Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and the notes to those statements included in Part II, Item 8, "Financial Statements and Supplementary Data" in this Annual Report on Form 10‑K. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. See Part I, "Forward-Looking Statements" and Part I, Item 1A, "Risk Factors" for a discussion of the uncertainties, risks, and assumptions associated with these statements. Actual results could differ materially from the results referenced in forward-looking statements.
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 is a leader in helping transform wealth management, working towards its goal of expanding a holistic financial wellness ecosystem so that our clients can better serve their clients.
Envestnet's clients include more than 108,000 advisors, 16 of the 20 largest U.S. banks, 48 of the 50 largest wealth management and brokerage firms, over 500 of the largest RIAs and hundreds of FinTech companies, all of which leverage Envestnet technology and services that help drive better outcomes for enterprises, advisors and their clients.
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 in Berwyn, Pennsylvania, as well as other locations throughout the United States and India and other international locations.
Recent Developments
Leadership Update
On January 7, 2024, the Company entered into a separation and release agreement with Mr. Crager in which it was agreed that Mr. Crager will step down as chief executive officer on March 31, 2024 and as a member of the Company’s Board of Directors promptly following Envestnet’s 2024 Annual Meeting. Beginning April 2024, Mr. Crager will serve as a senior advisor, focusing on client and partner relationships. Beginning April 1, 2024, James Fox will begin serving as our Interim Chief Executive Officer until our Board of Directors has appointed a new chief executive officer. Mr. Fox has served as a member of our Board of Directors since February 2015 and Chair of the Board of Directors since March 2020.
Business Segments
On October 1, 2023, we changed the composition of our 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 change does 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 Annual Report on Form 10-K for the year ended December 31, 2023 is presented in conjunction with the current organizational structure, with prior periods adjusted accordingly.
Correction of Immaterial Error
During the fourth quarter of 2023, the Company identified that the arrangement with a third-party for the use of cloud hosted virtual servers which was previously accounted for as a finance lease transaction and included as a component of property and equipment, net in the consolidated balance sheets should have been recognized as a prepayment included within prepaid expenses and other current assets and other assets in the consolidated balance sheets. The Company concluded that the classification of these transactions was immaterial in prior period financial statements and that amendment of previously filed reports was not required. However, the Company corrected this immaterial error in the prior years reported within this Annual Report on Form 10-K for the year ended December 31, 2023.
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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 and after October 7, 2023, the military conflict between Russia and Ukraine which escalated in February 2022, as well as rising inflation, contributed to significant volatility and decline in global financial markets during 2022 which continued throughout most of 2023. 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 to estimate the overall financial effect of these and this period of inflation at this time, as these conditions continue, they could have a material effect on our business, results of operations, financial condition and cash flows. As of December 31, 2023, the consolidated financial statements do not reflect any adjustments as a result of these macroeconomic conditions.
Convertible Promissory Note
On January 31, 2023, we entered into a Convertible Promissory Note with a customer of the Company's business, a privately held company, whereby we were issued a convertible promissory note with a principal amount of $20.0 million and a stated interest rate of 8.0% 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 events or corporate transactions. During the year ended December 31, 2023, interest income related to the Convertible Promissory Note included in interest income in the consolidated statements of operations was $1.5 million.
In connection with the Convertible Promissory Note, we concurrently entered into a call option agreement with the privately held company, which provides us 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 year ended December 31, 2023; however, we did not exercise the call option.
Convertible Notes due 2023
The Convertible Notes due 2023 matured on June 1, 2023. Upon maturity, we settled the remaining aggregate principal amount of 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.
Reduction in Force Initiative
During the year ended December 31, 2023, as part of a reduction in force initiative, we 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, we incurred approximately $35.4 million of total severance expense in the year ended December 31, 2023.
As of December 31, 2023 we had an ending liability balance of $10.3 million related to these efforts, of which we anticipate approximately $9.2 million to be paid throughout 2024, with the remaining balance paid through 2030.
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Operating Results
Beginning in the three months ended December 31, 2021 through December 31, 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: Throughout 2022, the financial markets experienced a broad downturn and our redemption rates were higher than our historical average, and as a result, in our Wealth Solutions segment, our asset-based recurring revenue was materially adversely affected. Beginning in the three months ended March 31, 2023 asset-based recurring revenue has been increasing steadily. 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 revenue has 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. In addition, during the fourth quarter of 2023, the Company recognized a non-cash impairment charge to goodwill of $191.8 million. See below for further discussion of the goodwill impairment.
