total |
| | | | | | | | |
| | (in thousands) |
Balance as of December 31, 2022 | | $ | 11,929 | | | $ | 3,439 | | | $ | — | | | $ | 15,368 | |
Severance expense | | 9,931 | | | 11,849 | | | 4,124 | | | 25,904 | |
Cash payments | | (14,170) | | | (9,535) | | | (4,124) | | | (27,829) | |
| | | | | | | | |
Balance as of September 30, 2023 | $ | 7,690 | | | $ | 5,753 | | | $ | — | | | $ | 13,443 | |
InSubsequent to September 30, 2023, in connection with the eventreduction in force initiative, the Company has borrowings underentered into separation agreements with a number of employees and incurred an additional $5.6 million in severance expense, of which the Third Credit Agreement, atCompany anticipates approximately $1.8 million to be paid during the Company's option, it will pay interest on these borrowings at a rate equalremainder of 2023 and $3.8 million to either (i) a base rate plus an applicable margin ranging from 0.25% to 1.75% per annum or (ii) an adjusted Term Secured Overnight Financing Rate (“SOFR”) plus an applicable margin ranging from 1.25% to 2.75% per annum, in each case based uponbe paid during the total net leverage ratio, as calculated pursuant to the Credit Agreement. Any borrowings under the Third Credit Agreement will mature on February 4, 2027. There is also a commitment fee at a rate ranging from 0.25% to 0.30% per annum based upon the total net leverage ratio.first quarter of 2024.
As of September 30, 2022, debt issuance costs related to the Third Credit Agreement are presented in prepaid expenses and other non-current assets in the condensed consolidated balance sheets which have outstanding amounts of $0.7 million and $2.3 million, respectively.
12.Debt
The Thirdfollowing tables set forth the carrying value and estimated fair value of the Company's debt obligations as of September 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2023 |
| | Issuance Amount | | Unamortized Issuance Costs | | Carrying Value | | Fair Value (Level II) |
| | | | | | | | |
| | (in thousands) |
| | | | | | | | |
Revolving Credit Facility | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Convertible Notes due 2025 | | 317,500 | | | (3,419) | | | 314,081 | | | 293,875 | |
Convertible Notes due 2027 | | 575,000 | | | (13,691) | | | 561,309 | | | 523,595 | |
Total debt | | $ | 892,500 | | | $ | (17,110) | | | $ | 875,390 | | | $ | 817,470 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Issuance Amount | | Unamortized Issuance Costs | | Carrying Value | | Fair Value (Level II) |
| | | | | | | | |
| | (in thousands) |
| | | | | | | | |
Revolving Credit Facility | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Convertible Notes due 2023 | | 45,000 | | | (114) | | | 44,886 | | | 46,058 | |
Convertible Notes due 2025 | | 317,500 | | | (4,765) | | | 312,735 | | | 293,688 | |
Convertible Notes due 2027 | | 575,000 | | | (15,966) | | | 559,034 | | | 606,119 | |
Total debt | | $ | 937,500 | | | $ | (20,845) | | | $ | 916,655 | | | $ | 945,865 | |
Revolving Credit AgreementFacility
The Revolving Credit Facility 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 total leverage ratio and a minimum interest coverage ratio and a minimum liquidity covenant.ratio. The Company was in compliance with these financial covenants as of September 30, 2022.2023.
As of September 30, 2023 and December 31, 2022 the Company had all $500.0 million available to borrowthere were no amounts outstanding under the Revolving Credit Facility, subjectand all $500.0 million was available to covenant compliance.
Convertible Notes due 2023
In May 2018, the Company issued $345.0 millionborrow as of Convertible Notes due 2023 that mature on June 1, 2023. The Convertible Notes due 2023 bear interest at a rate of 1.75% per annum payable semiannually in arrears on June 1 and December 1 of each year. The Convertible Notes due 2023 are general unsecured obligations, subordinated in right of payment to the Company's obligations under its Credit Agreement.
The effective interest rate of the Convertible Notes due 2023 was approximately 2.4% for the three and nine months ended September 30, 2022 and 2021. The effective interest rate of the Convertible Notes due 2023 is equal to the stated interest rate plus the amortization of the debt issuance costs.
Convertible Notes due 2025
In August 2020, the Company issued $517.5 million of Convertible Notes due 2025 that mature on August 15, 2025. The Convertible Notes due 2025 bear interest at a rate of 0.75% per annum payable semiannually in arrears on February 15 and August 15 of each year. The Convertible Notes due 2025 are general unsecured obligations, subordinated in right of payment to the Company's obligations under its Credit Agreement.
The effective interest rate of the Convertible Notes due 2025 was approximately 1.3% for the three and nine months ended September 30, 2022 and 2021. The effective interest rate of the Convertible Notes due 2025 was equal to the stated interest rate plus the amortization of the debt issuance costs.2023.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
As of September 30, 2023 and December 31, 2022, debt issuance costs related to the Revolving Credit Facility included in prepaid expense and other current assets in the condensed consolidated balance sheets was $0.7 million and $0.7 million, respectively, and included in other assets in the condensed consolidated balance sheets was $1.6 million and $2.2 million, respectively.
Convertible Notes due 2023
The Convertible Notes due 2023 matured on June 1, 2023. Upon maturity, the Company settled the remaining aggregate principal amount on the Convertible Notes due 2023 for $45.0 million. The Convertible Notes due 2023 were paid using a combination of cash on hand and borrowings under the Company's Revolving Credit Facility. No shares of the Company's common stock were issued upon settlement of the Convertible Notes due 2023.
Interest Expense
Interest expense was comprised of the following and is included in other expense, net in the condensed consolidated statements of operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
| | (in thousands) |
Coupon interest | | $ | 2,479 | | | $ | 2,479 | | | $ | 7,439 | | | $ | 7,439 | |
Amortization of issuance costs | | 1,443 | | | 1,443 | | | 4,917 | | | 4,295 | |
Undrawn and other fees | | 320 | | | 320 | | | 951 | | | 948 | |
| | | | | | | | |
| | | | | | | | |
Total interest expense | | $ | 4,242 | | | $ | 4,242 | | | $ | 13,307 | | | $ | 12,682 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | | |
| | (in thousands) |
Convertible Notes interest | | $ | 4,368 | | | $ | 2,479 | | | $ | 13,476 | | | $ | 7,439 | |
Amortization of debt discount and issuance costs | | 1,389 | | | 1,443 | | | 4,258 | | | 4,917 | |
Undrawn and other fees | | 312 | | | 320 | | | 936 | | | 951 | |
Revolving Credit Facility interest | | 133 | | | — | | | 383 | | | — | |
Total interest expense | | $ | 6,202 | | | $ | 4,242 | | | $ | 19,053 | | | $ | 13,307 | |
For eachThe effective interest rate of the three months ended September 30, 2022 and 2021, total interest expense related to the Convertible Notes due 2023 and the Convertible Notes due 2025 (collectively, the "Convertible Notes") was $3.7 million with coupon interest expense of $2.5 million and amortization of debt discount and issuance costs of $1.2 million.
For each of the nine months ended September 30, 2022 and 2021, total interest expense related to the Convertible Notes was $11.1 million with couponequal to the stated interest expense of $7.4 million andrate plus the amortization of the debt discount and issuance costs of $3.7 million.and is set forth below:
| | | | | | | | | | | | | | |
| | September 30, | | September 30, |
| | 2023 | | 2022 |
| | | | |
Convertible Notes due 2023 | | N/A | | 2.4 | % |
Convertible Notes due 2025 | | 1.3 | % | | 1.3 | % |
Convertible Notes due 2027 | | 3.2 | % | | N/A |
10.13.Fair Value Measurements
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 September 30, 20222023 and December 31, 2021,2022, based on the three-tier fair value hierarchy, as defineddescribed in ASC 820, “Fair Value Measurements and Disclosures”:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 |
| | Fair Value | | Level I | | Level II | | Level III |
| | | | | | | | |
| | (in thousands) |
Assets: | | | | | | | | |
Money market funds | | $ | 2,597 | | | $ | 2,597 | | | $ | — | | | $ | — | |
| | | | | | | | |
Assets to fund deferred compensation liability | | 9,690 | | | — | | | — | | | 9,690 | |
Total assets | | $ | 12,287 | | | $ | 2,597 | | | $ | — | | | $ | 9,690 | |
Liabilities: | | | | | | | | |
| | | | | | | | |
Deferred compensation liability | | 7,373 | | | 7,373 | | | — | | | — | |
Total liabilities | | $ | 7,373 | | | $ | 7,373 | | | $ | — | | | $ | — | |
detail within the Company's Annual Report on Form 10-K:
| | | | December 31, 2021 | | | September 30, 2023 |
| | | Fair Value | | Level I | | Level II | | Level III | | | Fair Value | | Level I | | Level II | | Level III |
| | | (in thousands) | | (in thousands) |
Assets: | Assets: | | | | | | | | | Assets: | | | | | | | | |
Money market funds | Money market funds | | $ | 2,684 | | | $ | 2,684 | | | $ | — | | | $ | — | | Money market funds | | $ | 22,701 | | | $ | 22,701 | | | $ | — | | | $ | — | |
| Assets to fund deferred compensation liability | Assets to fund deferred compensation liability | | 11,140 | | | — | | | — | | | 11,140 | | Assets to fund deferred compensation liability | | 10,366 | | | — | | | — | | | 10,366 | |
Total assets | Total assets | | $ | 13,824 | | | $ | 2,684 | | | $ | — | | | $ | 11,140 | | Total assets | | $ | 33,067 | | | $ | 22,701 | | | $ | — | | | $ | 10,366 | |
Liabilities: | Liabilities: | | | | | | | | | Liabilities: | | | | | | | | |
Contingent consideration | | $ | 743 | | | $ | — | | | $ | — | | | $ | 743 | | |
| Deferred compensation liability | Deferred compensation liability | | 10,418�� | | | 10,418 | | | — | | | — | | Deferred compensation liability | | 7,849 | | | 7,849 | | | — | | | — | |
Total liabilities | Total liabilities | | $ | 11,161 | | | $ | 10,418 | | | $ | — | | | $ | 743 | | Total liabilities | | $ | 7,849 | | | $ | 7,849 | | | $ | — | | | $ | — | |
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Fair Value | | Level I | | Level II | | Level III |
| | | | | | | | |
| | (in thousands) |
Assets: | | | | | | | | |
Money market funds | | $ | 2,628 | | | $ | 2,628 | | | $ | — | | | $ | — | |
Assets to fund deferred compensation liability | | 10,074 | | | — | | | — | | | 10,074 | |
Total assets | | $ | 12,702 | | | $ | 2,628 | | | $ | — | | | $ | 10,074 | |
Liabilities: | | | | | | | | |
| | | | | | | | |
Deferred compensation liability | | 8,088 | | | 8,088 | | | — | | | — | |
Total liabilities | | $ | 8,088 | | | $ | 8,088 | | | $ | — | | | $ | — | |
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 when changes in circumstances caused the transfer, in accordance with the Company’s accounting policy regarding the recognition of transfers between levels of the fair value
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
hierarchy. There were no transfers between Levels I, II and III during the three and nine months ended September 30, 20222023 and 2021.2022.
Fair Value of Contingent Consideration Liabilities
The fair value ofAssets Used to Fund the contingent consideration liabilities related to certain of the Company's acquisitions were estimated using a discounted cash flow method with significant inputs that are not observable in the market and thus represents a Level III fair value measurement. The significant inputs in the Company's Level III fair value measurement not supported by market activity included its assessments of expected future cash flows related to these acquisitions and their ability to meet the target performance objectives during the subsequent periods from the date of acquisition, which management believes are appropriately discounted considering the uncertainties associated with these obligations, and are calculated in accordance with the terms of their respective agreements.
The Company will continue to reassess the fair values of the contingent consideration liabilities at each reporting date until settlement. Changes to these estimated fair values will be recognized in the Company's earnings and included in general and administration expenses in the condensed consolidated statements of operations. The Company had contingent consideration liabilities of $0.7 million as of December 31, 2021 which were recorded as a component of Accrued expenses and other liabilities on the condensed consolidated balance sheets. These contingent consideration liabilities were paid in the nine months ended September 30, 2022. The Company had no contingent consideration liabilities as of September 30, 2022.
Fair Value of Deferred Compensation Liability
The table below presents a reconciliation of the assets used to fund the Company's deferred compensation liability, which is measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the period from December 31, 20212022 to September 30, 2022:2023:
| | | | | | | | |
| | Fair Value of Assets Used to Fund Deferred Compensation Liability |
| | |
| | (in thousands) |
Balance atas of December 31, 20212022 | | $ | 11,14010,074 | |
Contributions | | 649 | |
Fair value adjustments and fees | | (2,099)292 | |
Balance atas of September 30, 20222023 | | $ | 9,69010,366 | |
The fair market value of the assets used to fund the Company's deferred compensation liability is based upon the cash surrender value of the Company's life insurance premiums. The value of the assets used to fund the Company's deferred compensation liability, which are included in other non-current assets in the condensed consolidated balance sheets, decreasedincreased due to net lossesgains on the underlying investment vehicles, partially offset by additional funding.vehicles. These lossesgains are recognized in the Company's earnings and included in general and administrationadministrative expenses in the condensed consolidated statements of operations.
Fair Value of Debt Agreements
The Company considered its Convertible Notes to be Level II liabilities atas of September 30, 2023 and December 31, 2022, and used a market approach to calculate their respective fair values. The estimated fair value for each convertible note was determined based on estimated or actual bids and offers in an over-the-counter market on September 30, 2022 (See “Note 9—Debt”).
As of September 30, 20222023 and December 31, 2021, the carrying value of the Convertible Notes due 2023 equaled $343.6 million and $342.0 million,2022, respectively and represented the aggregate principal amount outstanding less the debt issuance costs. As of September 30, 2022 and December 31, 2021, the estimated fair value of the Convertible Notes due 2023 was $338.1 million and $439.9 million, respectively.
As of September 30, 2022 and December 31, 2021, the carrying value of the Convertible Notes due 2025 equaled $509.0 million and $506.8 million, respectively, and represented the aggregate principal amount outstanding less the
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
debt issuance costs. As of September 30, 2022 and December 31, 2021, the estimated fair value of the Convertible Notes due 2025 was $438.6 million and $526.1 million, respectively.(See “Note 12—Debt”).
