AssetMark Financial Holdings, Inc. (NYSE:AMK) Q3 2023 Earnings Call Transcript

AssetMark Financial Holdings, Inc. (NYSE:AMK) Q3 2023 Earnings Call Transcript November 6, 2023

Operator: Good afternoon, everyone, and welcome to AssetMark’s Third Quarter 2023 Earnings Conference Call. Currently, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. Today’s call is being recorded. Now I’d like to turn the call over to Taylor Hamilton, Head of Investor Relations. Please go ahead, Mr. Hamilton.

Taylor Hamilton: Thank you. Good afternoon, everyone, and welcome to AssetMark’s third quarter 2023 earnings conference call. Joining me are AssetMark’s Chief Executive Officer, Michael Kim; and Chief Financial Officer, Gary Zyla. Today, we’ll discuss the results for the third quarter and provide an update to AssetMark’s business outlook for 2023. Following our introductory remarks, we’ll open up the call for questions. We also have an earnings presentation that Michael and Gary will reference during their prepared remarks. It can be accessed on our IR website at ir.assetmark.com. Before we get started, I’d like to note that certain statements made during this conference call are forward-looking statements. These forward-looking statements represent our outlook only as of the date of this call, and actual results could differ materially.

Additionally, during today’s conference call, we’ll be discussing net revenue, adjusted EBITDA, adjusted EBITDA margin and adjusted net income, all of which are non-GAAP financial metrics. Please refer to our earnings press release and SEC filings for more information on forward-looking statements, risk factors associated with our business and required disclosures related to non-GAAP financial information. And with that, I’ll turn the call over to my colleagues. Michael, take it away.

Michael Kim: Thank you, Taylor. Good afternoon and welcome to our third quarter earnings call and my first as CEO. I’m excited and honored to talk to you today. For those of you that do not know me, let me briefly introduce myself and provide some perspective about why the Board has selected me to lead AssetMark into the future. I’ve been at AssetMark for 13 years and I’ve spent almost 30 years in the financial services industry helping financial advisors and their clients. Prior to taking over as CEO in September, I most recently served as President and Chief Client Officer at AssetMark. In that role, I led the firm’s Client Success Group, which is focused on helping advisors grow and deepening advisors engagement with advisors.

At AssetMark, our mission is to make a difference in the lives of our advisors and their clients. We are an adviser focused company. Every strategic decision we make revolves around what is the best for the advisers. Having the opportunity to lead our client success group for the last decade plus, I have a deep understanding of how advisors and their clients think about what solutions, tools and technology they need to be successful. As a result, the leadership transition has been seamless for our teams, for our advisors and their clients. I’m very excited to continue to set the strategic vision for the firm and to create continued value for our advisors, their clients and our shareholders. Not only I’m deeply committed to our mission, but I’m also deeply committed to our values of heart, integrity, respect and excellence.

These values define how we engage with our advisors, partners and team members. During the first two months as CEO, I’ve been on a listening tour and feedback has been clear. Coupled with my previous experience leading our Client Success Group, I want to share some perspective on my long-term focus, which I believe will enhance shareholder value. Turning to Slide 3. I am focused on three priorities, hyper growth, accelerated capital deployment and enhance scalability. Let’s dig into the details of each of these. First hyper growth, the team and I are manically focused on accelerating the growth of the business. This starts with growing net flows and the number of engaged advisors on our platform. We are committed to return to 10% organic growth and believe that our recent acquisitions, platform enhancements and compelling outsourced offering positions us well to get there.

We are committed to getting to 5,000 engaged advisors by end of 2026. Let me share with you, why this is so important. As you know, engaged advisors make up north of 90% of our platform assets. These low advisors grow faster, have stickier assets and enjoy more of the benefits of outsourcing. If we grow to 5,000 engaged advisors, we’d double the size of the company. Let me repeat that. Over the next three years, we can double the size of AssetMark. Second, I’m focused on accelerated capital deployment. One of AssetMark’s many strengths as a company is our ability to generate cash. It is time we start putting that cash to better use. To start, we are increasing our focus on M&A and partnerships, which I will discuss a bit later in my prepared remarks.