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, which the Company has undertaken as discussed above.
Goodwill Impairment
Due to lower revenue and profits in the Envestnet Data & Analytics segment in 2023 compared to prior years, the Company performed a quantitative goodwill impairment evaluation as part of the annual goodwill impairment analysis for each reporting unit in the fourth quarter of 2023 utilizing a combination of the discounted cash flow method (income approach) and guideline public company method (market approach). As a result of this impairment test, the carrying value of the Envestnet Data & Analytics reporting unit exceeded its fair value, which resulted in the recognition of a non-cash impairment charge to goodwill of $191.8 million in the consolidated statements of operations for the year ended December 31, 2023.
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Key Metrics
Envestnet Wealth 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 December 31,
(in millions, except accounts and advisors data)
Platform Assets
AUM
AUA
Total AUM/A
Subscription
Total platform assets
Platform Accounts
AUM
AUA
Total AUM/A
Subscription
Total platform accounts
Advisors
AUM/A
Subscription
Total Advisors
The following tables 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 - 2023
As of December 31, 2022
Gross Sales
Redemptions
Net Flows
Market Impact
Reclass to Subscription
As of December 31, 2023
(in millions, except account data)
AUM
AUA
Total AUM/A
Fee-Based Accounts
The above AUM/A gross sales figures for the year ended December 31, 2023 include $72.3 billion in new client conversions. We onboarded an additional $169.7 billion in subscription conversions during the year ended December 31, 2023 bringing total conversions for the year ended December 31, 2023 to $242.0 billion.
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Asset Rollforward - 2022
As of December 31, 2021
Gross Sales
Redemptions
Net Flows
Market Impact
Reclass to Subscription
Reclassification (1)
As of December 31, 2022
(in millions, except account data)
AUM
AUA
Total AUM/A
Fee-Based Accounts
(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 for the year ended December 31, 2022 include $52.9 billion in new client conversions. We onboarded an additional $132.3 billion in subscription conversions during the year ended December 31, 2022, bringing total conversions for the year ended December 31, 2022 to $185.2 billion.
Asset and account figures in the “Reclass to Subscription” columns for the years ended December 31, 2023 and 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 year in which the reclassification occurred, with no impact on total platform assets or accounts.
Envestnet Data & Analytics Segment
Paid End-Users
A paid end-user is defined as a user of an application or service provided to our customer using the Envestnet Data & Analytics platform whose status corresponds to a billable activity under the associated customer contract. We believe that our ability to increase the number of paid end-users is an indicator of our market penetration, the growth of our business, and our potential future business opportunities.
The following table provides information regarding the number of paid end-users and firms using the Envestnet Data & Analytics platform in the periods indicated:
December 31,
December 31,
December 31,
(in millions, except number of firms data)
Number of paid end-users
Number of firms
Revenue
Overview
We earn revenue primarily under three pricing models. First, a portion of our revenue is derived from fees charged as a percentage of the assets that are managed or administered on our technology platforms by financial advisors. This revenue is recorded under asset-based revenue. Our asset‑based fees vary based on the types of investment solutions and services that financial advisors utilize. In future periods, the percentage of our total revenue attributable to asset‑based fees is expected to vary based on fluctuations in securities markets, whether we enter into new, or lose, significant subscription agreements, the mix of AUM or AUA, and other factors.
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We also generate revenue from recurring, contractual subscription fees for providing access to our technology platforms. This subscription revenue includes both contractual minimum payments and usage-based fees and is driven primarily by the number of customers, including new customers as well as customers who renew their existing subscription contracts, and the number of paid end-users. This revenue is recorded under subscription-based revenue. Subscription fees vary based on the scope of technology solutions and services being used, and are priced in a variety of constructs based on the size of the business, number of users or number of accounts and in many cases can increase over time based on the growth of these factors.
Finally, a portion of our revenue is generated from fees received in connection with professional services and other sources.
Asset-based recurring revenue
We generally charge our customers fees based on a higher percentage of the market value of AUM than the fees we charge on the market value of AUA, because we provide fiduciary oversight and/or act as the investment advisor in connection with assets we categorize as AUM. The level of fees varies based on the nature of the investment solutions and services we provide, as well as the specific investment manager, fund and/or custodian chosen by the financial advisor. A portion of our revenue from assets under management or administration includes costs paid by us to third parties for sub‑advisory, clearing, custody and brokerage services. These expenses are recorded under direct expense. We do not have fiduciary responsibility in connection with AUA and, therefore, generally charge lower fees on these assets. Our fees for AUA vary based on the nature of the investment solutions and services we provide.