Fair Value of Other Financial Assets and Liabilities
The Company considered the recorded value of its 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 atas of September 30, 20222023 and December 31, 20212022, based upon the short-term nature of these assets and liabilities.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
11.14.RevenuesRevenue and Cost of RevenuesDirect Expense
Disaggregation of Revenue
The following table presents the Company’s revenuesrevenue by segment disaggregated by major source:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2022 | | 2021 |
| | Envestnet Wealth Solutions | | Envestnet Data & Analytics | | Consolidated | | Envestnet Wealth Solutions | | Envestnet Data & Analytics | | Consolidated |
| | | | | | | | | | | | |
| | (in thousands) |
Revenues: | | | | | | | | | | | | |
Asset-based | | $ | 177,131 | | | $ | — | | | $ | 177,131 | | | $ | 184,008 | | | $ | — | | | $ | 184,008 | |
Subscription-based | | 75,975 | | | 47,772 | | | 123,747 | | | 66,988 | | | 46,584 | | | 113,572 | |
Total recurring revenues | | 253,106 | | | 47,772 | | | 300,878 | | | 250,996 | | | 46,584 | | | 297,580 | |
Professional services and other revenues | | 4,229 | | | 1,588 | | | 5,817 | | | 3,738 | | | 1,735 | | | 5,473 | |
Total revenues | | $ | 257,335 | | | $ | 49,360 | | | $ | 306,695 | | | $ | 254,734 | | | $ | 48,319 | | | $ | 303,053 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2023 | | 2022 |
| | Envestnet Wealth Solutions | | Envestnet Data & Analytics | | Total | | Envestnet Wealth Solutions | | Envestnet Data & Analytics | | Total |
| | | | | | | | | | | | |
| | (in thousands) |
Revenue: | | | | | | | | | | | | |
Asset-based | | $ | 193,901 | | | $ | — | | | $ | 193,901 | | | $ | 177,131 | | | $ | — | | | $ | 177,131 | |
Subscription-based | | 76,813 | | | 38,126 | | | 114,939 | | | 75,975 | | | 47,772 | | | 123,747 | |
Total recurring revenue | | 270,714 | | | 38,126 | | | 308,840 | | | 253,106 | | | 47,772 | | | 300,878 | |
Professional services and other revenue | | 4,313 | | | 3,694 | | | 8,007 | | | 4,229 | | | 1,588 | | | 5,817 | |
Total revenue | | $ | 275,027 | | | $ | 41,820 | | | $ | 316,847 | | | $ | 257,335 | | | $ | 49,360 | | | $ | 306,695 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2022 | | 2021 |
| | Envestnet Wealth Solutions | | Envestnet Data & Analytics | | Consolidated | | Envestnet Wealth Solutions | | Envestnet Data & Analytics | | Consolidated |
| | | | | | | | | | | | |
| | (in thousands) |
Revenues: | | | | | | | | | | | | |
Asset-based | | $ | 571,820 | | | $ | — | | | $ | 571,820 | | | $ | 513,458 | | | $ | — | | | $ | 513,458 | |
Subscription-based | | 218,080 | | | 138,521 | | | 356,601 | | | 197,663 | | | 138,242 | | | 335,905 | |
Total recurring revenues | | 789,900 | | | 138,521 | | | 928,421 | | | 711,121 | | | 138,242 | | | 849,363 | |
Professional services and other revenues | | 13,003 | | | 5,486 | | | 18,489 | | | 10,320 | | | 7,213 | | | 17,533 | |
Total revenues | | $ | 802,903 | | | $ | 144,007 | | | $ | 946,910 | | | $ | 721,441 | | | $ | 145,455 | | | $ | 866,896 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2023 | | 2022 |
| | Envestnet Wealth Solutions | | Envestnet Data & Analytics | | Total | | Envestnet Wealth Solutions | | Envestnet Data & Analytics | | Total |
| | | | | | | | | | | | |
| | (in thousands) |
Revenue: | | | | | | | | | | | | |
Asset-based | | $ | 556,595 | | | $ | — | | | $ | 556,595 | | | $ | 571,820 | | | $ | — | | | $ | 571,820 | |
Subscription-based | | 228,807 | | | 118,170 | | | 346,977 | | | 218,080 | | | 138,521 | | | 356,601 | |
Total recurring revenue | | 785,402 | | | 118,170 | | | 903,572 | | | 789,900 | | | 138,521 | | | 928,421 | |
Professional services and other revenue | | 17,866 | | | 6,550 | | | 24,416 | | | 13,003 | | | 5,486 | | | 18,489 | |
Total revenue | | $ | 803,268 | | | $ | 124,720 | | | $ | 927,988 | | | $ | 802,903 | | | $ | 144,007 | | | $ | 946,910 | |
The following table presents the Company’s revenuesrevenue disaggregated by geography, based on the billing address of the customer:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
| | (in thousands) |
United States | | $ | 300,465 | | | $ | 298,022 | | | $ | 931,465 | | | $ | 851,683 | |
International | | 6,230 | | | 5,031 | | | 15,445 | | | 15,213 | |
Total revenues | | $ | 306,695 | | | $ | 303,053 | | | $ | 946,910 | | | $ | 866,896 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | | |
| | (in thousands) |
United States | | $ | 311,045 | | | $ | 300,465 | | | $ | 911,205 | | | $ | 931,465 | |
International | | 5,802 | | | 6,230 | | | 16,783 | | | 15,445 | |
Total revenue | | $ | 316,847 | | | $ | 306,695 | | | $ | 927,988 | | | $ | 946,910 | |
Remaining Performance Obligations
As of September 30, 2023, the Company's estimated revenue expected to be recognized in the future related to performance obligations associated with existing customer contracts that are partially or wholly unsatisfied is approximately $567.0 million. We expect to recognize approximately 12% of this revenue during the remainder of 2023, approximately 61% throughout 2024 and 2025, with the balance recognized thereafter. These remaining performance obligations are not indicative of revenue for future periods.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Remaining Performance Obligations
The following table includes estimated revenue expected to be recognized in the future as of September 30, 2022:
| | | | | | | | |
Years ending December 31, | | (in thousands) |
Remainder of 2022 | | $ | 73,189 | |
2023 | | 212,908 | |
2024 | | 126,098 | |
2025 | | 73,464 | |
2026 | | 40,655 | |
Thereafter | | 16,890 | |
Total | | $ | 543,204 | |
The remaining performance obligations disclosed above are not indicative of revenue for future periods.
Remaining performance obligations represent the transaction price allocated to unsatisfied or partially satisfied performance obligations. The disclosure includes estimates of variable consideration. The Company applies the practical expedients and exemption not to 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
Total deferred revenue as of September 30, 2022 increased2023 decreased by $2.9$4.0 million from December 31, 2021,2022, primarily the result of revenue growth, timing of cash receipts and revenue recognition. The majority of the Company's deferred revenue will be recognized over the course of the next twelve months.
The amount of revenue recognized for the three months ended September 30, 2023 and 2022 that was included in the opening deferred revenue balance was $5.5$5.4 million and $5.3$5.5 million, for the three months ended September 30, 2022 and 2021, respectively. The amount of revenue recognized for the nine months ended September 30, 2023 and 2022, that was included in the opening deferred revenue balance was $31.7$33.6 million and $31.6$31.7 million, for the nine months ended September 30, 2022 and 2021, respectively. The majority of this revenue consists of subscription-based services and professional services arrangements. The amount of revenue recognized from performance obligations satisfied in prior periods was not material.
Deferred Sales Incentive Compensation
Deferred sales incentive compensation was $11.0$11.7 million and $11.8$11.0 million as of September 30, 20222023 and December 31, 2021,2022, respectively. Amortization expense for the deferred sales incentive compensation was $1.0$1.1 million and $1.2$1.0 million for the three months ended September 30, 2023 and 2022, and 2021.respectively. Amortization expense for the deferred sales incentive compensation was $3.2$3.4 million and $3.3$3.2 million for the nine months ended September 30, 2023 and 2022, and 2021.respectively. Deferred sales incentive compensation is included in other non-current assets onin the condensed consolidated balance sheets and amortization expense is included in employee compensation and benefits expenses onexpense in the condensed consolidated statements of operations. No significant impairment loss for capitalized costs was recorded during the periods.nine months ended September 30, 2023 and 2022.
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 in the condensed consolidated statements of operations.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Cost of RevenuesDirect Expense
The following table summarizes cost of revenuesdirect expense by revenue category:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
| | (in thousands) |
Asset-based | | $ | 102,409 | | | $ | 102,298 | | | $ | 332,138 | | | $ | 281,829 | |
Subscription-based | | 7,768 | | | 7,355 | | | 22,820 | | | 20,986 | |
Professional services and other | | (69) | | | 183 | | | 6,914 | | | 384 | |
Total cost of revenues | | $ | 110,108 | | | $ | 109,836 | | | $ | 361,872 | | | $ | 303,199 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | | |
| | (in thousands) |
Asset-based | | $ | 112,938 | | | $ | 102,409 | | | $ | 324,093 | | | $ | 332,138 | |
Subscription-based | | 6,974 | | | 7,768 | | | 20,269 | | | 22,820 | |
Professional services and other | | (374) | | | (69) | | | 7,662 | | | 6,914 | |
Total direct expense | | $ | 119,538 | | | $ | 110,108 | | | $ | 352,024 | | | $ | 361,872 | |
12.15.Stock-Based Compensation
The Company has stock options, restricted stock units (“RSUs”)RSUs and performance-based stock units (“PSUs”)PSUs outstanding under the 2010 Long-Term Incentive Plan (the “2010 Plan”) and the Envestnet, Inc. 2019 Acquisition Equity Incentive Plan (the “2019 Equity Plan”).
Plan. As of September 30, 2022,2023, the maximum number of common shares available for future issuance under the Company’sCompany's plans is 2,538,508.1,701,899.
Stock-based compensation expense under the Company’s plans was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
| | (in thousands) |
Stock-based compensation expense | | $ | 17,265 | | | $ | 18,512 | | | $ | 61,831 | | | $ | 49,934 | |
Tax effect on stock-based compensation expense | | (4,403) | | | (4,720) | | | (15,767) | | | (12,733) | |
Net effect on income | | $ | 12,862 | | | $ | 13,792 | | | $ | 46,064 | | | $ | 37,201 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | | |
| | (in thousands) |
Stock-based compensation expense | | $ | 17,298 | | | $ | 17,265 | | | $ | 58,141 | | | $ | 61,831 | |
Tax effect on stock-based compensation expense | | (4,411) | | | (4,403) | | | (14,826) | | | (15,767) | |
Net effect on income (loss) | | $ | 12,887 | | | $ | 12,862 | | | $ | 43,315 | | | $ | 46,064 | |
The tax effect on stock-based compensation expense above was calculated using a blended statutory rate of 25.5% for each of the three and nine months ended September 30, 20222023 and 2021.
Stock Options
The Company did not grant any stock options in the three and nine months ended September 30, 2021 or 2022. 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 |
| | | | | | | | (in thousands) |
Outstanding as of December 31, 2021 | | 365,241 | | | $ | 38.61 | | | 3.3 | | $ | 14,878 | |
| | | | | | | | |
Exercised | | (78,802) | | | 32.49 | | | | | |
Forfeited | | (4,904) | | | 72.96 | | | | | |
Outstanding as of September 30, 2022 | | 281,535 | | | 39.73 | | | 2.4 | | 2,496 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Options exercisable | | 281,303 | | | $ | 39.69 | | | 2.4 | | $ | 2,496 | |
Exercise prices of stock options outstanding as of September 30, 2022 range from $15.34 to $74.83. At September 30, 2022, there was an immaterial amount of unrecognized stock-based compensation expense related to unvested stock options, which the Company expects to recognize over a weighted-average period of 0.8 years.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Stock Options
The following table summarizes option activity under the Company’s plans:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Weighted- | | Weighted-Average | | |
| | | | Average | | Remaining | | Aggregate |
| | Options | | Exercise Price | | Contractual Life | | Intrinsic Value |
| | | | | | | | |
| | | | | | (in years) | | (in thousands) |
Outstanding as of December 31, 2022 | | 277,535 | | $ | 40.07 | | | 2.2 | | $ | 6,005 | |
| | | | | | | | |
Exercised | | (52,376) | | $ | 19.97 | | | | | |
Forfeited | | (2,938) | | $ | 55.00 | | | | | |
Outstanding as of September 30, 2023 | | 222,221 | | $ | 44.61 | | | 1.7 | | $ | 1,067 | |
Options exercisable as of September 30, 2023 | | 222,221 | | $ | 44.61 | | | 1.7 | | $ | 1,067 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
As of September 30, 2023, there was an immaterial amount of unrecognized stock-based compensation expense related to stock options.
Restricted Stock Units and Performance Stock Units
The Company has granted restricted stock unitsfollowing table summarizes RSU and performance-based stock units to employees that are unvested. Performance-based stock units vest upon the achievement of certain pre-established business and financial metrics as well as a subsequent service condition. The business and financial metrics governing the vesting of these performance-based stock units provide thresholds that dictate the number of shares to vest upon each evaluation date, which range from 0% to 150%. If these metrics are achieved, as defined in the individual grant terms, these shares would cliff vest three years from the grant date.
The following is a summary of thePSU activity for unvested restricted stock units and performance-based stock units granted under the Company’s plans:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | RSUs | | PSUs |
| | Number of Shares | | Weighted- Average Grant Date Fair Value per Share | | Number of Shares | | Weighted- Average Grant Date Fair Value per Share |
Outstanding as of December 31, 2021 | | 1,507,424 | | | $ | 71.50 | | | 359,184 | | | $ | 73.64 | |
Granted | | 1,385,937 | | | 73.31 | | | 113,269 | | | 68.51 | |
Vested | | (759,930) | | | 70.79 | | | (148,904) | | | 66.33 | |
Forfeited | | (262,510) | | | 73.05 | | | (57,987) | | | 77.53 | |
Outstanding as of September 30, 2022 | | 1,870,921 | | | 72.91 | | | 265,562 | | | 74.70 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | RSUs | | PSUs |
| | Number of Shares | | Weighted- Average Grant Date Fair Value per Share | | Number of Shares | | Weighted- Average Grant Date Fair Value per Share |
| | | | | | | | |
Non-vested as of December 31, 2022 | | 1,681,976 | | | $ | 72.69 | | | 259,049 | | | $ | 74.83 | |
Granted | | 1,101,448 | | | $ | 61.13 | | | 40,010 | | | $ | 69.47 | |
Vested | | (849,920) | | | $ | 72.99 | | | (21,994) | | | $ | 104.96 | |
Forfeited | | (210,336) | | | $ | 62.64 | | | (51,062) | | | $ | 65.13 | |
Non-vested as of September 30, 2023 | | 1,723,168 | | | $ | 66.38 | | | 226,003 | | | $ | 73.14 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
AtAs of September 30, 2022,2023, there was $109.2$89.8 million of unrecognized stock-based compensation expense related to unvested restricted stock units,RSUs, which the Company expects to recognize over a weighted-average period of 2.01.8 years. AtAs of September 30, 2022,2023, there was $6.4$3.8 million of unrecognized stock-based compensation expense related to unvested performance-based restricted stock units,PSUs, which the Company expects to recognize over a weighted-average period of 1.7 years.1.0 year.