Next, we are increasing our CapEx as a percent of total revenue to 8% to 10% from the previous 6% to 7% run rate. This will allow us to invest more in the business specifically into projects that drive growth and scalability. And speaking of scalability that is my third long-term focus. AssetMark has done a great job scaling with EBITDA margins up over 800 basis points since our IPO and we can continue to scale. One of many areas of focus is automation, especially in our operations function, where we can remove up to $25 million of cost per year while continuing to invest in our already industry-leading service offering. I hope this gives you some insights into what is important to the executive committee and me as we take AssetMark into the future.

I look forward to updating you on these long-term priorities during subsequent earnings calls. Now let’s turn to the heart of today’s earnings presentation. I will highlight our record quarter results and then provide an update on how we are executing on our strategy. On Slide 4, the third quarter 2023 was another record quarter for AssetMark. We ended the quarter serving an all-time high of 251,000 plus households at over 9,300 advisors, of which approximately 3,000 are engaged. Our advisors are extremely pleased with their decision to outsource to AssetMark as evidenced by our all-time high NPS of 72 which we highlighted last quarter. From a financial standpoint, total revenue was record $191 million, up 23% year-over-year, while net revenue was a record of $139 million, up 20% year-over-year.

These all-time high top-line results allowed us to achieve best ever bottom-line results. Specifically adjusted EBITDA was $67 million for the quarter. This marks the sixth straight quarter of record-setting quarterly EBITDA a powerful testament to our diversified revenue mix and disciplined expense management. Adjusted EBITDA margin was a record 34.9% and up 90 basis points year-over-year. Net income was $38 million, up 28% year-over-year, while adjusted net income was $46 million, up 32% year-over-year. Adjusted earnings per share was $0.62 in the third quarter also up 32% year-over-year. Results for the third quarter were excellent. And we feel we are well on track for the best year in our company’s history. Next, I want to give you an update on our strategic execution.

As I stated earlier, it is important to note that our strategy is 100% adviser focused, meaning every strategic decision we make is made with the adviser in mind. Moving to Slide 5. The first component of our growth strategy is to meet advisors where they are. Adhesion Wealth had another strong quarter and continues to focus on bringing on new RIA firms while expanding share of wallet of existing firms. Adhesion added a total of $485 million of assets from new firms through the first three quarters of the year. 75% of RIA firms experienced growth year-to-date with 46% seeing significant double-digit growth. Adhesion added four new managers and 25 models to their platform while adding three new Adhesion Alliance managers. In the third quarter, Adhesion was able to advance their strategic goals, specifically around building out their API toolkit and enhancing their platform with their pilot of Adhesion, TaxAlpha Dashboard.

We are excited about the advantage that Adhesion gives us in the RIA market and look forward to sharing their continued progress during future earnings calls. Turning to Slide 6. The second component of our growth strategy is to deliver a holistic, differentiated experience to our advisors and their clients. This quarter, I want to share some exciting news that will allow us to further penetrate the Bank Trust channel. First, let me provide some context. Banks are seeing increased competition from regional RIAs and wirehouse advisors who are competing for a client wallet share and raising the level of service model standards. Today, wealth management services are becoming integral to how banks better serve their clients, get a well-integrated trust accounting and wealth management solution has remained elusive in the marketplace, not anymore, I am pleased to announce that we have entered a partnership with an Accutech company, Cheetah, to better penetrate the $600 billion plus total addressable market.

Cheetah is a modern cloud-based trust accounting system built to serve the evolving needs of banks and their end clients. Together Cheetah and AssetMark will offer a premier integrated trust accounting and wealth management solutions that will allow banks to empower their trust officers and wealth advisors with a full ecosystem of trust accounting and investment capabilities. We plan to invest between $5 million to $10 million of capital as an upfront technology investment in the partnership and expect to start onboarding clients in the second half of 2024. To highlight the potential long-term opportunity, we forecast an incremental $25 billion of platform assets by end of 2028. We could not be more excited about this opportunity, it represents AssetMark’s continued expansion into the Bank Trust channel and integral part of the firm’s growth strategy.

