Enfusion, Inc. (NYSE:ENFN) Q3 2023 Earnings Call Transcript

Enfusion, Inc. (NYSE:ENFN) Q3 2023 Earnings Call Transcript November 11, 2023

Operator: Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Enfusion’s Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I’d now like to turn the call over to Ignatius Njoku, Head of Investor Relations, to begin.

Ignatius Njoku: Good morning, and thank you, operator. We welcome you to Enfusion’s Third Quarter 2023 Earnings Conference Call. Hosting today’s call are Oleg Movchan, Enfusion’s Chief Executive Officer; and Brad Herring, Enfusion’s Chief Financial Officer. Please note, our quarterly shareholder letter, which includes our quarterly financial results have all been posted through our IR website. I would like to remind you that today’s call may contain forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including those set forth in our filings with the SEC and are available under Investor Relations section on our website. Actual results may differ materially from any forward-looking statements we make today.

These forward-looking statements speak only as of today, and the company does not assume any obligation or intent to update them following today’s call. except as required by law. In addition, today’s call may include non-GAAP measures. These measures should be considered as a supplement to and not a substitute for GAAP financial measures. Reconciliation to the nearest GAAP measure can be found in today’s quarterly Shareholder Letter, which is available on the company’s website. With that, I’d like to turn the call over to Oleg to begin.

Oleg Movchan: Good morning, and thank you for joining us today to discuss our results in the third quarter of this year. I’m pleased to announce that Enfusion business delivered another solid quarter for both revenue and profitability. Value creation engine has gained in momentum. Our disciplined go-to-market strategy is validated by persistent market capture and expansion across target segments in the face of ongoing macroeconomic uncertainty. We continue to execute against our large market opportunity, take market share, expand our global footprint and improve our profitability. Our value proposition remains intact, validated by healthy client additions, improving net dollar retention, increase in average contract value and expanded margins.

I’m very excited about the formal launch of Portfolio Workbench, which empowers portfolio managers to seamlessly integrate Portfolio construction processes with operational workflows. Innovation is embedded in our culture and is at the core of our strategy. This product release not only represents a pivotal moment in our journey to support the largest and most complex institutional clients but also underscores our commitment to technological development and a best-in-class client experience. I will share more details on this in a moment. Although we’re not immune to macro headwinds, I’m more optimistic than ever about our future. We’ll continue to grow above market rates and taking business from resourcing centers, fragment and expensive solutions.

Enfusion continues to prove that it deserves to be a platform of choice for investment management organizations of any scale and complexity. Ultimately, our results are the evidence that Enfusion’s business model is truly global, scalable and adaptable. Enfusion remains well positioned to benefit from secular industry tailwinds, while increasing its resilience to macro uncertainty. Regardless of market environment, we will continue to operate from a position of strength and iterate towards recapturing our unit growth and profitability profile. Now let me walk you through some of our key financial metrics in the third quarter. Revenue grew 13% to $44.4 million as we continue to execute on our go-to-market strategy and product road map. Adjusted EBITDA was $8.2 million and represented an 18.5% margin.

We continue to improve our margin profile, benefiting from strong expense control and operating leverage. We added 37 clients this quarter, bringing the total client count to 842 and increased our ACV to $217,000, representing 2.4% quarter-over-quarter and about 8% year-over-year growth. Brad will discuss our financial results in more detail in a few moments. Now I would like to share a few notable client additions, validating our execution framework as we expand across geographies and market segments. In the Americas, revenue grew 10% year-over-year reflecting ongoing market share gains with larger fund managers despite macro headwinds. I’m thrilled to share that Enfusion signed a bottom-pace alternative manager with approximately $2.5 billion in AUM.