13.16. Income Taxes
The following table includes the Company’s income (loss)loss before income tax provision (benefit), income tax provision (benefit) and effective tax rate:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
| | (in thousands, except for effective tax rate) |
Income (loss) before income tax provision (benefit) | | $ | (6,392) | | | $ | 10,584 | | | $ | (49,181) | | | $ | 27,078 | |
Income tax provision (benefit) | | 2,271 | | | (854) | | | (1,542) | | | 9,074 | |
Effective tax rate | | (35.5) | % | | (8.1) | % | | 3.1 | % | | 33.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | | |
| | (in thousands, except for effective tax rate) |
Loss before income tax provision (benefit) | | $ | (3,768) | | | $ | (6,392) | | | $ | (45,474) | | | $ | (49,181) | |
Income tax provision (benefit) | | $ | (8,824) | | | $ | 2,271 | | | $ | 15,363 | | | $ | (1,542) | |
Effective tax rate | | 234.2 | % | | (35.5) | % | | (33.8) | % | | 3.1 | % |
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Under ASC 740-270-25, the Company is required to report income tax expense by applying a projected annual effective tax rate ("AETR")AETR to ordinary pre-tax book income for the interim period. The tax impact of discrete items is accounted for separately in the period in which they occur. The effective tax rate ("ETR")ETR for the quarter is the result of the projected AETR applied to actual pre-tax book income plus discrete items as a percentage of pre-tax book income. Therefore, a change in pre-tax book income, either forecasted or actual year-to-date, from one period to the next will cause the ETR to change.
For the three and nine months ended September 30, 2022 and 2021,2023, the Company's ETReffective tax rate was impacted by the change in forecasted and actual year-to-date pre-tax book income.
For the three and nine months ended September 30, 2022,2023, the Company’s effective tax rate differed from the statutory rate primarily due to the increase in the valuation allowance the Company has placed on a portion of its U.S. deferred tax assets which includes the impact of the Redi2 and Truelytics acquisitions and IRC Section 174, permanent book-tax differences, uncertain tax positions and the impact of state and local taxes offset by federal and state research and development ("R&D")&D credits.
For the three and nine months ended September 30, 2022, the Company's effective tax rate differed from the statutory rate primarily due to the increase in the valuation allowance the Company has placed on a portion of its U.S. deferred tax assets
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
which includes the impact of the Redi2 and Truelytics acquisitions and IRC Section 174, permanent book-tax differences, the impact of state and local taxes offset by federal and state R&D credits and the partial reserve release of an uncertain tax position due to the expiration of a statute of limitations.
For the three months ended September 30, 2021, the Company's effective tax rate differed from the statutory rate primarily due to the increase in forecasted book income for the year, the decrease in the valuation allowance the Company has placed on a portion of its U.S. deferred tax assets, including the valuation allowance impact of the acquisition of Harvest Savings & Wealth Technologies ("Harvest") in April 2021, and the windfall from stock-based compensation.
For the nine months ended September 30, 2021, the Company's effective tax rate differed from the statutory rate primarily due to the increase in the valuation allowance the Company has placed on a portion of its U.S. deferred tax assets, including the valuation allowance impact of the Harvest acquisition, permanent book-tax differences, and the impact of state and local taxes offset by federal and state R&D credits.
Inflation Reduction Act of 2022
On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022, ("IRA"), which, among other things, implements a 15% minimum tax on book income of certain large corporations and a 1% excise tax on net stock repurchases. The provisions of the IRA areInflation Reduction Act of 2022 became effective beginning in 2023. The Company is currently evaluating the impacts of this actdoes not anticipate a material impact on the consolidated financial statements.
14.17.Net Income (Loss) Per Share
BasicThe following table provides the numerators and denominators used in computing basic and diluted net income (loss) attributable to Envestnet, Inc., per common share is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding for the period. For the calculation of diluted net income (loss)per share, the basic weighted average number of shares is increased by the dilutive effect of stock options, common warrants, restricted stock awards and restricted stock units and convertible notes, if dilutive, using either the treasury method or if-converted method as appropriate.share:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | | |
| | (in thousands, except per share and per share data) |
Net income (loss) attributable to Envestnet, Inc. | | $ | 7,091 | | | $ | (7,290) | | | $ | (55,553) | | | $ | (44,434) | |
Weighted average common shares outstanding: | | | | | | | | |
Basic | | 54,562,270 | | | 55,226,777 | | | 54,380,231 | | | 55,109,387 | |
Effect of dilutive shares: | | | | | | | | |
| | | | | | | | |
Non-vested RSUs and PSUs | | 361,982 | | | — | | | — | | | — | |
Options to purchase common stock | | 46,364 | | | — | | | — | | | — | |
| | | | | | | | |
Diluted | | 54,970,616 | | | 55,226,777 | | | 54,380,231 | | | 55,109,387 | |
Net income (loss) attributable to Envestnet, Inc., per share: | | | | | | | | |
Basic | | $ | 0.13 | | | $ | (0.13) | | | $ | (1.02) | | | $ | (0.81) | |
Diluted | | $ | 0.13 | | | $ | (0.13) | | | $ | (1.02) | | | $ | (0.81) | |
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
The following table provides the numerators and denominators used in computing basic and diluted net income (loss) per share attributable to Envestnet, Inc.:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
| | (in thousands, except share and per share data) |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Net income (loss) attributable to Envestnet, Inc. (a) | | $ | (7,290) | | | $ | 11,740 | | | $ | (44,434) | | | $ | 18,405 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Weighted-average common shares outstanding: | | | | | | | | |
Basic (b) | | 55,226,777 | | | 54,547,858 | | | 55,109,387 | | | 54,400,247 | |
Effect of dilutive shares: | | | | | | | | |
Options to purchase common stock | | — | | | 201,103 | | | — | | | 207,281 | |
Unvested restricted stock units | | — | | | 570,515 | | | — | | | 614,005 | |
| | | | | | | | |
Warrants | | — | | | 69,151 | | | — | | | 66,439 | |
Diluted (c) | | 55,226,777 | | | 55,388,627 | | | 55,109,387 | | | 55,287,972 | |
| | | | | | | | |
Net income (loss) per share attributable to Envestnet, Inc common stock: | | | | | | | | |
Basic (a/b) | | $ | (0.13) | | | $ | 0.22 | | | $ | (0.81) | | | $ | 0.34 | |
Diluted (a/c) | | $ | (0.13) | | | $ | 0.21 | | | $ | (0.81) | | | $ | 0.33 | |
Securities that were anti-dilutive and therefore excluded from the computation of diluted net income (loss) per share were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | (in thousands) |
Options to purchase common stock | | 281,535 | | | — | | | 281,535 | | | — | |
Unvested RSUs and PSUs | | 2,136,483 | | | — | | | 2,136,483 | | | — | |
Warrants | | 470,000 | | | — | | | 470,000 | | | — | |
Convertible Notes | | 9,898,549 | | | 9,898,549 | | | 9,898,549 | | | 9,898,549 | |
Total anti-dilutive securities | | 12,786,567 | | | 9,898,549 | | | 12,786,567 | | | 9,898,549 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | | |
Convertible Notes | | 10,811,884 | | | 9,898,549 | | | 11,176,254 | | | 9,898,549 | |
Non-vested RSUs and PSUs | | — | | | 2,136,483 | | | 1,949,171 | | | 2,136,483 | |
Options to purchase common stock | | — | | | 281,535 | | | 222,221 | | | 281,535 | |
Warrants | | — | | | 470,000 | | | — | | | 470,000 | |
Total anti-dilutive securities | | 10,811,884 | | | 12,786,567 | | | 13,347,646 | | | 12,786,567 | |
15.18.Segment Information
Business segments are generally organized around the Company's business services. The Company's business segments are:
•Envestnet Wealth Solutions – a leading provider of unified wealth management software and services to empower financial advisors and institutions to enable them to deliver an intelligent financial life to their clients.
•Envestnet Data & Analytics – a leading data aggregation, intelligence, and experiences platform that powers data connectivity and business intelligence across digital financial services to enable them to deliver an Intelligent Financial Lifeintelligent financial life to their clients.
Subsequent to September 30, 2023, the Company changed the composition of its reportable segments to reflect the way that the Company's chief operating decision maker reviews the operating results, assesses performance and allocates resources. As a result, the advisor-focused Wealth Analytics business has been reclassified from the Envestnet Data & Analytics segment to the Envestnet Wealth Solutions segment. The segment changes do not impact nonsegment results or the Company's consolidated balance sheets, consolidated statements of operations or consolidated statements of cash flows.
All segment information presented within this quarterly report on Form 10-Q for the quarter ended September 30, 2023 is presented in conjunction with the historical organizational structure as that is the organizational structure in place as of the balance sheet date of September 30, 2023.
The information in the following tables is derived from the Company’s internal financial reporting used for corporate management purposes. Nonsegment operating expenses may include salary and benefits for certain corporate officers, certain types of professional service expenses and insurance, acquisition related transaction costs, certain restructuring charges and other non-recurring and/or non-operationally related expenses. Intersegment revenues wererevenue was not material for the three and nine months ended September 30, 20222023 and 2021.2022.
See “Note 11—Revenues14—Revenue and Cost of Revenues”Direct Expense” for detail of revenuesrevenue by segment.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
The following table presents a reconciliation from income (loss) from operations by segment to consolidated net income (loss) attributable to Envestnet, Inc.:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
| | (in thousands) |
Envestnet Wealth Solutions | | $ | 20,607 | | | $ | 34,386 | | | $ | 49,844 | | | $ | 101,042 | |
Envestnet Data & Analytics | | 74 | | | 1,265 | | | (9,218) | | | 3,896 | |
Nonsegment operating expenses | | (21,727) | | | (21,516) | | | (80,116) | | | (63,057) | |
Income (loss) from operations | | (1,046) | | | 14,135 | | | (39,490) | | | 41,881 | |
Other expense, net | | (5,346) | | | (3,551) | | | (9,691) | | | (14,803) | |
Consolidated income (loss) before income tax benefit | | (6,392) | | | 10,584 | | | (49,181) | | | 27,078 | |
Income tax provision (benefit) | | 2,271 | | | (854) | | | (1,542) | | | 9,074 | |
Consolidated net income (loss) | | (8,663) | | | 11,438 | | | (47,639) | | | 18,004 | |
Add: Net loss attributable to non-controlling interest | | 1,373 | | | 302 | | | 3,205 | | | 401 | |
Consolidated net income (loss) attributable to Envestnet, Inc. | | $ | (7,290) | | | $ | 11,740 | | | $ | (44,434) | | | $ | 18,405 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | | |
| | (in thousands) |
Envestnet Wealth Solutions | | $ | 31,392 | | | $ | 20,607 | | | $ | 78,254 | | | $ | 49,844 | |
Envestnet Data & Analytics | | (9,115) | | | 74 | | | (27,888) | | | (9,218) | |
Nonsegment operating expenses | | (21,676) | | | (21,727) | | | (76,134) | | | (80,116) | |
Income (loss) from operations | | 601 | | | (1,046) | | | (25,768) | | | (39,490) | |
Other expense, net | | (4,369) | | | (5,346) | | | (19,706) | | | (9,691) | |
Consolidated loss before income tax provision (benefit) | | (3,768) | | | (6,392) | | | (45,474) | | | (49,181) | |
Income tax provision (benefit) | | (8,824) | | | 2,271 | | | 15,363 | | | (1,542) | |
Consolidated net income (loss) | | 5,056 | | | (8,663) | | | (60,837) | | | (47,639) | |
Add: Net loss attributable to non-controlling interest | | 2,035 | | | 1,373 | | | 5,284 | | | 3,205 | |
Consolidated net income (loss) attributable to Envestnet, Inc. | | $ | 7,091 | | | $ | (7,290) | | | $ | (55,553) | | | $ | (44,434) | |
AThe following table presents a summary of consolidated total assets follows:by segment:
| | | | | | | | | | | | | | |
| | September 30, | | December 31, |
| | 2022 | | 2021 |
| | | | |
| | (in thousands) |
Envestnet Wealth Solutions | | $ | 1,558,756 | | | $ | 1,720,779 | |
Envestnet Data & Analytics | | 644,465 | | | 520,403 | |
Consolidated total assets | | $ | 2,203,221 | | | $ | 2,241,182 | |
| | | | | | | | | | | | | | |
| | September 30, | | December 31, |
| | 2023 | | 2022 |
| | | | |
| | (in thousands) |
Envestnet Wealth Solutions | | $ | 1,456,849 | | | $ | 1,503,646 | |
Envestnet Data & Analytics | | 574,040 | | | 608,519 | |
Consolidated total assets | | $ | 2,030,889 | | | $ | 2,112,165 | |
16.Geographical Information
The following table sets forth certain long-lived assets including property and equipment, net and internally developed software, net by geographic area:
| | | | | | | | | | | | | | |
| | September 30, | | December 31, |
| | 2022 | | 2021 |
| | | | |
| | (in thousands) |
United States | | $ | 230,990 | | | $ | 180,680 | |
India | | 2,223 | | | 2,923 | |
Other | | 133 | | | 271 | |
Total long-lived assets, net | | $ | 233,346 | | | $ | 183,874 | |
See “Note 11—Revenues and Cost of Revenues” for detail of revenues by geographic area.
17.19.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 associated with these arrangements in the condensed consolidated balance sheets.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
The Company enters into unconditional purchase obligations arrangements for certain of its services that it receives in the normal course of business.
Procurement of Technology Solutions
On April 1, 2022, the Company entered into a purchase agreement with a privately held company to acquire the technology solutions being developed by this privately held company for a purchase price of $9.0 million. The Company has paid a $4.0 million advance during the nine months ended September 30, 2022. This advance is included in other non-current assets in the condensed consolidated balance sheets.