The third component of our growth strategy is to enable advisors to serve more investors. Let’s turn to Slide 7, tax considerations play a prominent role in most wealth management activities. Nearly half of high net worth investors are looking for proactive tax planning support from their financial advisors and studies show that tax management may improve tax after tax returns by over 1%. Last month, we soft launched AssetMark’s Tax Management Services or TMS for a select group of 350 advisors. TMS is a personalized and comprehensive service that enables advisors to unlock new tax efficiencies for their clients at every step of their financial journey. This includes a tax-efficient transition of assets from an existing investment strategy into a new investment strategy, ongoing tax law harvesting, tax efficient rebalances and tax-efficient client direct at activity.

The user-friendly service makes tax management is a straightforward, efficient and seamless process and has key benefits for advisors, clients and AssetMark. For AssetMark, TMS allows us to amplify our financial wellness offering and provide increased revenue opportunity with additional fee of 10 basis points on enrolled AUM per year. We expect to rollout a national launch to all of our advisors in early 2024. Let’s turn our attention to Slide 8 and the fourth component of our growth strategy to help advisors grow and scale their business. This quarter, I want to provide an update on our business consulting offering. Previously, leading our Client Success Group, I had the privilege to oversee our business consulting function and truly believe it is a competitive differentiator for AssetMark.

Today, I want to highlight some of the programs that we have rolled out over the last year and provide an update on adoption. First is AssetMark’s marketing advantage. Since launch, it has been adopted by close to 400 advisors, which is over 150% of our goal. Second is this AssetMark’s investment consulting. We have been extremely pleased with our results here as the program has leveraged — has been leveraged by over 45 advisors with over $2 billion of total business commitment. Investment consulting is one of the key programs that will help us accelerate our organic growth. Lastly AdvisorLink. We have over 100 advisors who have requested access with a majority setup as buyers on the platform. Turning to Slide 9, the final component of our growth strategy is to pursue strategic transactions.

M&A is a key component of our business model and as CEO, I’m highly committed to leveraging M&A to grow our business. I want to provide some color on what we’re seeing in the market and our position. Activity is bouncing back. This past quarter saw a number of deals announced in the wealth tech space and adjacent sectors such as RI consolidation and wealth management, and we are seeing the follow-on effects in sectors of interest to AssetMark. We are also encouraged by increased interest from businesses seeking a strategic partner. We’re in a great position to be successful and capitalize on the warming M&A market. We have a strong balance sheet with significant dry powder and very low debt, which differentiates us from many of our peers. Our story is resonating with potential buyers.

They see significant value in our market-leading footprint additive distribution capabilities, technology and deep corporate resources we bring to the table. Sellers see the opportunity to take their business to the next level by partnering with us. We are also developing creative ways to use our balance sheet to help advisors with succession planning and growth. We see much interest in this area and are excited about the opportunity to deepen our relationship with advisors. Overall, we are in a great position to be an acquirer and making the right acquisitions will be crucial to achieve some of the long-term priorities I laid out at the beginning of the call. I will now turn the call over to Gary to take us through a deep dive on our third-quarter results and provide an outlook — on our 2023 outlook.

Gary Zyla: Thank you, Michael, and congratulations on your new role. It’s truly an honor to be here. And good afternoon to those on the call. As Michael mentioned, the third quarter was another record quarter for AssetMark. During my remarks today, I will highlight our results for the quarter and then provide an update to our 2023 outlook. Turning to Slide 10. Third quarter platform assets increased 26% year-over-year to $99.6 billion. Quarter-over-quarter platform assets were slightly down, driven by the negative market impact net of fees of $2.7 billion, partially offset by quarterly net flows of $1.5 billion. Year-to-date, our annualized net flows as a percentage of beginning period assets is 7.1%. Given current market dynamics, we are pleased about third quarter net flows that make no mistake about it, as Michael said, we are committed to getting back to our 10% plus organic growth and have a strategy to get there.

Turning to our advisors. Advisor Metrics, we added 158 new producing advisors, or NPAs, in the quarter. We are pleased that the quality of these NPAs is much higher than it has been in the past. Through the third quarter, year-to-date NPAs are down 6.4% year-over-year, yet production from this year’s NPAs is up over 50% as compared to last year. This improvement in the first year production from NPAs should lead to them getting to engaged status at a faster rate than previous NPA vintages. We are focused on continuing to stay close to our existing advisors. We just finished our third quarter Premier Advisor meeting with approximately 600 advisors attending across 18 locations. We are focused on winning new advisors and share of wallet from existing advisors, both of which can positively impact future slips.