Approximately 75% of our asset-based recurring revenue from AUM/A are billed to customers at the beginning of each quarter and are based on the market value of their assets on our platforms as of the end of the prior quarter. For example, asset-based recurring revenue recognized during the fourth quarter of 2023 was primarily based on the market value of assets as of September 30, 2023. Our asset-based recurring revenue is generally recognized ratably throughout the quarter based on the number of days in the quarter.
Our asset-based recurring revenue is affected by the amount of new assets that are added to existing and new client accounts, which we refer to as gross sales. Gross sales, from time to time, also include conversions of client assets to our technology platforms. The amounts of assets that are withdrawn from client accounts are referred to as redemptions. We refer to the difference between gross sales and redemptions as net flows. Positive net flows indicate that the market value of assets added to client accounts exceeds the market value of assets that have been withdrawn from client accounts.
Our asset-based revenue is also affected by changes in the market values of securities held in client accounts due to fluctuations in the securities markets. Certain types of securities have historically experienced greater market price fluctuations, such as equity securities, than other securities, such as fixed income securities, though in any given period the type of securities that experience the greatest fluctuations may vary.
Subscription-based recurring revenue
Subscription-based recurring revenue is generally recognized ratably over the term of each respective subscription agreement, commencing on the date the service is provisioned to the customer, provided all applicable revenue recognition criteria have been satisfied. As part of the subscription contracts, many of our open banking customers commit to a minimum level of paid end-users from which a minimum level of non-refundable subscription revenue is derived. As paid end-users in excess of the guaranteed minimum level access the platform, the customer is then required to pay additional usage fees calculated based upon a contracted per-paid-user fee. No refunds or credits are given if fewer paid end-users access the platform than the contracted minimum level. Usage-based revenue is recognized as earned, provided all applicable revenue recognition criteria have been satisfied. Our subscription-based revenue is affected by the addition, loss and timing of customer contracts as well as access to data in the research business.
Professional services and other revenue
We also receive revenue from professional services fees by providing customers with certain technology platform software development and implementation services. This revenue is recognized when completed, under a proportional‑performance model utilizing an output‑based approach or on a straight‑line basis, over the estimated life of the customer relationship. Our contracts generally have fixed prices and generally specify or quantify interim deliverables.
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Expenses
The following is a description of our principal expense items:
Direct expense
Direct expense primarily consists of expenses related to our receipt of sub‑advisory and clearing, custody and brokerage services from third parties. The largest component of direct expense is paid to third-party investment managers. Clearing, custody and brokerage services are performed by third‑party providers. These expenses are typically calculated based upon a contractual percentage of the market value of assets held in customer accounts measured as of the end of each fiscal quarter and are recognized ratably throughout the quarter based on the number of days in the quarter. Also included in direct expense are vendor specific expenses related to the direct support of revenue associated with the Envestnet Data & Analytics products.
Employee compensation
Employee compensation expense primarily consists of employee salaries, incentive compensation, non‑cash stock‑based compensation, incentive compensation, benefits and employer‑related taxes.
General and administrative
General and administrative expense primarily consists of costs related to occupancy, communications services, research and data services, software and maintenance charges, marketing, professional and legal services, travel and entertainment and acquisition/transaction related expenses.
Depreciation and amortization
Depreciation and amortization expense primarily consists of depreciation and amortization related to:
• fixed assets, including building and building improvements, computer equipment and software, leasehold improvements, office furniture and fixtures and office equipment and other;
• internally developed software; and
• intangible assets, primarily related to customer lists, proprietary technology and trade names, the values of which are capitalized in connection with our acquisitions.
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Operational Highlights
Year Ended December 31,
$ Change
% Change
$ Change
% Change
(in thousands, except per share information and percentages)
Revenue:
Envestnet Wealth Solutions:
Asset-based
Subscription-based
Total recurring revenue
Professional services and other revenue
Total Envestnet Wealth Solutions revenue
Envestnet Data & Analytics:
Subscription-based
Total recurring revenue
Professional services and other revenue
Total Envestnet Data & Analytics revenue
Total consolidated revenue
Deferred revenue fair value adjustment
Total consolidated adjusted revenue*
Consolidated net income (loss) attributable to Envestnet, Inc.