Legal Proceedings
The Company and its subsidiary, Yodlee, Inc. (“Yodlee”), have been named as defendants in a lawsuit filed on July 17, 2019, by FinancialApps LLC (“FinancialApps”) in the United States District Court for the District of Delaware. The case caption is FinancialApps, LLC v. Envestnet Inc., et al., No. 19-cv-1337 (D. Del.). FinancialApps alleges that, after entering into a 2017 services agreement with Yodlee, Envestnet and Yodlee breached the agreement and misappropriated proprietary information to develop competing credit risk assessment software. The complaint includes claims for, among other things, misappropriation of trade secrets, fraud, tortious interference with prospective business opportunities, unfair competition, copyright infringement and breach of contract. FinancialApps is seeking significant monetary damages and various equitable and injunctive relief.
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
On September 17, 2019, the Company and Yodlee filed a motion to dismiss certain of the claims in the complaint filed by FinancialApps, including the copyright infringement, unfair competition and fraud claims. On August 25, 2020, the District Court granted in part and denied in part the Company and Yodlee’s motion. Specifically, the Company and Yodlee prevailed on FinancialApps’ counts alleging copyright infringement and violations of the Illinois Deceptive Trade Practices Act. And while the Court was receptive to Envestnet and Yodlee’s argument that several of FinancialApps’ other counts are based on allegations that amount to copyright infringement—and therefore should fail due to copyright preemption—the Court found that FinancialApps had alleged enough conduct distinct from copyright infringement to survive dismissal at this early stage.
On October 30, 2019, the Company and Yodlee filed counterclaims against FinancialApps. Yodlee alleges that FinancialApps fraudulently induced it to enter into contracts with FinancialApps, then breached those contracts. FinancialApps has filed a motion to dismiss Yodlee’s counterclaims. On September 15, 2020, the District Court denied FinancialApps’ motion on all counts except for the breach-of-contract claim which was dismissed on a pleading technicality without prejudice. On that count, the Court granted Yodlee leave to amend its counterclaim, cure the technical deficiency, and reassert its claim. Yodlee and Envestnet filed amended counterclaims on September 30, 2020. The amended counterclaims (1) cure that technical deficiency and reassert Yodlee’s contract counterclaim; and (2) broaden the defamation counterclaims arising out of various defamatory statements FinancialApps disseminated in the trade press after filing the lawsuit. On January 14, 2021, the Court ordered that (i) FinancialApps’sFinancialApps' claims against Yodlee—as well as Yodlee’s counterclaims against FinancialApps—must be tried before the judge instead of a jury pursuant to a jury waiver provision in the parties’ agreement; and (ii) FinancialApps’sFinancialApps' claims against Envestnet (and Envestnet’s counterclaim) must be heard by a jury. The Court has scheduled the Envestnet jury trial to take place before the Yodlee bench trial. Fact discovery closed on April 23, 2021, other than a few outstanding matters, and expert discovery concluded on September 30, 2022.
The parties’ respective summary judgment and motions to exclude the presentation of expert testimony (a “Daubert Motion”) are fully briefed and are awaiting final ruling. On July 25, 2023, the Magistrate Judge issued a report and recommendation that the Court grant FinancialApps’ summary judgment motion on Envestnet’s defamation counterclaim. The Magistrate Judge did not make a ruling as to Yodlee’s defamation counterclaim. On July 28, 2023, the Magistrate Judge denied Envestnet and Yodlee's Daubert motion to exclude FinancialApps' technical expert, Isaac Pflaum. On July 31, 2023, the Magistrate Judge issued a report and recommendation that the Court grant in part and deny in part Envestnet's summary judgment motion. The Magistrate Judge recommended that the motion be denied as to FinancialApps' vicarious liability theory and direct liability theory but recommended that the motion be granted with respect to the unjust enrichment count. The reports and recommendations are not final rulings, however, and the Company has filed objections against their adoption by the District Court. Those objections are fully briefed and pending before the District Court. On August 14, 2023, the Magistrate Judge granted-in-part and denied-in-part FinancialApps' Daubert motion to exclude Envestnet and Yodlee's technical expert. On September 13, 2023, the Magistrate Judge granted-in-part and denied-in-part Envestnet and Yodlee's Daubert motion to exclude FinancialApps' damages expert. The Company believes FinancialApps’sFinancialApps' allegations are without merit and will continue to defend the claims against it and litigate the counterclaims vigorously.
The Company and Yodlee were also named as defendants in a putative class action lawsuit filed on August 25, 2020, by Plaintiff Deborah Wesch in the United States District Court for the Northern District of California. On October 21, 2020, an amended class action complaint was filed by Plaintiff Wesch and nine additional named plaintiffs. The case caption is Deborah Wesch, et al., v. Yodlee, Inc., et al., Case No. 3:20-cv-05991-SK. Plaintiffs allege that Yodlee unlawfully collected their financial transaction data when plaintiffs linked their bank accounts to a mobile application that uses Yodlee’s API, and plaintiffs further allege that Yodlee unlawfully sold the transaction data to third parties. The complaint alleges violations of certain California statutes and common law, including the Unfair Competition Law, and federal statutes, including the Stored Communications Act. Plaintiffs are seeking monetary damages and equitable and injunctive relief on behalf of themselves and a putative nationwide class and California subclass of persons who provided their log-in credentials to a Yodlee-powered app in an allegedly similar manner from 2014 to the present. The Company believes that it is not properly named as a defendant in the
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
lawsuit and it further believes, along with Yodlee, that plaintiffs’ claims are without merit. On November 4, 2020, the Company and Yodlee filed separate motions to dismiss all of the claims in the complaint. On February 16, 2021, the district court granted in part and denied in part Yodlee’s motion to dismiss the amended complaint and granted the plaintiffs leave to further amend. The Court reserved ruling on the Company’s motion to dismiss and granted limited jurisdictional discovery to the plaintiffs. On March 15, 2021, Plaintiffs filed a second amended class action complaint re-alleging, among others, the claims the district court had dismissed. The second amended complaint did not allege any claims against the Company or Yodlee that were not previously alleged in first amended complaint. On May 5, 2021, the Company filed a motion to dismiss all claims asserted against it in the second amended complaint, and Yodlee filed a motion to dismiss most claims asserted against it in the second amended complaint. On July 19, 2021, the Court granted in part Yodlee’s motion, resulting in the dismissal of all federal law claims and two of the state-law claims. On August 5, 2021, the Court granted the Company's motion to dismiss, and dismissed the Company from the lawsuit. On October 8, 2021, Yodlee filed aan early motion for summary judgment, which has been fully briefed. Oral argument on Yodlee’s motion was heard on September 19, 2022, and the motion has been submitted for decision.judgment. On August 12, 2022, Plaintiffs moved for leave to file a third amended complaint, which Yodlee opposed. On September 29, 2022, the Court denied Plaintiffs’ motion to amend the complaint. On December 13, 2022, the Court granted in part and denied in part Yodlee’s early motion for summary judgment, narrowing the scope of issues that remain to be resolved. On January 30, 2023, the Court
Envestnet, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
granted Yodlee’s motion for reconsideration and dismissed one additional claim. On July 20, 2023, the Court granted Yodlee’s motion for judgment on the pleadings and dismissed equitable monetary claims, allowing Plaintiffs leave to seek to amend by August 7, 2023. Plaintiffs filed an amended complaint on September 19, 2023, which Yodlee answered on October 3, 2023. Yodlee will continue to vigorously defend the remaining claims against it.
In addition, the Company is involved in legal 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. 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 September 30, 2022.2023. 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 legal proceedings could have a material adverse effect on the Company'sCompany’s results of operations or cash flow in a particular quarter or year.
18.Subsequent Events
Entry into Outsourcing Arrangement and Organizational Realignment
In October 2022, the Company entered into an outsourcing arrangement with Tata Consultancy Services (“TCS”) to increase operational scale and business agility. Under this agreement, the Company will outsource certain administrative and operational services of the Envestnet Data & Analytics business located in Bangalore, India. The agreement became effective in October 2022 and will continue for a period of ten years. In connection with this arrangement, the Company anticipates it will incur severance expense in the fourth quarter of 2022. In certain circumstances, the Company may terminate certain portions of the agreement, and in doing so, the agreement requires the Company to pay significant termination fees.
In the fourth quarter of 2022, as part of an organizational realignment, the Company entered into separation agreements with a number of employees. This realignment will allow Envestnet to operate more efficiently and prioritize activities and services that will benefit its clients and the future of its business.
In connection with the outsourcing arrangement with TCS and the organizational realignment, the Company estimates it will incur approximately $15 million of total severance expense during the fourth quarter of 2022.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Unless otherwise indicated,The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the terms “Envestnet,” the “Company,” “we,” “us” and “our” refer to Envestnet, Inc. and its subsidiaries as a whole.
Thisrelated notes included elsewhere in this quarterly report on Form 10-Q for the quarter ended September 30, 2022 ("2023 and the consolidated financial statements and related notes included on Form 10-K for the year ended December 31, 2022.
This Quarterly Report")Report 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. The potential risks, uncertainties and other factors that could cause actual results to differ from those expressed by the forward-looking statements in this Quarterly Report include, but are not limited to,
•Adverse economic or global market conditions, including periods of rising inflation and market interest rates, and governmental responses to such conditions;
•the conflict between Russia and Ukraine including related sanctions, and their impact on the global economy and capital markets;
•a pandemic or health crisis, including the COVID-19 pandemic;
•the concentration 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 fees by our clients;
•changes in the estimates of fair value of reporting units or of long-lived assets;
•the amount of our debt and our ability to service our debt;
•limitations on our ability to access information from third parties or charges for accessing such information;
•the targeting of some of our sales efforts at large financial institutions and large financial technology ("FinTech") companies which prolongs sales cycles, requires substantial upfront sales costs and results in less predictability in completing some of our sales;
•changes in investing patterns on the assets on which we derive revenue and the freedom of investors to redeem or withdraw investments generally at any time;
•the impact of fluctuations in market conditions and interest rates on the demand for our products and services and the value of assets under management or administration;
•our ability to keep up with rapid technological change, evolving industry standards or changing requirements of clients;
•risks associated with our international operations;
•the competitiveness of our solutions and services as compared to those of others;
•liabilities associated with potential, perceived or actual breaches of fiduciary duties and/or conflicts of interest;
•harm to our reputation;
•our ability to successfully identify potential acquisition candidates, complete acquisitions and successfully integrate acquired companies;
•our ability to successfully execute the conversion of clients’ assets from their technology platform to our technology platforms in a timely and accurate manner;
•the failure to protect our intellectual property rights;
•our ability to introduce new solutions and services and enhancements;
•our ability to maintain the security and integrity of our systems and facilities and to maintain the privacy of personal information and potential liabilities for data security breaches;
•the effect of privacy laws and regulations, industry standards and contractual obligations and changes to these laws, regulations, standards and obligations on how we operate our business and the negative effects of failure to comply with these requirements;
•regulatory compliance failures;
•failure by our customers to obtain proper permissions or waivers for our use of disclosure of information;
•adverse judicial or regulatory proceedings against us;
•failure of our solutions, services or systems, or those of third parties on which we rely, to work properly;
•potential liability for use of inaccurate information by third parties provided by us;
•the occurrence of a deemed “change of control”;
•the uncertainty of the application and interpretation of certain tax laws;
•issuances of additional shares of common stock or issuances of shares of preferred stock or convertible securities on our existing stockholders;
•general economic, political and regulatory conditions;
•global events, natural disasters, environmental disasters, terrorist attacks and pandemics, including their impact on the economy and trading markets; 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, Item 1A.“Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”); as updated in Part II, Item 1A.“Risk Factors” of this Form 10-Q;2022; 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 and the 20212022 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 2021 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.
35Unless otherwise indicated, the terms “Envestnet,” the “Company,” “we,” “us” and “our” refer to Envestnet, Inc. and its subsidiaries as a whole.
Overview
Envestnet, through its subsidiaries, is transforming the way financial advice and insight are delivered. Our mission is to empower financial advisors and service providers with innovative technology, solutions and intelligence. Envestnet has been a leader in helping transform wealth management, working towards our goal of expanding a holistic financial wellness ecosystem so that our clients can deliver an intelligent financial life to their clients ("Intelligent Financial Life").clients.
Approximately 107,000 advisors and approximately 6,900 companies, including 16 of the 20 largest U.S. banks, 4748 of the 50 largest wealth management and brokerage firms, over 500 of the largest registered investment advisers (“RIAs”),RIAs, and hundreds of FinTech companies, leverage Envestnet technology and services that help drive better outcomes for enterprises, advisors and their clients. We also operate six RIAs registered with the SEC. We believe that our business model results in a high degree of recurring and predictable financial results.
Through a combination of platform enhancements, partnerships and acquisitions, Envestnet uniquely provides a financial network connecting technology, solutions and data, delivering better intelligence and enabling its customers to drive better outcomes.
Envestnet, a Delaware corporation originally founded in 1999, serves clients from its headquarters based in Berwyn, Pennsylvania as well as other locations throughout the United States, India and other international locations.
Recent Developments
Macroeconomic Environment
Our business is directly and indirectly affected by macroeconomic conditions and the state of global financial markets. Recent geopolitical uncertainty, resulting, in part, from the conflict in the Middle East which intensified on October 7, 2023, military conflict between Russia and Ukraine which escalated in February 2022, as well as rising inflation, have contributed to significant volatility and decline in global financial markets during 2022 which continuescontinue as of the date of this quarterly report.Quarterly Report. The uncertainty over the extent and duration of the ongoing conflict and this period of inflation continues to cause disruptions to businesses and markets worldwide. The extent of the effect on our financial performance will continue to depend on future developments, including the extent and duration of the conflict and this period of inflation, the Federal Reserve's monetary policy in response to rising inflation, the extent of economic sanctions imposed, changes in market interest rates, further governmental and private sector responses and the timing and extent normal economic conditions resume, all of which are uncertain and difficult to predict. Although we are unable to estimate the overall financial effect of the conflictthese conflicts and this period of inflation at this time, as these conditions continue, they could have a material adverse effect on our business, results of operations, financial condition and cash flows. As of September 30, 2022, these condensed2023, the consolidated financial statements do not reflect any adjustments as a result of these macroeconomic conditions.