On Slide 11, we show our engaged adviser count. We ended the third quarter with 2,995 total engaged advisors, down 3,032 engaged advisors in the second quarter. The quarter-over-quarter decline, was a result of the third quarter market appreciation, which took 49 advisors below the $5 million platform asset threshold and was offset though by 12 new organic engaged adviser adds. Our engaged advisors account for 32% of all advisors using our platform and make up 92% of our platform assets, growing the number of engaged advisors and a key focus for management as it is crucial to drive further growth of our business and its financials. As Michael mentioned, we are focused on getting to 5,000 engaged advisors by the end of 2026, which will double the size of the company.

To achieve this, we need to convert more non-engaged advisors to engaged status while also increasing the speed and rate at which we get NPAs to engage stats. M&A is also a crucial part of adding more engaged advisors to our platform. In addition to asset level and advisor count, the third way we measure growth which is not asset base is the number of households in our platform. The number of households are up 13% year-over-year to 251,000. Now let’s turn to Slide 12, to discuss this quarter’s revenue, which is a record $191 million. And we focus on our revenue net of related variable senses. For the third quarter of 2023, our net revenue was a record $139 million, up 20% year-over-year. All four components of our revenue increased year-over-year with spread and other income up a robust 52% and 129% (ph), respectively.

Slide 13 details our year-over-year net revenue walk. Asset-based revenue was up $9.1 million year-over-year, $11.7 million of that increase can be attributed to an $11.1 billion increase in billable assets. In addition to an incremental $2.4 million in revenue from Adhesion Wealth. These increases were partially offset by two headwinds to our asset-based revenue for the quarter for its fee compression of approximately 1 basis point, which is relatively in line with our expectations. And second, higher asset-based expenses due to an expense shift from SG&A asset based expenses. Spread revenue was up $9.8 million year-over-year, driven by yield improvement from 209 basis points to 402 basis points. Of this total yield, our securities-backed lines of credit program, or SBLOC, contributed 10 basis points, excluding the contribution from SBLOC net yield for the quarter was 392 basis points.

Subscription revenue from Voyant was up approximately 25% year-over-year, driven by growth in software revenue and foreign exchange tailwinds. Lastly, other income increased $3.3 million year-over-year, driven largely by higher interest income earned on our corporate cash. Now, let’s discuss expenses. Turning to Slide 14. Total adjusted expenses increased 19% year-over-year to $130 million. Quarterly operating expenses were up 11% year-over-year to $69.5 million, driven by increases in both employee compensation and SG&A. Employee compensation increased $4.4 million or 12% year-over-year, driven by an increased headcount of 60, of which 80% is from the acquisition of Adhesion. SG&A increased $2.6 million year — or 10% year-over-year, driven by increased audit preparation costs.

— I’m sorry, increased audit preparation costs, the addition of Adhesion, SG&A and other professional fees. Now I’ll quickly run through our adjustments for the quarter. In the third quarter, we added back a total of $7.4 million pretax, which is comprised of three items. First $4.3 million in non-cash share-based compensation. We anticipate approximately $4.5 million next quarter and between $5.5 million and $6 million per quarter in the first half of 2024. Second adjustment is $2.7 million related primarily to reorganization and integration costs. And lastly $2.2 million of acquisition-related amortization. Now let’s turn to Slide 15 to discuss our earnings for the quarter. Third quarter 2023 adjusted EBITDA was a record $66.5 million, up 26% year-over-year and more than the — then record $60.4 million we reported last quarter.

As Michael mentioned, this is the sixth straight quarter of record-adjusted EBITDA and is a testament to our growing revenue diversification and the flexibility and disciplined management of our expense base. Adjusted EBITDA margin was also on record, up 90 basis points year-over-year to 34.9%. Our reported net income for the quarter was a record $38.4 million, while adjusted net income was also a record $46 million or a record $0.62 per share. This is based on the third quarter diluted share count of $74.7 million. Our estimated tax rate for the full-year is 24%. For further color, please see the adjusted net income walk on Slide 20. Now let’s look at the reported third quarter balance sheet. I would highlight two items. First, we continue to do a great job at generating cash.