Net income (loss) attributable to Envestnet, Inc. per share:
Basic
Diluted
Adjusted EBITDA*
Adjusted net income*
Adjusted net income per diluted share*
*Non-GAAP financial measure. See "Non-GAAP Financial Measures" below for definitions and reconciliations of non-GAAP measures.
**Not meaningful
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Results of Operations
Year ended December 31, 2023 compared to year ended December 31, 2022
Year Ended December 31,
Amount
% of Revenue
Amount
% of Revenue
$ Change
% Change
(in thousands, except percentages)
Revenue:
Asset-based
Subscription-based
Total recurring revenue
Professional services and other revenue
Total revenue
Operating expenses:
Direct expense
Employee compensation
General and administrative
Depreciation and amortization
Goodwill impairment
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense
Other income (expense), net
Total other income (expense), net
Loss before income tax provision
Income tax provision
Net loss
Add: Net loss attributable to non-controlling interest
Net loss attributable to Envestnet, Inc.
* Not meaningful
Asset-based recurring revenue
Asset-based recurring revenue increased $7.0 million, or 1%, for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to an increase in asset values applicable to our quarterly billing cycles, which 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 increased from approximately 38,000 as of December 31, 2022 to approximately 39,000 as of December 31, 2023 and the number of AUM/A client accounts increased from approximately 2.7 million as of December 31, 2022 to approximately 2.9 million as of December 31, 2023.
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Subscription-based recurring revenue
Subscription-based recurring revenue decreased $13.1 million, or 3%, for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to a decrease of $28.3 million in the Envestnet Data & Analytics segment, which is primarily attributable to a loss in access to data in the research business and continued impact from the regional banking crisis which led to our customer’s cost cutting initiatives, partially offset by an increase of $15.2 million in the Envestnet Wealth Solutions segment, which can be attributed to new and existing customer growth.
Professional services and other revenue
Professional services and other revenue increased $11.9 million, or 50%, for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to timing of the completion of customer projects and deployments and an increase in revenue recognized in the Data & Analytics segment as a result of point in time revenue recognized on customer deployments.
Direct expense
Direct expense increased $2.6 million, or 1%, for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to an increase in asset-based direct expense of $3.8 million, which directly correlates with the increase to asset-based recurring revenue during the period, partially offset by a decrease in subscription-based direct expense of $1.8 million, which directly correlates with the decrease to subscription-based recurring revenue during the period.
Employee compensation
Employee compensation decreased $45.9 million, or 9%, for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to decreases in salaries, benefits and related payroll taxes of $38.8 million, which is primarily a result of the outsourcing arrangement with TCS in 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 $9.3 million and other immaterial decreases within employee compensation, partially offset by an increase in severance expense of $5.3 million as a result of the reduction in force initiative and organizational realignment.
As a percentage of total revenue, employee compensation decreased 4% points for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily a result of the outsourcing arrangement with TCS, a reduction in force initiative in 2023 and an organizational realignment in the fourth quarter of 2022.
General and administrative
General and administrative expenses decreased $8.7 million, or 4%, for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to decreases in restructuring charges and transaction costs of $22.1 million, marketing costs of $7.3 million, occupancy costs of $4.6 million, communications, research and data services of $3.4 million and other immaterial decreases within general and administrative expense, partially offset by increases in software and maintenance charges of $31.4 million which is primarily a result of the outsourcing arrangement with TCS.
Depreciation and amortization
Depreciation and amortization expense increased $4.5 million, or 4%, for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to an increase in amortization related to internally developed software of $15.5 million, partially offset by decreases in amortization related to intangible assets of $9.0 million and deprecation related to fixed assets of $2.2 million.
Goodwill impairment
Goodwill impairment increased $191.8 million for the year ended December 31, 2023 compared to the year ended December 31, 2022 as a result of the recognition of a non-cash impairment charge to goodwill in the Envestnet Data & Analytics segment during the year ended December 31, 2023.
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Total other income (expense), net
Total other income (expense), net increased $16.1 million, or 130% for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to a $9.0 million decrease in dilution gain on equity method investee share issuance, an $8.3 million increase in interest expense and a $1.7 million increase in loss allocations from equity method investments. These increases were partially offset by an increase of $2.1 million in interest income, a $1.0 million decrease in foreign currency expense and a $0.4 million increase in fair market value adjustment on investment in private company.