The firm opted out of upgrading its legacy OMS given the resource challenges. As a result, the system became obsolete after several years. Unlike the legacy provider, our team was able to understand the complexity of the clients’ workflows and design a well-suited solutions. Notably, this conversion resulted in Enfusion providing both software and managed services, as a much more cost-effective alternative compared to using in-house resources. Enfusion also signed a New York based loan-only asset manager focused on emerging and frontier markets. In this competitive takeaway, Enfusion is consolidating the investment managers patchwork of disparate solutions, which required manual processes for communication between systems. As a result, the in-house solution became exceedingly complex, drove higher maintenance costs and demanded more IT resources.

By implementing Enfusion’s platform, the asset manager benefits from our fluid front-to-back solution inclusive of the new launch Portfolio WorkBench tightly integrated with both golden source of true data sets and workflows, result in a minimized operational risk and material cost reduction. In EMEA, revenue grew 29% year-over-year as the market continues to embrace our differentiated offering. We’re excited about our momentum in the region as we diversify our revenue portfolio moving to larger and more complex markets and expand into new regions. For example, we stand with another London-based multibillion-dollar global institutional asset manager. The fund manager outgrew its legacy incumbent provider and faced multiple challenges, including manual trade allocation and an adequate cash reconciliations.

They selected Enfusion because of the robust front-to-back platform, allowing them to streamline and automate their workflow and scale as they grow. With Enfusion, the client now has a unified view across all funds and product, can, execute swift trade instructions and benefits from our multi-asset class NAV generation capability. We also signed a large newly launched debt manager, the largest distressed specialist launched in recent history, demonstrating our ongoing success with credit strategies. They selected Enfusion platform because of its flexibility to support the company’s future growth and robust major support across various asset classes as well as workflow automation. Importantly, we continue to expand our geographic presence in Europe.

I’m thrilled to announce that we entered into an agreement with Oslo-based Investment Manager which runs a loan-only equity strategy. The manager is part of a newly formed entity with a large, well-known team with a significant track record. This particular client will be leveraging Enfusion software and managed services offering. We also won a mandate from a South African-based loan-only fund. This client lends to leverage Enfusion software and services to streamline their workflow and realize cost savings. In APAC, we grew revenue by 13% year-over-year. We’re seeing early signs of improvement in the launch market and getting traction with our upmarket motion. For example, we signed a Hong Kong based global macro alternative manager. The fund manager was looking for a platform to enable them to launch quickly with robust end-to-end architecture and a single source of truth for data and operations.

Additionally, by partnering with Enfusion, the fund manager leverages Enfusion’s value at risk and other risk measurement and reporting capabilities. Finally, we entered into an agreement with another recent fund launch, an Australian alternative asset manager based in Sydney. The fund manager chose Enfusion because they were looking for a flexible platform that would facilitate a timely launch and set up the company for future scale from day one. Let’s move to some updates on the product front. As I’ve said many times, innovation is one of our core values and has always differentiated Enfusion from our competition. It is embedded in our culture and permeates throughout everything we do on a daily basis. I’m thrilled to announce the recent formal launch of our Portfolio WorkBench, a highly intuitive capability that enables investment managers to rebalance their portfolios across multiple strategies and investment vehicles.

By leveraging in-grid portfolio editing and an intuitive user interface, Portfolio WorkBench works in concert with our OMS functionality and allows PMs to easily manage performance and risk against the benchmark. As a result, PMs can test pre-trade compliance rules, monitor post-trade compliance, and model upcoming subscriptions and redemptions across multiple investment vehicles within one user interface without concerns about data integrity. The Portfolio WorkBench is a strategic product launch for several reasons. First, Portfolio WorkBench is a critical component in our stated strategy to move upmarket to larger and more complex asset managers, that expands our traditional operational capabilities into the decision-making segment of the workflows in a way that is tightly integrated with decision implementation.

Second, it’s an intermediate step to support investment managers to deploy both proprietary and third-party risk models facilitating their portfolio optimization and the risk management frameworks. It has important implications for both passive managers that are tracking benchmarks with periodic rebalancing and active managers focused on outperforming benchmarks by taking active positions. This will drive more quantitative and systematic portfolio construction in addition to heuristic and manual portfolio adjustments. Third, Portfolio WorkBench continues to build on Enfusion’s all-in-one product philosophy, where we insist on eliminating fault lines across all segments of investment management workflows. With just another set of functionality, that is a fluid and natural extension of the existing platform.