In the third quarter, we generated a robust $54 million of cash from operating activities. In the first three quarters of the year, we have generated over $159 million in cash from operating activities. Now let’s discuss capital expenditures, which primarily reflect our long-term investments in creating new capabilities, increase scale and improving service. In the third quarter, our capital spend was $11.6 million or 6.1% of total revenue. As Michael mentioned earlier, we are planning to increase our CapEx run rate next year to 8% to 10% of total revenue and that we can invest in more growth and scalability projects. Turning to Slide 16. I would like to provide some commentary on the meaningful impact that spread-based revenue continues to make on our financial results and how we look to maintain that.

Our ability to earn spread is a direct result of owning our custodian at AssetMark Trust Company or ATC. Spread-based revenue is a function of the amount of cash held by investors at ATC and interest rates, but first let’s discuss cash balances. In the third quarter, total cash as a percentage of assets at ATC was 3.9% while ICD or non-discretionary cash was 3.2%. Cash and the percentage of platform assets has been on a downward trajectory as more and more strategists put money to work in the equity and fixed-income market. We expect ICD cash in the percentage of assets and agency to return to more historical levels of 3.5%. Turning our attention to interest rates, the Fed increased rates once during the quarter. These rate increases are highly beneficial for the growth of our spread income, rates will not stay high forever.

As discussed in previous quarters, we have started to deploy a portion of our insured cash deposits to fixed-term agreements. As of September 30, 39% of cash at ATC is in a fixed rate term with an average maturity of 1.3 years and a growth rate of 4.59%. We have now close to 40% of cash at ATC into fixed-rate term which is currently our target threshold. We will continue to update you on the deployment of cash into fixed-rate term on future earnings calls. Finally, let’s turn to Slide 17 to discuss our revised 2023 outlook. Our platform asset guidance is 10%. Year-to-date through the third quarter platform assets were up 9% and full year of platform asset growth will be impacted by the fourth quarter market impact in addition to our net flows.

We are revising our revenue — net revenue to 20% from our previous guidance of 20% to 22%. We launched $2.7 billion of platform assets as a result — on the down markets in the third quarter, and this is — this will have an adverse effect on our fourth quarter revenue. Turning to expenses, we are maintaining our expense growth outlook for the year of 15% to 17%. As a reminder, amounts about one-third of this increase is the result of the addition of Adhesion. This level of expense growth allows us to continue to meaningfully invest in the future of our business while maintaining discipline, so the expense growth will not outpace revenue growth. We are maintaining our adjusted EBITDA guidance at 22% plus in 2023, which we believe is fantastic given the fact that we grew adjusted EBITDA by 27% in 2022.

Lastly, we are targeting adjusted EBITDA margin expansion of 100 basis points for the year. We are extremely pleased by our — about our financial results this year and are on track for the best year in our company’s history. With that, I will hand the over to Michael for his concluding remarks.

Michael Kim: Thank you, Gary, and thank you to everyone on the call today. I look forward to building relationships with all of you on the line, and I’m always open to a conversation with our investors and potential investors. I will be on the road with Gary and Taylor in early December attending the Goldman Sachs US Financial Services conference. This concludes our prepared remarks. I will now turn the call back to the operator to begin Q&A.

Operator: Certainly. [Operator Instructions] Our first question is from the line of Michael Cho with J.P. Morgan. Please proceed.

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Q&A Session

Michael Cho: Hi. Good afternoon, guys. Michael and Gary, thanks for taking my questions. I just want to touch, my first question, on your comments, Michael and Gary, around engaged advisors. So, if I just look over history engaged advisors went from about 2,000 to 3,000 over the course of about four to five years. And Michael, you kind of laid out today that we’re going to add, I don’t know, I think 2,000 in the next couple of years. And so I’m just trying to understand how much of this acceleration is driven by, capabilities and AssetMark’s toolkit today and how much of it is really things from — that you’re hoping to develop in the future. And I think you mentioned M&A as well. So ultimately, I’m just trying to better understand, what gives you so much confidence in this accelerated growth profile looking ahead?