Credit Agreement AmendmentConvertible Promissory Note
On February 4, 2022,January 31, 2023, we entered into a Third Amended and Restated Credit Agreement (the “Third Credit Agreement”)Convertible Promissory Note with a groupcustomer of banks. The Third Credit Agreement amendsthe Company's business, a privately held company, whereby we were issued a convertible promissory note with a principal amount of $20.0 million and restates, in its entirety, our prior Amended and Restated Credit Agreement, dated as of July 18, 2017, as amended (the “Prior Credit Agreement”).
The Third Credit Agreement amended certain provisions under the Prior Credit Agreement to, among other things, (i) extend the maturity of loans and the revolving credit commitments, (ii) reduce thea stated interest rate payable on the loansof 8.0% per annum. The Convertible Promissory Note has a maturity date of January 31, 2026 and (iii) increase capacity and flexibility under certainis convertible into common stock or preferred stock of the negative covenants.
The Third Credit Agreement provides, subject to certain customary conditions, for a revolving credit facility (the “Credit Facility”), in an aggregate amount of $500.0 million, with a $20.0 million sub-facility for letters of credit.
The Credit Facility matures on February 4, 2027.
Outstanding loans under the Credit Facility accrue interest, at Envestnet’s option, at a rate equal to either (i) a base rate plus an applicable margin ranging from 0.25% to 1.75% per annumprivately held company upon qualified financing events or (ii) an adjusted Term Secured Overnight Financing Rate ("SOFR") plus an applicable margin ranging from 1.25% to 2.75% per annum, based upon the total net leverage ratio, as calculated pursuant to the Third Credit Agreement. The undrawn portion of the commitments under the Credit Facility is subject to a commitment fee at a rate ranging from 0.25% to 0.30% per annum, based upon the total net leverage ratio as calculated pursuant to the Credit Agreement.
The obligations of Envestnet under the Third Credit Agreement are guaranteed by substantially all of Envestnet’s domestic subsidiaries and are secured by a first-priority lien on substantially all of the personal property (other than intellectual property) of Envestnet and the guarantors, subject to certain exclusions.
In connection with entering the Third Credit Agreement, we capitalized $1.9 million of new issuance costs and wrote off $0.6 million of existing deferred financing charges.
Accelerated Investment Plan
In February 2021, we announced that we would be accelerating our investment in our ecosystem, to fulfill our strategy of:
•Capturing more of the addressable market;
•Modernizing the digital engagement marketplace; and
•Opening the platform.
We expect to incur an additional $20 to $25 million over the remainder of 2022 as we continue to invest in our ecosystem. The majority of these charges will be recorded to compensation and benefits expense in our condensed consolidated statement of operations. Forcorporate transactions. During the three and nine months ended September 30, 2022, we recorded approximately $13 million and $36 million, respectively of compensation and benefit expense2023, interest income related to this plan.
Procurement of Technology Solutions
On April 1, 2022, we entered into a purchase agreement with a privately held company to acquire the technology solutions being developed by this privately held company for a purchase price of $9.0 million. We have paid a $4.0 million advance during the nine months ended September 30, 2022. This advance is included in other non-current assets in the condensed consolidated balance sheets.
Office Closures
In April 2022, in response to changing needs and an increase in employees working remotely, we closed three offices in the United States. We are currently exploring alternative uses for these properties, including sublease options. In connection with these closures, in the three and nine months ended September 30, 2022, we recognized zero and $3.7 million of losses on asset retirements, respectively, which are included in general and administration expense in the condensed consolidated statement of operations. Additionally, in the three and nine months ended September 30, 2022, we recognized $1.1 million and $14.1 million of lease restructuring costs, respectively, which are included in general and administration expense in the condensed consolidated statement of operations.
Investment in Privately Held Companies
On May 20, 2022, we acquired a 25.0% interest in a privately held company for cash consideration of $5.0 million. Subject to the occurrence of certain conditions, we agreed to invest up to an additional $10.0 million for additional units in the future. We use the equity method of accounting to record our portion of this privately held company's net income or loss on a one quarter lag from the actual results of operations. We use the equity method of accounting because of our less than 50% ownership interest and lack of control and we do not otherwise exercise control over the significant economic and operating decisions of the privately held company.
On September 2, 2022, we acquired additional membership units in a privately held company in which we already had an approximate 43% ownership interest for $8.4 million which increased our ownership interest to 48%. We use the equity method of accounting to record our portion of this privately held company's net income or loss on a one quarter lag from the actual results of operations. After this unit purchase, our investment in this privately held company exceeded our proportionate share of our net assets by approximately $7.8 million, which represents amortizable intangible assets. We will recognize amortization of this basis difference prospectively over a period of 5 years. This amortization will be included within our proportional share of income (loss) in other expense, net in the condensed consolidated statements of operations.
Acquisition of 401kplans.com
On May 31, 2022, we acquired 401kplans.com LLC (“401kplans.com”). 401kplans.com has been integrated into the Envestnet Wealth Solutions segment.
401kplans.com provides a digital 401(k) retirement plan marketplace that streamlines retirement plan distribution and due diligence among financial advisors and third-party administrators. The acquisition demonstrates our commitment to the retirement plan industry and is expected to create a more seamless experience and enhance productivity for advisors by helping them shop, compare and select the best-fitting 401(k) plan for their client.
In connection with the 401kplans.com acquisition, we paid estimated consideration of $14.5 million, net of cash acquired, subject to certain post-closing adjustments. We funded the acquisition with available cash resources.
Dilution gain on equity method investee share issuance
We have an ownership interest in a privately held company that is accounted for under the equity method. During the first quarter of 2022, we funded a $2.5 million convertible loan to this privately held company. During the second quarter of 2022, this privately held company raised additional preferred equity which reduced our ownership to 41.0% and our convertible loan was converted. As a result of this transaction, we recorded a $6.9 million dilution gain during the second quarter of 2022, which isConvertible Promissory Note included in other expense, net in the condensed consolidated statements of operations.
Acquisition of Truelytics
On July 1, 2022, we acquired Truelytics, Inc. (“Truelytics”). The acquisition of Truelytics aligns with our strategy to further connect our ecosystem by creating transformative progress for our advisorsoperations was $0.4 million and clients. Truelytics is an Advisor Transition Management platform and the first end-to-end data-driven system to help wealth management and insurance enterprises attract, grow, and retain advisory businesses, while also reducing the costs related to advisor transitions. The Truelytics platform combines our data, analytics, and wealth technology to further support advisors across the ecosystem. Truelytics has been integrated into the Envestnet Data & Analytics segment.$1.1 million, respectively.
In connection with the acquisition of Truelytics,Convertible Promissory Note, we paid estimated cash consideration of approximately $21 million, net of cash acquired, subject to certain post-closing adjustments. We funded the Truelytics acquisition with available cash resources.
Acquisition of Redi2 Technologies
On July 1, 2022, we acquired Redi2 Technologies Inc. (“Redi2 Technologies”). Redi2 Technologies provides revenue management and hosted fee-billing solutions. Its platform enables fee calculation, invoice creation, payouts and accounting, and billing compliance. Redi2 Technologies has been integratedconcurrently entered into the Envestnet Wealth Solutions segment.
In connectiona call option agreement with the Redi2 Technologies Acquisition, we paid estimated considerationprivately held company, which provides us an option to acquire the privately held company at a predetermined price as of approximately $68 million in cash. We funded the Redi2 Technologies Acquisition with available cash resources. In addition, certain executives may earn up to $20.0 million in performance bonuses basedearlier of July 2024 or upon the achievementsatisfaction of certain target financial and non-financial metrics. These performance bonuses will be recognized as compensation and benefits expense in the statement of operations. No amountsThe financial metrics were recordedmet during the three months ended September 30, 2022.2023, however, we did not exercise the call option.
Exercise of Membership InterestsConvertible Notes due 2023
We granted membership interestsThe Convertible Notes due 2023 matured on June 1, 2023. Upon maturity, we settled the remaining aggregate principal amount on the Convertible Notes due 2023 for $45.0 million. The Convertible Notes due 2023 were paid using a combination of cash on hand and borrowings on the Company's Revolving Credit Facility. No shares of the Company's common stock were issued upon settlement of the Convertible Notes due 2023.
Reduction in certain of our equity investments to two legacy PIEtech executivesForce Initiative
During the nine months ended September 30, 2023, as part of the 2019 acquisition of PIEtech. These interests, which were fully vested as of May 1, 2020, became exercisable on May 1, 2022. In July 2022, these executives exercised their respective put options and sold these membership interests to us for approximately $10 million.
Inflation Reduction Act of 2022
On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022 (“IRA”), which, among other things, implements a 15% minimum tax on book income of certain large corporations and a 1% excise tax on net stock repurchases. The provisions of the IRA are effective beginningreduction in 2023. We are currently evaluating the impacts of this act on our consolidated financial statements.
Entry into Outsourcing Arrangement and Organizational Realignment
In October 2022, we entered into an outsourcing arrangement with Tata Consultancy Services ("TCS") to increase operational scale and business agility. Under this agreement, we will outsource certain administrative and operational services of the Envestnet Data & Analytics business located in Bangalore, India. The agreement became effective in October 2022 and will continue for a period of ten years. In connection with this arrangement, we anticipate we will incur severance expense in the fourth quarter of 2022. In certain circumstances, we may terminate certain portions of the agreement, and in doing so, the agreement requires us to pay significant termination fees.
In the fourth quarter of 2022, as part of an organizational realignment,force initiative, we entered into separation agreements with a number of employees. This realignment will allow us to operate more efficiently and prioritize activities and services that will benefit our clients and the future of our business.
In connection with this reduction in force initiative that began in the outsourcing arrangement with TCS and thefirst quarter of 2023, as well as a fourth quarter 2022 organizational realignment, we estimate we will incurincurred approximately $15$11.5 million and $25.9 million of total severance expense in the three and nine months ended September 30, 2023, respectively.
As of September 30, 2023 we had an ending liability balance of $13.4 million related to these efforts, of which we anticipate approximately $10.1 million to be paid during the remainder of 2023, $2.7 million to be paid throughout 2024, with the remaining balance paid through 2030.
Subsequent to September 30, 2023, in connection with the reduction in force initiative, we entered into separation agreements with a number of employees and incurred an additional $5.6 million in severance expense, of which the Company anticipates approximately $1.8 million to be paid during the remainder of 2023 and $3.8 million to be paid during the first quarter of 2024.
Operating Results
Beginning in the three months ended December 31, 2021 through June 30, 2023, the Company reported a loss from operations and loss before income tax provision in every quarter.We have incurred these quarterly losses as a result of several factors as described below.
Revenue Factors: In early 2022 continuing through the fourth quarter of 2022, the financial markets experienced a broad downturn, our redemption rates were higher than our historical average, and as a result, in our Wealth Solutions segment, our asset-based recurring revenues were materially adversely affected. Beginning in the three months ended March 31, 2023 asset-based recurring revenues have been increasing sequentially since the three months ended December 31, 2022.In addition, as a result of competitive pricing pressures in our Data & Analytics segment research business, beginning in the three months ended December 31, 2022 subscription-based recurring revenues have been materially adversely affected.
Expense Factors: We have incurred certain expenses that are not recurring in nature and that are a direct result of significant, distinct enterprise-wide strategic initiatives that we have taken in order to reshape and streamline the organization, which we believe will increase our operational efficiencies and to reduce future operating expenses, while negatively impacting our operating results in the short-term.These actions include both internal and external related expenses associated with an accelerated investment plan announced in the first quarter of 2021, expenses associated with office closures announced in the second quarter of 2022, severance and office closure related expenses associated with an organizational realignment and entry into an outsourcing arrangement announced in the fourth quarter of 2022, as well as severance expense for a reduction in force initiative announced in the first quarter of 2023 which has continued into the fourth quarter of 2023.
As discussed above, our business is directly and indirectly affected by macroeconomic conditions and the state of global financial markets.The return to positive income before income taxes, largely depends on a combination of improved industry dynamics, including overall technology and data spending by financial institutions and an improvement in capital market valuations, including asset flows and redemption rates, both of which are outside of the Company’s control, as well as a reduction in future operating expenses, as a result of the actions taken by management as discussed above.
Segments
Envestnet is organized around two primary, complementary business segments. Financial information about each business segment is contained in Part I, Item 1, “Note 15—18—Segment Information” to the condensed consolidated financial statements included in Item 1 of this Quarterly Report. Our business segments are as follows:
•Envestnet Wealth Solutions – a leading provider of unified wealth management software and services to empower financial advisors and institutions to enable them to deliver an Intelligent Financial Lifeintelligent financial life to their clients.
•Envestnet Data & Analytics – a leading data aggregation, intelligence, and experiences platform that powers data connectivity and business intelligence across digital financial services to enable them to deliver an Intelligent Financial Lifeintelligent financial life to their clients.
Subsequent to September 30, 2023, the Company changed the composition of its reportable segments to reflect the way that the Company's chief operating decision maker reviews the operating results, assesses performance and allocates resources. As a result, the advisor-focused Wealth Analytics business has been reclassified from the Envestnet Data & Analytics segment to the Envestnet Wealth Solutions Segment
Envestnet Wealth Solutions empowers financial advisors at broker-dealers, banks, and RIAs with allsegment. The segment changes do not impact nonsegment results or the tools they require to deliver holistic wealth management to their end clients, enabling them to deliver an Intelligent Financial Life to their clients. In addition, the firm provides advisors with practice management support so that they can grow their practices and operate more efficiently. By September 30, 2022, Envestnet’s platform assets were approximately $4.8 trillion in over 18 million accounts overseen by nearly 106,000 advisors.
Services provided to advisors include: financial planning, risk assessment tools, investment strategies and solutions, asset allocation models, research, portfolio construction, proposal generation and paperwork preparation, model management and account rebalancing, account monitoring, customized fee billing, overlay services covering asset allocation, tax management and socially responsible investing, aggregated multi-custodian performance reporting and communication tools, plus data analytics. We have access to a wide rangeCompany's consolidated balance sheets, consolidated statements of leading third-party asset custodians.
We offer these solutions principally through the following 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 the creationoperations or consolidated statements of a financial plan, asset allocation, investment strategy, portfolio management, rebalancing and performance reporting. Advisors have access to more than 22,000 investment products. Envestnet | Enterprise also sells data aggregation and reporting, data analytics and digital advice capabilities to customers.cash flows.
•Envestnet | Tamarac™ provides leading trading, rebalancing, portfolio accounting, performance reporting and client relationship management software, principally to high-end RIAs.All segment information presented within this quarterly report on Form 10-Q for the quarter ended September 30, 2023 is presented in conjunction with the historical organizational structure as that is the organizational structure in place as of the balance sheet date of September 30, 2023.