Lastly, it further expands our competitive advantage by widening our mold from legacy competitors, responding to market demand including client retention and expanding Enfusion value proposition. Here is just one of many examples of our Portfolio WorkBench allows us to expand into the loan-only segment. It was a key element that helped us convert a large emerging markets equities and credit focused manager that initially went with one of our competitors. In addition to Portfolio WorkBench, Enfusion rolled out 366 additional enhancements and features across our portfolio management and OEMS. The frequency and scope of the software updates is an important dimension of our competitive advantage and value creation mechanism. With that, I would like to highlight 2 other important enhancements the team released this quarter.

The first is Bloomberg real-time mobile support, which connects Bloomberg’s real-time pricing in their terminals with third-party applications so that the investment team can stay connected, leveraging Enfusion’s mobile apps. The other is native support for an OTC product, [indiscernible], which provides investors with a cost effective and optimal way to obtain data exposure to corporate bonds and leverage loan markets. Enfusion’s front-to-back platform remains well suited to support complex instruments and solve for simplicity that legacy vendors simply cannot. These new features are the result of long-term efforts by our product and engineering teams to deliver value-added capabilities, highly requested by our clients. Now moving on to market dynamics.

We see some green shooting managers planning to launch new hedge fund. However, the overall launch dynamics remain the low historically. Be that as it may, while we continue to successfully protect and expand our hedge fund home turf, our book of business is increasingly less dependent on launches. Importantly, Enfusion continues to benefit from secular tailwinds as the entire investment management industry is reevaluating its software stack, workloads and related costs and risk. Our upmarket motion keeps gaining momentum as we continue to scale our technology, execute on our product road map and listen to our clients. All of this is reflected in our recent robust market share gains and continued shift in the revenue mix away from launch of store conversions and away from pure hedge fund managers for institutional investment managers.

As like I have said multiple times, Enfusion is a pain killer, not a vitamin. As a side benefit of killing our clients fee, we inflict an increasing amount of pain on our competition. Now let me review some key elements of our long-term strategy. Our strategic position continues to evolve as we unlock new market opportunities and diversify our client base towards institutional asset managers and asset owners. Enfusion is a business in transition, and we continue to prove our business model as we optimize our go-to-market strategy, shorten the sales cycle and increase velocity of our onboarding process. Naturally, all of that drives TAM expansion, improvement in durability and speed of our growth, margin expansion and client retention. Importantly, this framework is designed to protect our business economics from excessive macro headwinds.

As evidenced by our performance over the last year, we continue to spread our growth wins globally, shifting our book of business away from minor center cities and targeting regions where competition is in. We continue to maintain our focus on returning to Enfusion’s historical financial profile. Enfusion value creation machine is back to its normal virtuous cycle as we exercise surgical precision in our pipeline generation, operational excellence of our client services, product innovation, optimization of our revenue strategies and relentless fiscal discipline. In conclusion, we delivered solid third quarter results. We remain focused on sales execution, moving up market and expanding our global footprint. I’m very grateful to all my Enfusion colleagues for hard work, passion and focus on our clients.

I will now turn the call over to Brad to discuss our financials.

Brad Herring: Thanks, Oleg, and thank you, everyone, for joining us today. Speaking on behalf of the entire Enfusion management team, I’m glad to report yet another quarter of top line growth, combined with strong profitability and cash flow generation. For the third quarter, we generated revenue of $44.4 million, an increase of 13% over the same quarter last year. Just as we reported last quarter, these results represent a slowdown in our historical growth rates. However, we’re seeing some positive indicators in our underlying growth algorithm. First, bookings in both new fund launches and conversions continue to be strong as the sector continues to look for effective and efficient solutions to manage back-office tasks. Second, the quality of our pipeline continues to improve as we expand our market opportunities by deploying new product features such as portfolio benchmarking and additional capabilities around credit.