Income tax provision
Year Ended December 31,
(in thousands, except for percentages)
Loss before income tax provision
Income tax provision
Effective tax rate
Our 2023 effective tax rate differs from the statutory rate primarily due to the effect of goodwill impairment, the change in the valuation allowance we have placed on a portion of U.S. deferred tax assets, the generation of R&D tax credits, executive compensation deduction limitations, tax deficiency related to stock-based compensation, income related to Indian partnerships, a change in our India indefinite reinvestment assertion and state income taxes.
Our 2022 effective tax rate differs from the statutory rate primarily due to the change in the valuation allowance we have placed on a portion of U.S. deferred tax assets, the generation of R&D tax credits, executive compensation deduction limitations, income related to Indian partnerships, a change in our India indefinite reinvestment assertion and state income taxes.
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Year ended December 31, 2022 compared to year ended December 31, 2021
Year Ended December 31,
Amount
% of Revenue
Amount
% of Revenue
$ Change
% Change
(in thousands, except percentages)
Revenue:
Asset-based
Subscription-based
Total recurring revenue
Professional services and other revenue
Total revenue
Operating expenses:
Direct expense
Employee compensation
General and administrative
Depreciation and amortization
Total operating expenses
Income (loss) from operations
Other income (expense):
Interest income
Interest expense
Other income (expense), net
Total other income (expense), net
Income (loss) before income tax provision
Income tax provision
Net income (loss)
Add: Net loss attributable to non-controlling interest
Net income (loss) attributable to Envestnet, Inc.
* Not meaningful
Asset-based recurring revenue
Asset-based recurring revenue increased $28.9 million, or 4%, for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to an increase in asset values applicable to our quarterly billing cycles, which are based on the market value of the customers' assets on our platforms at the end of the previous quarter, partially offset by existing customers switching from an asset-based pricing model to a subscription-based pricing model.
The number of financial advisors with asset-based recurring revenue on our technology platforms decreased from approximately 40,000 as of December 31, 2021 to approximately 38,000 as of December 31, 2022 and the number of AUM/A client accounts increased from approximately 2.6 million as of December 31, 2021 to approximately 2.7 million as of December 31, 2022.
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Subscription-based recurring revenue
Subscription-based recurring revenue increased $23.9 million, or 5%, for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to an increase of $30.1 million in the Envestnet Wealth Solutions segment, which can be attributed to new and existing customer growth along with additional revenue from existing customers switching from an asset-based pricing model to a subscription-based pricing model, partially offset by a decrease of $6.3 million in the Envestnet Data & Analytics segment, which is primarily attributable to the equity market decline impacting our asset management customers in the research business.
Professional services and other revenue
Professional services and other revenue increased $0.6 million, or 2%, for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to an increase in revenue 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.
Direct expense
Direct expense increased $46.7 million, or 11%, for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to an increase in asset-based direct expense of $36.6 million, which directly correlates with the increase to asset-based recurring revenue during the period, an increase in professional services and other direct expense of $6.9 million, primarily as a result of our 2022 Advisor Summit, which was held in-person, and an increase in subscription-based direct expense of $3.1 million, which directly correlates with the increase in subscription-based recurring revenue during the period.
Employee compensation
Employee compensation increased $57.9 million, or 13%, for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to increases in salaries, benefits and related payroll taxes of $40.5 million, non-cash compensation expense of $12.3 million and other miscellaneous increases within employee compensation of $3.6 million, primarily due to increased headcount as a result of growth and acquisitions in the Envestnet Wealth Solutions segment. Also contributing to this increase was an increase in severance expense of $18.8 million, primarily a result of the outsourcing arrangement with TCS in the Envestnet Data & Analytics segment and an organizational realignment in the fourth quarter of 2022. These increases were partially offset by a decrease in incentive compensation expense of $20.5 million primarily due to lower revenue and profitability measures achieved in our incentive compensation program.
As a percentage of total revenue, employee compensation increased 4% points for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to higher employee compensation related to increased headcount in the Envestnet Wealth Solutions segment and higher severance expense primarily a result of the outsourcing arrangement with TCS and an organizational realignment in the fourth quarter of 2022.