•Envestnet | MoneyGuide provides leading goals-based financial planning solutionsAs part of the annual goodwill impairment analysis, the Company will perform a quantitative goodwill impairment evaluation for each reporting unit as of October 31, 2023. As a result of the segment change and a corresponding adjustment to the financial services industry. The highly adaptable software helps financial advisors add significantcomposition of reporting units, as well as lower revenue and profits in 2023 compared to prior years in the Envestnet Data & Analytics segment, the Envestnet Data & Analytics reporting unit goodwill balance may be considered at risk for future impairment. Based on the results of this assessment, if the carrying value for their clients using best-in-class technology with enhanced integrations to generate financial plans.of the reporting unit exceeds its fair value, it could result in the recognition of an impairment of goodwill in the fourth quarter of 2023, and such impairment could be material.
•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.Key Metrics
•Envestnet | PMC®, or Portfolio Management Consultants (“PMC”) provides research and consulting services to assist advisors in creating investment solutions for their clients. These solutions include more than 5,000 vetted third party managed account products, multi-manager portfolios, and fund strategist portfolios, as well as approximately 900 proprietary products, such as quantitative portfolios and fund strategist portfolios. PMC also offers portfolio overlay and tax optimization services.
Key MetricsWealth Solutions Segment
The following table provides information regarding the amount of assets utilizing our platforms, financial advisors and investor accounts in the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of |
| | September 30, | | December 31, | | March 31, | | June 30, | | September 30, |
| | 2021 | | 2021 | | 2022(1) | | 2022 | | 2022 |
| | | | | | | | | | |
| | (in millions, except accounts and advisors data) |
Platform Assets | | | | | | | | | | |
Assets under Management (“AUM”) | | $ | 327,279 | | | $ | 362,038 | | | $ | 361,251 | | | $ | 325,209 | | | $ | 315,883 | |
Assets under Administration (“AUA”) | | 431,040 | | | 456,316 | | | 432,141 | | | 352,840 | | | 350,576 | |
Total AUM/A | | 758,319 | | | 818,354 | | | 793,392 | | | 678,049 | | | 666,459 | |
Subscription | | 4,670,827 | | | 4,901,662 | | | 4,736,537 | | | 4,312,114 | | | 4,134,414 | |
Total Platform Assets | | $ | 5,429,146 | | | $ | 5,720,016 | | | $ | 5,529,929 | | | $ | 4,990,163 | | | $ | 4,800,873 | |
Platform Accounts | | | | | | | | | | |
AUM | | 1,276,066 | | 1,345,274 | | 1,459,093 | | 1,491,861 | | 1,522,968 |
AUA | | 1,193,069 | | 1,217,076 | | 1,186,180 | | 1,061,484 | | 1,135,302 |
Total AUM/A | | 2,469,135 | | 2,562,350 | | 2,645,273 | | 2,553,345 | | 2,658,270 |
Subscription | | 14,810,664 | | 14,986,531 | | 15,151,569 | | 15,312,144 | | 15,596,403 |
Total Platform Accounts | | 17,279,799 | | 17,548,881 | | 17,796,842 | | 17,865,489 | | 18,254,673 |
Advisors | | | | | | | | | | |
AUM/A | | 41,696 | | 39,735 | | 39,800 | | 38,394 | | 38,417 |
Subscription | | 66,489 | | 68,808 | | 67,168 | | 66,838 | | 67,348 |
Total Advisors | | 108,185 | | 108,543 | | 106,968 | | 105,232 | | 105,765 |
(1) Certain assets and accounts have been reclassified from AUA to AUM to better reflect the nature of the services provided to certain customers.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of |
| | September 30, | | December 31, | | March 31, | | June 30, | | September 30, |
| | 2022 | | 2022 | | 2023 | | 2023 | | 2023 |
| | | | | | | | | | |
| | (in millions, except accounts and advisors data) |
Platform Assets | | | | | | | | | | |
Assets under Management (“AUM”) | | $ | 315,883 | | | $ | 341,144 | | | $ | 363,244 | | | $ | 384,773 | | | $ | 375,408 | |
Assets under Administration (“AUA”) | | 350,576 | | | 367,412 | | | 379,843 | | | 394,078 | | | 398,082 | |
Total AUM/A | | 666,459 | | | 708,556 | | | 743,087 | | | 778,851 | | | 773,490 | |
Subscription | | 4,134,414 | | | 4,382,109 | | | 4,566,971 | | | 4,643,313 | | | 4,579,248 | |
Total Platform Assets | | $ | 4,800,873 | | | $ | 5,090,665 | | | $ | 5,310,058 | | | $ | 5,422,164 | | | $ | 5,352,738 | |
Platform Accounts | | | | | | | | | | |
AUM | | 1,522,968 | | 1,547,009 | | 1,571,862 | | 1,609,677 | | 1,614,873 |
AUA | | 1,135,302 | | 1,135,026 | | 1,142,166 | | 1,144,375 | | 1,257,094 |
Total AUM/A | | 2,658,270 | | 2,682,035 | | 2,714,028 | | 2,754,052 | | 2,871,967 |
Subscription | | 15,596,403 | | 15,665,020 | | 15,779,980 | | 15,916,955 | | 16,072,848 |
Total Platform Accounts | | 18,254,673 | | 18,347,055 | | 18,494,008 | | 18,671,007 | | 18,944,815 |
Advisors | | | | | | | | | | |
AUM/A | | 38,417 | | 38,025 | | 38,611 | | 38,809 | | 38,078 |
Subscription | | 67,348 | | 67,520 | | 67,843 | | 68,439 | | 69,318 |
Total Advisors | | 105,765 | | 105,545 | | 106,454 | | 107,248 | | 107,396 |
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, 2022 | | | Asset Rollforward - Three Months Ended September 30, 2023 |
| | | As of | | Gross | | Net | | Market | | Reclass to | | | As of | | | As of June 30, | | Gross | | Net | | Market | | Reclass to | | | As of September 30, |
| | | 6/30/2022 | | Sales | | Redemptions | | Flows | | Impact | | Subscription | | | 9/30/2022 | | | 2023 | | Sales | | Redemptions | | Flows | | Impact | | Subscription | | | 2023 |
| | | | (in millions, except account data) | | | (in millions, except account data) |
AUM | AUM | | $ | 325,209 | | | $ | 24,912 | | | $ | (15,971) | | | $ | 8,941 | | | $ | (17,762) | | | $ | (505) | | | | $ | 315,883 | | AUM | | $ | 384,773 | | | $ | 24,754 | | | $ | (19,846) | | | $ | 4,908 | | | $ | (12,821) | | | $ | (1,452) | | | | $ | 375,408 | |
AUA | AUA | | 352,840 | | | 37,880 | | | (19,986) | | | 17,894 | | | (17,544) | | | (2,614) | | | | 350,576 | | AUA | | 394,078 | | | 39,624 | | | (23,889) | | | 15,735 | | | (11,731) | | | — | | | | 398,082 | |
Total AUM/A | Total AUM/A | | $ | 678,049 | | | $ | 62,792 | | | $ | (35,957) | | | $ | 26,835 | | | $ | (35,306) | | | $ | (3,119) | | | | $ | 666,459 | | Total AUM/A | | $ | 778,851 | | | $ | 64,378 | | | $ | (43,735) | | | $ | 20,643 | | | $ | (24,552) | | | $ | (1,452) | | | | $ | 773,490 | |
Fee-Based Accounts | Fee-Based Accounts | | 2,553,345 | | | | | | | 114,147 | | | | | (9,222) | | | | 2,658,270 | | Fee-Based Accounts | | 2,754,052 | | | | | | | 128,548 | | | | | (10,633) | | | | 2,871,967 | |
The above AUM/A gross sales figures for the three months ended September 30, 2023 include $23.6$25.8 billion in new client conversions. We onboarded an additional $35.8$28.5 billion in subscription conversions during the three months ended September 30, 20222023 bringing total conversions for the three months ended September 30, 20222023 to $59.4$54.3 billion.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Asset Rollforward - Nine Months Ended September 30, 2023 |
| | As of December 31, | | Gross | | | | Net | | Market | | Reclass to | | | | As of September 30, |
| | 2022 | | Sales | | Redemptions | | Flows | | Impact | | Subscription | | | | 2023 |
| | | | | | | | | | | | | | | | |
| | (in millions, except account data) |
AUM | | $ | 341,144 | | | $ | 74,693 | | | $ | (52,153) | | | $ | 22,540 | | | $ | 14,315 | | | $ | (2,591) | | | | | $ | 375,408 | |
AUA | | 367,412 | | | 97,564 | | | (69,449) | | | 28,115 | | | 16,427 | | | (13,872) | | | | | 398,082 | |
Total AUM/A | | $ | 708,556 | | | $ | 172,257 | | | $ | (121,602) | | | $ | 50,655 | | | $ | 30,742 | | | $ | (16,463) | | | | | $ | 773,490 | |
Fee-Based Accounts | | 2,682,035 | | | | | | | 289,041 | | | | | (99,109) | | | | | 2,871,967 | |
The above AUM/A gross sales figures for the nine months ended September 30, 2023 include $54.6 billion in new client conversions. We onboarded an additional $96.6 billion in subscription conversions during the nine months ended September 30, 2023 bringing total conversions for the nine months ended September 30, 2023 to $151.2 billion.
Asset and account figures in the “Reclass to Subscription” columns for the three months ended September 30, 2022 represent enterprise customers whose billing arrangements in future periods are subscription-based, rather than asset-based. Such amounts are included in Subscription metrics at the end of the quarter in which the reclassification occurred, with no impact on total platform assets or accounts.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Asset Rollforward - Nine Months Ended September 30, 2022 |
| | As of | | Gross | | | | Net | | Market | | Reclass to | | | | As of |
| | 12/31/2021 | | Sales | | Redemptions | | Flows | | Impact | | Subscription | | Reclassification(1) | | 9/30/2022 |
| | | | | | | | | | | | | | | | |
| | (in millions, except account data) |
AUM | | $ | 362,038 | | | $ | 78,440 | | | $ | (50,900) | | | $ | 27,540 | | | $ | (81,911) | | | $ | (505) | | | $ | 8,721 | | | $ | 315,883 | |
AUA | | 456,316 | | | 93,544 | | | (67,560) | | | 25,984 | | | (91,926) | | | (31,077) | | | (8,721) | | | 350,576 | |
Total AUM/A | | $ | 818,354 | | | $ | 171,984 | | | $ | (118,460) | | | $ | 53,524 | | | $ | (173,837) | | | $ | (31,582) | | | $ | — | | | $ | 666,459 | |
Fee-Based Accounts | | 2,562,350 | | | | | | | 216,564 | | | | | (120,644) | | | — | | | 2,658,270 | |
(1) Certain assets have been reclassified from AUA to AUM to better reflect the nature of the services provided to certain customers.
The above AUM/A gross sales figures include $41.9 billion in new client conversions. We onboarded an additional $94.5 billion in subscription conversions during theand nine months ended September 30, 2022 bringing total conversions for the nine months ended September 30, 2022 to $136.4 billion. (Note: We have revised our subscription conversions for the three months ended March 31, 2022 to $34.3 billion from the previously reported $32.8 billion.)
Asset and account figures in the “Reclass to Subscription” columns for the nine months ended September 30, 20222023 represent enterprise customers whose billing arrangements in future periods are subscription-based, rather than asset-based. Such amounts are included in Subscription metrics at the end of the quarter in which the reclassification occurred, with no impact on total platform assets or accounts.
Envestnet Data & Analytics Segment
Envestnet Data & Analytics is a leading data aggregation, data intelligence,The following table provides information regarding the amount of paid-end users and experiences platform. Envestnet Data & Analytics enables consumers to aggregate financial accounts within client applications and provides to clients the functionality to gather, refine, and aggregate massive sets of consumer permissioned data for use in financial applications, reports, market research analysis, and application programming interfaces (“APIs”).
Over 1,700 clients, including financial institutions, financial technology innovators and financial advisory firms including 13 of the 20 largest U.S. banks, subscribe tousing the Envestnet Data & Analytics platform to underpin personalized financial apps and services for over 37 million end-users.in the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of |
| | September 30, | | December 31, | | March 31, | | June 30, | | September 30 |
| | 2022 | | 2022 | | 2023 | | 2023 | | 2023 |
| | | | | | | | | | |
| | (in millions, except number of firms data) |
Number of paying users | | 38.1 | | | 38.8 | | | 37.5 | | | 38.0 | | | 42.3 | |
Number of firms | | 1,815 | | | 1,827 | | | 1,851 | | | 1,873 | | | 1,855 | |
Envestnet Data & Analytics serves four main client groups: financial institutions (“Banking”), financial advisors and institutions (“Wealth”), market intelligence and analytics providers (“Research”) and financial technology innovators (“Tech”).
These groups serve the following customers:
•Banking – Retail Banks, Credit Unions and credit card providers
•Wealth – Wealth management financial advisors and institutions
•Research – Research and analyst firms
•Tech – Personal financial management, small business accounting, e-commerce, payment solutions providers, small business lending and authentication
With the exception of the Tech Group, we provide clients with secure access to open APIs, user facing applications powered by our platform, APIs and reports. We aggregate and cleanse client permission consumer data elements. Envestnet Data & Analytics also enables clients to develop their own applications through its open APIs, which deliver secure data, payments solutions, and other functionality.
The Tech group enables clients to develop new applications and enhance existing solutions through our APIs. These clients operate in a number of sub-vertical markets, including FinTech, wealth management, personal financial management, small business accounting, small business lending and authentication.
We believe that our brand recognition, innovative technology and intellectual property, large client base, and unique data gathering and enrichment provide us with competitive advantages that have enabled us to grow.