Michael Kim: Yes. Hey, Michael. It’s Michael Kim here. So thank you for that question. Why don’t I get the conversation started, and Gary please add in additional details here as well. So Michael, you’re absolutely right. I mean, the engaged advisors is a top, top focus for our firm here. And as I mentioned during the prepared remarks, the engaged advisors, they represent over 90% of our platform assets. And as we take the march towards 5,000 engaged advisors, that will effectively help us double the size of the company by 2026. And so I cannot stress enough the importance of the engaged advisors. And Michael to your question, when we think about the how part of — how we get to the 5,000 engaged advisors and really accelerating the growth there’s three key areas that we are focused on in terms of driving the number of engaged advisors.

First is reengaging what we call our non-engaged advisors. So Michael, we have actually of over 6,000 non-engaged advisors, those advisors that are less than 5 million. And these are advisors that have already made a decision for one or more of their clients to work with AssetMark. And so this represents — this group represents a huge opportunity for us to reengage them and really share with them the full value of outsourcing with AssetMark. And we believe there’s a tremendous opportunity, from this group alone. At the second time, we — at the same time, the second area is that we’re extremely focused on is really around new producing advisors or NPAs. And Gary alluded to this as well, we believe we have an opportunity to really accelerate the NPAs and their journey towards the engaged status.

We are focused on not only the quantity, but as we talked about earlier today, we are seeing improved quality of our NPAs coming on board our platform. Gary alluded to production higher than about 50% from prior year NPA production. And so we’re seeing signs of improved quality and we want to make sure that we continue that momentum to help us get to the 5,000 engaged advisors. And then the third area is really around M&A. We believe as we continue to focus on our consolidation opportunities as well as capability acquisitions, that our focus on M&A opportunities will help us really drive towards the 5,000 engaged advisor count. So those are sort of the three key areas that we’re focused on. Gary, I’d love to see if you have other details that you can share with Michael here as well.

Gary Zyla: And so Michael, when you talk about how as well, the way advisors engage with us starts with the introduction we call the onboarding process. And then once they are onboarded, we have numerous processes and methods to help them increase their share of wallet with us. And in each one of those steps in the lifecycle of the advisor and the lifecycle of our relationship with them, we are focused on improving them. And there are multiple projects under this initiative but it is a holistic approach to both, like Michael said, the new producing advisors as well as that very large listening (ph) age group

Michael Cho: Okay. No, great. Thank you for the explanation. For just my second question, I want to switch gears just a little bit on the investment side. We talked through a bit about the heightened level of CapEx going forward. And I think you mentioned the Cheetah’s partnership as well. But just curious, where’s the focus in terms of the increase in CapEx and over the next year and a half or so? And then, does the accelerated investment period merit any revisit to the margin expansion framework that AssetMark has operated under for the last few years? Thanks.

Michael Kim: Yeah, Michael. Thank you again for the question. And so we are really sort of taking a very close look at the amount of capital that we have an opportunity to deploy. And then that’s actually one of our top initiatives to really accelerate the deployment of capital and make sure that we get the right return on the capital. And as I mentioned during the prepared remarks that we will be increasing the CapEx budget to about 8% to 10% of revenue from the current run rate of about 6% to 7%. And really there’s actually two primary goals with respect to increase in the investments. One is really to drive growth. You alluded to the Cheetah partnership. Michael, we are very excited about this partnership here with Cheetah.

Not only does it help us expand our footprint into the Bank Trust channel, but with the $5 million to $10 million of additional capital investment in this relationship that will really allow us to bring some of the trust capabilities even to our core channel as well. And so that’s a great example where the capital expense — capital investment will help drive additional growth. The other side of our objective is to really continue to drive scalability. And as I mentioned, automation, especially in our service and operations group, is a key focus for us. We have an opportunity to remove up to $25 million of annual costs per year, while, of course, never taking the foot off the pedal on our already world-class service offering. And so we have an opportunity to really drive both growth as well as enhancing our scale through the capital investments that we discussed earlier.