Finally, we are starting to see some favorable trends in the underlying revenue drivers within our back book. Specifically, we are seeing both improvement in net organic growth as well as lower churn. Third quarter ARR was $177.9 million, up 12% year-over-year and 4% higher than what we reported just last quarter. As a result of the trend improvements in the back book I mentioned, net dollar retention in the quarter, excluding involuntary churn, was 107% while net dollar retention, including involuntary churn, was just over 102%. For both NDR measures, this is the first quarter in the previous 4, where we see NDR increases, which leads to confidence that the headwinds related to the macro challenges facing the sector are either stabilizing or modestly reversing.

Adjusted gross profit increased by just over 9% year-over-year to $30.2 million. This represents an adjusted gross margin of 68%. As we’ve talked about in previous earnings calls, we expect adjusted gross margins to remain between 68% and 70% for the next several quarters as we continue to invest in our client onboarding and servicing capabilities in support of our growth strategy. Adjusted EBITDA for the quarter was $8.2 million, up over 50% compared to Q3 of last year. Against current quarter revenues, this represents an adjusted EBITDA margin of 18.5% up 460 basis points from the same period a year ago, and this is largely consistent with what we reported in Q2. Our end quarter results represent a 53% pass-through rate on incremental revenues.

For the quarter, we generated adjusted free cash flow of $9.5 million compared to $6.9 million in the same period a year ago. Cash flow conversion in the quarter of 116%, was higher than normal due to the timing of various cash inflows and outflows that is somewhat typical for the third quarter. While the quarterly conversion rates will fluctuate, we remain confident in our ability to convert approximately 50% of our adjusted EBITDA into free cash flow on a rolling 12-month basis. GAAP net income for the quarter was $2.7 million compared to $2.6 million in the same period last year. Against our fully diluted share count of 127.8 million shares, our current quarter net income results in a GAAP EPS of $0.02 per share. With respect to our balance sheet and capital considerations, there are a few items from the quarter to discuss.

First, we ended the quarter with approximately $32 million in cash and cash equivalents and no outstanding debt. Second, with our partners at Bank of America, we have recently secured a revolving credit line of $100 million with an additional $50 million available contingent on certain conditions. This line was exclusively put in place to provide access to liquid capital should we identify strategic targets that could help accelerate our growth trajectory. Finally, we are pleased to say that we completed the distribution of shares to holders of our management incentive units that were connected to our 2021 IPO. The most notable impact of completing these distributions is that all tax withholding obligations related to these shares are now fully satisfied.

Moving on to guidance. We are reaffirming the revised revenue and adjusted EBITDA figures that we provided in our Q2 earnings discussion. Just to confirm, that was a range of $170 million to $175 million for full year 2023 revenue in a range of $30 million to $32 million for full year 2023 adjusted EBITDA. With that, we’d like to open up the call to questions. Operator, please go ahead.

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Q&A Session

Operator: [Operator Instructions] We’ll take our first question from James Faucette at Morgan Stanley.

Michael Infante: It’s Michael Infante on for James. I wanted to ask on Portfolio WorkBench. Obviously, currently in beta expected to go GA by the end of the year. Oleg, I think you called that out as a driver of a win or 2 in the quarter. But I’m curious how you would characterize the early feedback thus far from clients and perhaps how it’s priced and the potential uplift from an NDR perspective over the medium term?

Oleg Movchan: Thanks, Michael. Great question. So this one of the products. I just want to emphasize it again. It’s not something that we went to the — our design lab and created without consulting with our customers. Actually, it’s a result of many conversations. We simply responding to what market is asking us to do, and on one hand. And on the other hand, it’s a part of our deliberate and purposeful strategy to create a product offering for institutional asset managers and move our traditional portfolio that is a mix, as you know, between middle and back office offering, more toward investment decision-making as opposed to investment decision implementation part. And so that’s the strength of the product where it doesn’t exist on a stand-alone basis outside of the core system, then there is another layer of integration that brings those orders into overall core.