Operational Highlights
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | |
| | September 30, | | $ | | % |
| | 2023 | | 2022 | | Change | | Change |
| | | | | | | | |
| | (in thousands, except percentages) |
Revenue: | | | | | | | | |
Envestnet Wealth Solutions: | | | | | | | | |
Asset-based | | $ | 193,901 | | | $ | 177,131 | | | $ | 16,770 | | | 9 | % |
Subscription-based | | 76,813 | | | 75,975 | | | 838 | | | 1 | % |
Total recurring revenue | | 270,714 | | | 253,106 | | | 17,608 | | | 7 | % |
Professional services and other revenue | | 4,313 | | | 4,229 | | | 84 | | | 2 | % |
Total Envestnet Wealth Solutions revenue | | $ | 275,027 | | | $ | 257,335 | | | $ | 17,692 | | | 7 | % |
| | | | | | | | |
Envestnet Data & Analytics: | | | | | | | | |
Subscription-based | | $ | 38,126 | | | $ | 47,772 | | | $ | (9,646) | | | (20) | % |
Total recurring revenue | | 38,126 | | | 47,772 | | | (9,646) | | | (20) | % |
Professional services and other revenue | | 3,694 | | | 1,588 | | | 2,106 | | | 133 | % |
Total Envestnet Data & Analytics revenue | | $ | 41,820 | | | $ | 49,360 | | | $ | (7,540) | | | (15) | % |
| | | | | | | | |
Total consolidated revenue | | $ | 316,847 | | | $ | 306,695 | | | $ | 10,152 | | | 3 | % |
| | | | | | | | |
Deferred revenue fair value adjustment | | — | | | 54 | | | (54) | | | (100) | % |
Total consolidated adjusted revenue* | | $ | 316,847 | | | $ | 306,749 | | | $ | 10,098 | | | 3 | % |
| | | | | | | | |
Consolidated net income (loss) attributable to Envestnet, Inc. | | $ | 7,091 | | | $ | (7,290) | | | $ | 14,381 | | | ** |
Net income (loss) attributable to Envestnet, Inc. per share - basic and diluted | | $ | 0.13 | | | $ | (0.13) | | | $ | 0.26 | | | ** |
| | | | | | | | |
Adjusted EBITDA* | | $ | 67,242 | | | $ | 53,498 | | | $ | 13,744 | | | 26 | % |
Adjusted net income* | | $ | 36,627 | | | $ | 29,546 | | | $ | 7,081 | | | 24 | % |
Adjusted net income per diluted share* | | $ | 0.56 | | | $ | 0.45 | | | $ | 0.11 | | | 24 | % |
*Non-GAAP financial measure. See "Non-GAAP Financial Measures" below for definitions and reconciliations of non-GAAP measures.
**Not meaningful
Results of Operations
Three months ended September 30, 2023 compared to three months ended September 30, 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Three Months Ended September 30, | | | | |
| | | | | | 2023 | | 2022 | | | | |
| | | | | | | | Amount | | % of Revenue | | Amount | | % of Revenue | | $ Change | | % Change |
| | | | | | | | | | | | | | | | | | |
| | | | | | (in thousands) | | | | (in thousands) | | | | (in thousands) | | |
Revenue: | | | | | | | | | | | | | | | | | | |
Asset-based | | | | | | | | $ | 193,901 | | | 61 | % | | $ | 177,131 | | | 58 | % | | $ | 16,770 | | | 9 | % |
Subscription-based | | | | | | | | 114,939 | | | 36 | % | | 123,747 | | | 40 | % | | (8,808) | | | (7) | % |
Total recurring revenue | | | | | | | | 308,840 | | | 97 | % | | 300,878 | | | 98 | % | | 7,962 | | | 3 | % |
Professional services and other revenue | | | | | | | | 8,007 | | | 3 | % | | 5,817 | | | 2 | % | | 2,190 | | | 38 | % |
Total revenue | | | | | | | | 316,847 | | | 100 | % | | 306,695 | | | 100 | % | | 10,152 | | | 3 | % |
Operating expenses: | | | | | | | | | | | | | | | | | | |
Direct expense | | | | | | | | 119,538 | | | 38 | % | | 110,108 | | | 36 | % | | 9,430 | | | 9 | % |
Employee compensation | | | | | | | | 113,334 | | | 36 | % | | 116,837 | | | 38 | % | | (3,503) | | | (3) | % |
General and administrative | | | | | | | | 49,063 | | | 15 | % | | 47,388 | | | 15 | % | | 1,675 | | | 4 | % |
Depreciation and amortization | | | | | | | | 34,311 | | | 11 | % | | 33,408 | | | 11 | % | | 903 | | | 3 | % |
Total operating expenses | | | | | | | | 316,246 | | | 100 | % | | 307,741 | | | 100 | % | | 8,505 | | | 3 | % |
Income (loss) from operations | | | | | | | | 601 | | | — | % | | (1,046) | | | — | % | | 1,647 | | | * |
Other expense, net | | | | | | | | (4,369) | | | (1) | % | | (5,346) | | | (2) | % | | 977 | | | 18 | % |
Loss before income tax provision (benefit) | | | | | | | | (3,768) | | | (1) | % | | (6,392) | | | (2) | % | | 2,624 | | | 41 | % |
Income tax provision (benefit) | | | | | | | | (8,824) | | | (3) | % | | 2,271 | | | 1 | % | | (11,095) | | | * |
Net income (loss) | | | | | | | | 5,056 | | | 2 | % | | (8,663) | | | (3) | % | | 13,719 | | | * |
Add: Net loss attributable to non-controlling interest | | | | | | | | 2,035 | | | 1 | % | | 1,373 | | | — | % | | 662 | | | 48 | % |
Net income (loss) attributable to Envestnet, Inc. | | | | | | | | $ | 7,091 | | | 2 | % | | $ | (7,290) | | | (2) | % | | $ | 14,381 | | | * |
*Not meaningful
Asset-based recurring revenues decreased 4% from $184.0revenue
Asset-based recurring revenue increased $16.8 million, inor 9%, for the three months ended September 30, 20212023 compared to $177.1 million in the three months ended September 30, 2022. Subscription-based recurring revenues increased 9% from $113.6 million in the three months ended September 30, 2021 to $123.7 million in the three months ended September 30, 2022. Total revenues, which also includes professional services and other revenues, increased 1% from $303.1 million in the three months ended September 30, 2021 to $306.7 million in the three months ended September 30, 2022.
The Envestnet Wealth Solutions segment's total revenues increased 1% from $254.7 million in the three months ended September 30, 2021 to $257.3 million in the three months ended September 30, 2022 due to an increase in subscription-based revenues of $9.0 million and an increase in professional services and other revenues of $0.5 million. These increases were partially offset by a decrease in asset-based revenues of $6.9 million. The Envestnet Data & Analytics segment's total revenues increased 2% from $48.3 million in the three months ended September 30, 2021 to $49.4 million in the three months ended September 30, 2022 primarily due to an increase in subscription-based revenues of $1.2 million, partially offset by a decrease in professional services and other revenues of $0.1 million.
Asset-based recurring revenues increased 11% from $513.5 million in the nine months ended September 30, 2021 to $571.8 million in the nine months ended September 30, 2022. Subscription-based recurring revenues increased 6% from $335.9 million in the nine months ended September 30, 2021 to $356.6 million in the nine months ended September 30, 2022. Total revenues, which also includes professional services and other revenues, increased 9% from $866.9 million in the nine months ended September 30, 2021 to $946.9 million in the nine months ended September 30, 2022.
The Envestnet Wealth Solutions segment's total revenues increased 11% from $721.4 million in the nine months ended September 30, 2021 to $802.9 million in the nine months ended September 30, 2022 due to an increase in asset-based revenues of $58.4 million, an increase in subscription-based revenues of $20.4 million and an increase in professional services and other revenues of $2.7 million. The Envestnet Data & Analytics segment's total revenues decreased 1% from $145.5 million in the nine months ended September 30, 2021 to $144.0 million in the nine months ended September 30, 2022 primarily due to a decrease in professional services and other revenues of $1.7 million, partially offset by an increase in subscription-based revenues of $0.3 million.
Net loss attributable to Envestnet, Inc. for the three months ended September 30, 2022 was $7.3 million, or $(0.13) per diluted share, compared to net income attributable to Envestnet, Inc. of $11.7 million, or $0.21 per diluted share, for the three months ended September 30, 2021.
Net loss attributable to Envestnet, Inc. for the nine months ended September 30, 2022 was $44.4 million, or $(0.81) per diluted share, compared to net income attributable to Envestnet, Inc. of $18.4 million, or $0.33 per diluted share, for the nine months ended September 30, 2021.
Adjusted revenues for the three months ended September 30, 2022 were $306.7 million, compared to adjusted revenues of $303.1 million in the prior year period. Adjusted EBITDA for the three months ended September 30, 2022 was $53.5 million, compared to adjusted EBITDA of $66.2 million in the prior year period. Adjusted net income for the three months ended September 30, 2022 was $29.5 million, or $0.45 per diluted share, compared to adjusted net income of $39.9 million, or $0.61 per diluted share in the prior year period.
Adjusted revenues for the nine months ended September 30, 2022 were $947.1 million, compared to adjusted revenues of $867.1 million in the prior year period. Adjusted EBITDA for the nine months ended September 30, 2022 was $166.3 million, compared to adjusted EBITDA of $205.5 million in the prior year period. Adjusted net income for the nine months ended September 30, 2022 was $92.6 million, or $1.41 per diluted share, compared to adjusted net income of $125.3 million, or $1.92 per diluted share in the prior year period.
Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per diluted share are non-GAAP financial measures. See “Non-GAAP Financial Measures” for a discussion of our non-GAAP measures and a reconciliation of such measures to the most directly comparable GAAP measures.
Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Nine Months Ended | | |
| | September 30, | | Percent | | September 30, | | Percent |
| | 2022 | | 2021 | | Change | | 2022 | | 2021 | | Change |
| | | | | | | | | | | | |
| | (in thousands) | | | | (in thousands) | | |
Revenues: | | | | | | | | | | | | |
Asset-based | | $ | 177,131 | | | $ | 184,008 | | | (4) | % | | $ | 571,820 | | | $ | 513,458 | | | 11 | % |
Subscription-based | | 123,747 | | | 113,572 | | | 9 | % | | 356,601 | | | 335,905 | | | 6 | % |
Total recurring revenues | | 300,878 | | | 297,580 | | | 1 | % | | 928,421 | | | 849,363 | | | 9 | % |
Professional services and other revenues | | 5,817 | | | 5,473 | | | 6 | % | | 18,489 | | | 17,533 | | | 5 | % |
Total revenues | | 306,695 | | | 303,053 | | | 1 | % | | 946,910 | | | 866,896 | | | 9 | % |
Operating expenses: | | | | | | | | | | | | |
Cost of revenues | | 110,108 | | | 109,836 | | | — | % | | 361,872 | | | 303,199 | | | 19 | % |
Compensation and benefits | | 116,837 | | | 109,839 | | | 6 | % | | 369,453 | | | 316,101 | | | 17 | % |
General and administration | | 47,388 | | | 39,393 | | | 20 | % | | 157,867 | | | 117,463 | | | 34 | % |
Depreciation and amortization | | 33,408 | | | 29,850 | | | 12 | % | | 97,208 | | | 88,252 | | | 10 | % |
Total operating expenses | | 307,741 | | | 288,918 | | | 7 | % | | 986,400 | | | 825,015 | | | 20 | % |
Income (loss) from operations | | (1,046) | | | 14,135 | | | (107) | % | | (39,490) | | | 41,881 | | | * |
Other expense, net | | (5,346) | | | (3,551) | | | 51 | % | | (9,691) | | | (14,803) | | | (35) | % |
Income (loss) before income tax provision (benefit) | | (6,392) | | | 10,584 | | | * | | (49,181) | | | 27,078 | | | * |
Income tax provision (benefit) | | 2,271 | | | (854) | | | * | | (1,542) | | | 9,074 | | | (117) | % |
Net income (loss) | | (8,663) | | | 11,438 | | | * | | (47,639) | | | 18,004 | | | * |
Add: Net loss attributable to non-controlling interest | | 1,373 | | | 302 | | | * | | 3,205 | | | 401 | | | * |
Net income (loss) attributable to Envestnet, Inc. | | $ | (7,290) | | | $ | 11,740 | | | * | | $ | (44,434) | | | $ | 18,405 | | | * |
*Not meaningful.
Three months ended September 30, 2022 compared to three months ended September 30, 2021
Asset-based recurring revenues
Asset-based recurring revenues decreased 4% from $184.0 million in the three months ended September 30, 2021 to $177.1 million in the three months ended September 30, 2022. The decrease was primarily due to a decrease in asset values applicable to our quarterly billing cycles, (whichwhich are based on the market value of the customers' assets on our platforms as of the end of the previous quarter).
The number of financial advisors with asset-based recurring revenue on our technology platforms decreased from approximately 42,000 as of September 30, 2021 toremained consistent with approximately 38,000 as of September 30, 2023 and 2022, respectively, and the number of AUM/A client accounts increased from approximately 2.5 million as of September 30, 2021 to approximately 2.7 million as of September 30, 2022.2022 to approximately 2.9 million as of September 30, 2023.
Asset-based recurring revenues decreased from 61%As a percentage of total revenue, inasset-based recurring revenue increased 3% points for the three months ended September 30, 20212023 compared to 58% of totalthe three months ended September 30, 2022 primarily due to the overall increase in asset-based recurring revenue coupled with the decrease in subscription-based revenue period over period.
Subscription-based recurring revenue
Subscription-based recurring revenue decreased $8.8 million, or 7%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 primarily due to a higher subscription-based recurring revenues increase and a decrease in asset-based recurring revenues.
Subscription-based recurring revenues
Subscription-based recurring revenue increased 9% from $113.6of $9.6 million in the three months ended September 30, 2021Envestnet Data & Analytics segment, which is primarily attributable to $123.7 milliona loss in access to data in the three months ended September 30, 2022. This increase was primarily dueresearch business and continued impact from the regional banking crisis which led to our customer’s cost cutting initiatives, pricing pressure and project delays, partially offset by an increase of$9.0 $0.8 million in the Envestnet Wealth Solutions segment, which can be attributed to new and existing customer growth,growth.
As a percentage of total revenue, subscription-based recurring revenue decreased 4% points for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 primarily due to the overall decrease in subscription-based recurring revenue coupled with the increase in asset-based revenue period over period.
Professional services and other revenue
Professional services and other revenue increased $2.2 million, or 38%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 primarily due to an increase in revenue recognized in the Data & Analytics segment as a result of $1.2point in time revenue recognized on a customer deployment.
Direct expense
Direct expense increased $9.4 million, or 9%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 primarily due to an increase in asset-based direct expense, which directly correlates with the increase to asset-based recurring revenue during the period.
Employee compensation
Employee compensation decreased $3.5 million, or 3%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 primarily due to decreases in salaries, benefits and related payroll taxes of $10.4 million, which is primarily a result of the outsourcing arrangement with TCS in the Envestnet Data & Analytics segment, which can be primarily attributableshifted certain expenses from employee compensation to increasesgeneral and administrative expense, a reduction in revenue from existing customers.force initiative in 2023 and an organizational realignment in the fourth quarter of 2022, a decrease in incentive compensation of $1.8 million and other immaterial decreases within employee compensation, partially offset by an increase in severance expense of $10.4 million as a result of the reduction in force initiative and organizational realignment.
Professional servicesGeneral and other revenuesadministrative
Professional servicesGeneral and other revenuesadministrative expenses increased 6% from $5.5$1.7 million, inor 4%, for the three months ended September 30, 20212023 compared to $5.8 million in the three months ended September 30, 2022. The increase was due to timing of the completion of customer projects and deployments.
Cost of revenues
Cost of revenues increased from $109.8 million in the three months ended September 30, 2021 to $110.1 million in the three months ended September 30, 2022. As a percentage of total revenues, cost of revenues remained consistent at 36% in the three months ended September 30, 2021 and 2022.
Compensation and benefits
Compensation and benefits increased 6% from $109.8 million in the three months ended September 30, 2021 to $116.8 million in the three months ended September 30, 2022. The increase was comprised primarily of increases in salaries, benefits and related payroll taxes of $10.3 million due to increased headcount as a result of growth and acquisitions in the Envestnet Wealth Solutions segment. Also contributing to this increase was miscellaneous employee expenses of $1.1 million which was partially offset by decreases in incentive compensation of $3.8 million and non-cash compensation expense of $1.6 million. As a percentage of total revenues, compensation and benefits increased from 36% in the three months ended September 30, 2021 to 38% in the three months ended September 30, 2022.
General and administration
General and administration expenses increased 20% from $39.4 million in the three months ended September 30, 2021 to $47.4 million in the three months ended September 30, 2022. The increase was2022 primarily due to increases in software and maintenance charges of $4.8$6.1 million restructuring chargeswhich is primarily a result of the outsourcing arrangement with TCS and transaction costs of $2.5 million driven by acquisition activity and system implementation costs, travel and entertainmentlitigation related expense of $1.9 million, professional and legal fees of $1.3 million and other immaterial increases within general and administration expense.$2.7 million. These increases were partially offset by decreases in litigationrestructuring charges and regulatory relatedtransaction costs of $2.9 million, professional fees of $1.3 million, marketing costs of $1.0 million, travel and entertainment expense of $3.6$1.0 million and occupancy costs of $1.2 million. As a percentage of total revenues,other immaterial decreases within general and administration expenses increased from 13% in the three months ended September 30, 2021 to 15% in the three months ended September 30, 2022.administrative expense.
Depreciation and amortization
Depreciation and amortization expense increased 12% from $29.9$0.9 million, inor 3%, for the three months ended September 30, 20212023 compared to $33.4 million in the three months ended September 30, 2022. The increase was2022 primarily due to increases in amortization related to internally developed software of $2.0 million, intangible asset amortization expense of $1.3 million and finance lease amortization expense of $1.2$4.1 million, partially offset by an immaterial decreasedecreases in depreciation expense. As a percentageamortization related to intangible assets of total revenues, depreciation and amortization expense increased from 10% in the three months ended September 30, 2021 to 11% three months ended September 30, 2022.$3.5 million.
Other expense, net
Other expense, net increased from $3.6decreased $1.0 million, inor 18%, for the three months ended September 30, 20212023 compared to $5.3 million in the three months ended September 30, 2022 primarily due to a one-time gain of $1.2$2.9 million recordedfair market value adjustment to investment in 2021 related to the settlement ofprivate company, partially offset by a liability and a one-time gain of $1.0$1.6 million recordedincrease in 2021 related to an insurance reimbursement.interest expense, net.
Income tax provision (benefit)
| | | | | | | | | | | | | | |
| | Three Months Ended |
| | September 30, |
| | 2022 | | 2021 |
| | | | |
| | (in thousands, except effective tax rate) |
Income (loss) before income tax provision (benefit) | | $ | (6,392) | | | $ | 10,584 | |
Income tax provision (benefit) | | 2,271 | | | (854) | |
Effective tax rate | | (35.5) | % | | (8.1) | % |
Under ASC 740-270-25, we are required to report income tax expense by applying a projected annual effective tax rate ("AETR")AETR to ordinary pre-tax book income for the interim period. The tax impact of discrete items is accounted for separately in the period in which they occur. The effective tax rate ("ETR")ETR for the quarter is the result of the projected AETR applied to actual pre-tax book income plus discrete items as a percentage of pre-tax book income. Therefore, a change in pre-tax book income, either forecasted or actual year-to-date, from one period to the next will cause the ETR to change.
For the three months ended September 30, 2022 and 2021,2023, our ETR was impacted byeffective tax rate of 234.2% differed from the statutory rate primarily due to the change in forecasted and actual year-to-date pre-tax book income.income as well as an increase in the valuation allowance we have placed on a portion of U.S. deferred tax assets which includes the impact of IRC Section 174, permanent book-tax differences, uncertain tax positions and the impact of state and local taxes offset by federal and state R&D credits.
For the three months ended September 30, 2022, our effective tax rate of (35.5)% differed from the statutory rate primarily due to the increase in the valuation allowance we hadthe Company has placed on a portion of its U.S. deferred tax assets which includes the impact of the Redi2 and Truelytics acquisitions and IRC Section 174, permanent book-tax differences, and the impact of state and local taxes offset by federal and state R&D credits.
For the three months ended September 30, 2021, our effective tax rate differed from the statutory rate primarily due to the increase in forecasted book income for the year, the decrease in the valuation allowance we had placed on a portion of U.S. deferred tax assets, including the valuation allowance impact of the the acquisition of Harvest Savings & Wealth Technologies ("Harvest") in April 2021, and the windfall from stock-based compensation.
Nine months ended September 30, 20222023 compared to nine months ended September 30, 20212022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Nine Months Ended September 30, | | | | |
| | | | | | 2023 | | 2022 | | | | |
| | | | | | | | Amount | | % of Revenue | | Amount | | % of Revenue | | $ Change | | % Change |
| | | | | | | | | | | | | | | | | | |
| | | | | | (in thousands) | | | | (in thousands) | | | | (in thousands) | | |
Revenue: | | | | | | | | | | | | | | | | | | |
Asset-based | | | | | | | | $ | 556,595 | | | 60 | % | | $ | 571,820 | | | 60 | % | | $ | (15,225) | | | (3) | % |
Subscription-based | | | | | | | | 346,977 | | | 37 | % | | 356,601 | | | 38 | % | | (9,624) | | | (3) | % |
Total recurring revenue | | | | | | | | 903,572 | | | 97 | % | | 928,421 | | | 98 | % | | (24,849) | | | (3) | % |
Professional services and other revenue | | | | | | | | 24,416 | | | 3 | % | | 18,489 | | | 2 | % | | 5,927 | | | 32 | % |
Total revenue | | | | | | | | 927,988 | | | 100 | % | | 946,910 | | | 100 | % | | (18,922) | | | (2) | % |
Operating expenses: | | | | | | | | | | | | | | | | | | |
Direct expense | | | | | | | | 352,024 | | | 38 | % | | 361,872 | | | 38 | % | | (9,848) | | | (3) | % |
Employee compensation | | | | | | | | 344,646 | | | 37 | % | | 369,453 | | | 39 | % | | (24,807) | | | (7) | % |
General and administrative | | | | | | | | 156,028 | | | 17 | % | | 157,867 | | | 17 | % | | (1,839) | | | (1) | % |
Depreciation and amortization | | | | | | | | 101,058 | | | 11 | % | | 97,208 | | | 10 | % | | 3,850 | | | 4 | % |
Total operating expenses | | | | | | | | 953,756 | | | 103 | % | | 986,400 | | | 104 | % | | (32,644) | | | (3) | % |
Loss from operations | | | | | | | | (25,768) | | | (3) | % | | (39,490) | | | (4) | % | | 13,722 | | | 35 | % |
Other expense, net | | | | | | | | (19,706) | | | (2) | % | | (9,691) | | | (1) | % | | (10,015) | | | (103) | % |
Loss before income tax provision (benefit) | | | | | | | | (45,474) | | | (5) | % | | (49,181) | | | (5) | % | | 3,707 | | | 8 | % |
Income tax provision (benefit) | | | | | | | | 15,363 | | | 2 | % | | (1,542) | | | — | % | | 16,905 | | | * |
Net loss | | | | | | | | (60,837) | | | (7) | % | | (47,639) | | | (5) | % | | (13,198) | | | (28) | % |
Add: Net loss attributable to non-controlling interest | | | | | | | | 5,284 | | | 1 | % | | 3,205 | | | — | % | | 2,079 | | | 65 | % |
Net loss attributable to Envestnet, Inc. | | | | | | | | $ | (55,553) | | | (6) | % | | $ | (44,434) | | | (5) | % | | $ | (11,119) | | | (25) | % |
*Not meaningful
Asset-based recurring revenue
Asset-based recurring revenues
Asset-based recurring revenues increased 11% from $513.5revenue decreased $15.2 million, inor 3%, for the nine months ended September 30, 20212023 compared to $571.8 million in the nine months ended September 30, 2022. The increase was2022 primarily due to an increasea decrease in asset values applicable to our quarterly billing cycles, (whichwhich are based on the market value of the customers' assets on our platforms as of the end of the previous quarter), as well as the impact of new account growth and positive net flows of AUM/A in the first nine months of 2022.quarter.
The number of financial advisors with asset-based recurring revenue on our technology platforms decreased from approximately 42,000 as of September 30, 2021 toremained consistent with approximately 38,000 as of September 30, 2023 and 2022, respectively, and the number of AUM/A client accounts increased from approximately 2.5 million as of September 30, 2021 to approximately 2.7 million as of September 30, 2022.2022 to approximately 2.9 million as of September 30, 2023.
Asset-basedSubscription-based recurring revenues increased from 59% of totalrevenue
Subscription-based recurring revenue indecreased $9.6 million, or 3%, for the nine months ended September 30, 20212023 compared to 60% of total revenue in the nine months ended September 30, 2022.
Subscription-based recurring revenues
Subscription-based recurring revenue increased 6% from $335.92022 primarily due to a decrease of $20.4 million in the nine months ended September 30, 2021Envestnet Data & Analytics segment, which is primarily attributable to $356.6 milliona loss in access to data in the nine months ended September 30, 2022. This increase was primarily dueresearch business and continued impact from the regional banking crisis which led to our customer’s cost cutting initiatives, partially offset by an increase of $20.410.7 million in the Envestnet Wealth Solutions segment, which can be attributed to new and existing customer growth.
Professional services and other revenuesrevenue
Professional services and other revenuesrevenue increased 5% from $17.5$5.9 million, inor 32%, for the nine months ended September 30, 20212023 compared to $18.5 million in the nine months ended September 30, 2022. The increase was due to an increase in revenues resulting from the 2022 Advisor Summit, which was held as an in-person event. The 2021 Advisor Summit was virtual due to the COVID-19 pandemic. This increase in Advisor Summit revenues was partially offset by lower professional services revenue in the Envestnet Data & Analytics segment due to the timing of the completion of customer projects and deployments.
Cost of revenues
Cost of revenues increased 19% from $303.2 million in the nine months ended September 30, 2021 to $361.9 million in the nine months ended September 30, 2022. The increase was primarily due to an increase in asset-based cost of revenues of $50.3 million, which directly correlates with the increase to asset-based recurring revenues during the period. An increase in professional services and other cost of revenues of $6.5 million, primarily as a result of our 2022 Advisor Summit, which was held in-person, and an increase in subscription-based cost of revenues of $1.8 million also contributed to this increase. As a percentage of total revenues, cost of revenues increased from 35% in the nine months ended September 30, 2021 to 38% in nine months ended September 30, 2022 primarily due to shiftstiming of the completion of customer projects and deployments and an increase in pricing and product mix for asset-based revenues and additional costs incurred in 2022 related to the in-person Advisor Summit eventrevenue recognized in the Envestnet Wealth Solutions segment.
Compensation and benefitsData & Analytics segment as a result of point in time revenue recognized on a customer deployment.
Compensation and benefits increased 17% from $316.1Direct expense
Direct expense decreased $9.8 million, inor 3%, for the nine months ended September 30, 20212023 compared to $369.5 million in the nine months ended September 30, 2022. The increase is primarily comprised of increases in salaries, benefits and related payroll taxes of $38.2 million due to increased headcount as a result of growth and acquisitions in the Envestnet Wealth Solutions segment. Also contributing to this increase were non-cash compensation expense of $12.3 million, miscellaneous employee expenses of $2.8 million, contract labor expenses of $2.2 million and short term variable expenses of $1.1 million. These increases were partially offset by a decrease in incentive compensation of $4.7 million. As a percentage of total revenues, compensation and benefits increased from 36% in the nine months ended September 30, 2021 to 39% in the nine months ended September 30, 2022 primarily due to a higher increasedecrease in compensation and benefitsasset-based direct expense, and a lower increase in revenues.which directly correlates with the decrease to asset-based recurring revenue during the period.
Employee compensation
General and administration
General and administration expenses increased 34% from $117.5Employee compensation decreased $24.8 million, inor 7%, for the nine months ended September 30, 20212023 compared to $157.9 million in the nine months ended September 30, 2022. The increase was primarily due to increases in lease restructuring and asset retirement costs of $15.4 million, software and maintenance charges of $12.0 million, restructuring charges and transaction costs of $4.9 million driven by acquisition activity and software implementation costs, travel and entertainment expenses of $4.4 million, marketing expense of $2.9 million, miscellaneous general and administration expense of $2.8 million and other immaterial increases within general and administration accounts. These increases were partially offset by decreases in occupancy costs of $3.3 million and bad debt expense of $2.5 million. As a percentage of total revenues, general and administration expenses increased from 14% in the nine months ended September 30, 2021 to 17% in the nine months ended September 30, 2022 primarily due to lease restructuringdecreases in salaries, benefits and asset retirements charges incurred for three office closuresrelated payroll taxes of $28.5 million, which is primarily a result of the outsourcing arrangement with TCS in 2022.the Envestnet Data & Analytics segment, which shifted certain expenses from employee compensation to general and administrative expense, a reduction in force initiative in 2023 and an organizational realignment in the fourth quarter of 2022, a decrease in non-cash compensation expense of $4.4 million, incentive compensation of $1.9 million and other immaterial decreases within employee compensation, partially offset by an increase in severance expense of $14.5 million as a result of the reduction in force initiative and organizational realignment.
General and administrative
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