It’s actually a part of the fluid Enfusion like ecosystem. And so once the decision is made, which is what Portfolio WorkBench is all about, it’s been seamlessly executed within our OEMS. So it’s basically, again, it’s a response to what market has been asking us to do and the result of multiple iterations that the product team and the technology team has performed with our clients. Naturally, it will — we believe it will make a serious impact on our client retention capability. I mean, look, the reality of it is Enfusion is becoming as opposed to just operational support platform. It’s also becoming a collaboration platform, where portfolio managers, the very people that think about how to position the portfolio, allocate capital, allocate risk, continue to interact with analysts, continue to interact with front-office teams portfolio — excuse me, order management capabilities, traders and so on and so forth.

And so that part is facilitating that collaboration, that part is facilitating that interaction and therefore, reinforces the quintessential nature of the platform and thereby translates into the high retention rates.

Michael Infante: Maybe just on some of the strategic commentary you made, obviously, good to see the incremental credit facility, the health of your balance sheet and the free cash flow generation that you guys are having. But how are you thinking about the capacity for near-term M&A? I’m more curious about the types of assets and/or geographies that you would be interested in?

Oleg Movchan: Sure. Great question. So we have — I mentioned a couple of quarters ago, first of all, very deliberate in what we are looking at as far as our M&A targets are concerned. Our thesis of all-in-one system, fluid one — one fluid up here in set of code, framework, workflows remains intact. Therefore, the bar for finding something where we have completely blinding the obvious value creation proposition technology stack compatibility. And of course, culture feed is pretty challenging, right? On the other hand, because of our system is so open and so flexible, it does facilitate interest in place, both in terms of scale, where we can bring something onboard that will simply accelerate our — either accelerate our travel from a growth perspective within the core product strategy or from a scope perspective where we would position the business within areas we’re simply not such as private equity markets or private credit market.

But from that perspective, it’s not so much geographical approach, we are global. We’re looking at things, both in Europe and in U.S. Of course, in the U.S., there is plenty more to look at. But it’s more related to a choice, whether it’s a scale deal where we look along our vertical and see what our technology platform allows us to bring onboard. Or we look at this from a scope perspective, where we’re seeing what’s available from modern technology perspective that would allow us to get into areas where Enfusion is not currently represented or doesn’t have capabilities to sell.

Operator: We’ll take our next question from Faith Brunner at William Blair.

Faith Brunner: I wanted to start on the international side. You guys are seeing strength, especially in EMEA. And I was just wondering how you’re thinking about this opportunity, how you guys are thinking about allocating resources and your competitive positioning to sustain momentum in these areas.

Oleg Movchan: Well, big focus for us. Thank you for the question. I mean as you’ve seen for the last couple of quarters, it’s been a strong driver of our growth, 29% year-on-year growth this quarter. We see a lot of opportunity there. People typically think about EMEA as one monolithic market. From our perspective, it’s anything but. Every country in Europe is relatively unique in terms of go-to-market strategy, in terms of how people think about technology, how people think about buying decisions, who are the gatekeepers in the industry and so on and so forth. And so our strategy is nuanced, and I have to give credit to our both revenue team and product team thinking through those nuances and designing that go-to-market strategy to attack those markets.

Those markets also, from our perspective, tend to be less competitive and less crowded, more stale, slower and therefore, in some sense, ripe for disruption by companies like Enfusion. They still either relying on a lot of legacy systems, legacy infrastructure, homegrown proprietary or relying on relatively clunky, obsolete legacy providers, where people are still babysitting capabilities and spending tens of millions of dollars without significant ROI. So we’re very excited about the opportunity, both Europe and Middle East, very interesting. And as you’ve seen, we’re gaining traction in multiple countries, France, Norway, of course, we’re seeing opportunities in U.K. as well. It’s still a home turf. We still are obviously controlling pretty large market share around money center cities like London, and of course, outside EMEA, like Hong Kong and New York.