General and administrative
General and administrative expenses increased $47.2 million, or 27%, for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to increases in lease restructuring and transaction costs of $16.6 million driven by the closure of four offices, software and maintenance charges of $16.6 million, travel and entertainment expenses of $5.6 million, communications, research and data services of $3.5 million, insurance, bank and payroll expenses of $2.0 million and other miscellaneous increases within general and administrative expense of $2.5 million. These increases were partially offset by decreases in total occupancy costs of $4.6 million and professional and legal fees of $4.3 million.
As a percentage of total revenue, general and administrative expense increased 4% points for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to an increase in lease restructuring and other related costs.
Depreciation and amortization
Depreciation and amortization expense increased $8.1 million, or 7%, for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to increases in amortization related to internally developed software of $8.4 million and intangible assets of $3.3 million, partially offset by a decrease in deprecation related to fixed assets of $3.7 million.
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Total other income (expense), net
Total other income (expense), net decreased $7.8 million, or 39% for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to a $9.5 million increase in dilution gain on equity method investee share issuance and a $3.4 million increase in interest income, partially offset by a $1.8 million increase in loss allocations from equity method investments and a $1.4 million increase in foreign currency expense.
Income tax provision
Year Ended December 31,
(in thousands, except for percentages)
Income (loss) before income tax provision
Income tax provision
Effective tax rate
Our 2022 effective tax rate differs from the statutory rate primarily due to the change in the valuation allowance we have placed on a portion of U.S. deferred tax assets, the generation of R&D tax credits, executive compensation deduction limitations, income related to Indian partnerships, a change in our India indefinite reinvestment assertion and state income taxes.
Our 2021 effective tax rate differs from the statutory rate primarily due to the change in the valuation allowance we have placed on a portion of U.S. deferred tax assets, the generation of R&D tax credits, executive compensation deduction limitations, income related to Indian partnerships and state income taxes.
Segment Results
Envestnet is organized around two business segments based on clients served and products provided to meet those needs. Financial information about each business segment is contained in Part II, Item 8, “Note 23—Segment Information” to the consolidated financial statements included within this Annual Report. Our business segments are as follows:
• Envestnet Wealth Solutions – a leading provider of comprehensive and unified wealth management software, services and solutions to empower financial advisors and institutions to enable them to deliver holistic advice to their clients.
• Envestnet Data & Analytics – a leading provider of financial data aggregation, analytics and digital experiences to meet the needs of financial institutions, enterprise FinTech firms and market investment research firms worldwide.
We also incur expenses not directly attributable to the segments listed above. These nonsegment operating expenses primarily consist of employee compensation for certain corporate officers, certain types of professional service expenses, insurance, acquisition related transaction costs, certain restructuring charges and other non-recurring and/or non-operationally related expenses.
On October 1, 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 change does 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 Annual report on Form 10-K for the year ended December 31, 2023 is presented in conjunction with the current organizational structure, with prior periods adjusted accordingly.
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The following table reconciles income (loss) from operations by segment to consolidated net income (loss) attributable to Envestnet, Inc.:
Year Ended December 31,
(in thousands)
Envestnet Wealth Solutions
Envestnet Data & Analytics
Nonsegment operating expenses
Income (loss) from operations
Total other income (expense), net
Income (loss) before income tax provision
Income tax provision
Net income (loss)
Add: Net loss attributable to non-controlling interest
Net income (loss) attributable to Envestnet, Inc.
Envestnet Wealth Solutions
Year ended December 31, 2023 compared to year ended December 31, 2022
Year Ended December 31,
Amount
% of Revenue
Amount
% of Revenue
$ Change
% Change
(in thousands, except percentages)
Revenue:
Asset-based
Subscription-based
Total recurring revenue
Professional services and other revenue
Total revenue
Operating expenses:
Direct expense
Employee compensation
General and administrative
Depreciation and amortization
Total operating expenses
Income from operations
Asset-based recurring revenue
Asset-based recurring revenue increased $7.0 million, or 1%, for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to an increase in asset values applicable to our quarterly billing cycles, which 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 increased from approximately 38,000 as of December 31, 2022 to approximately 39,000 as of December 31, 2023 and the number of AUM/A client accounts increased from approximately 2.7 million as of December 31, 2022 to approximately 2.9 million as of December 31, 2023.
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Subscription-based recurring revenue
Subscription-based recurring revenue increased $15.2 million, or 5%, for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to new and existing customer growth.
Professional services and other revenue
Professional services and other revenue increased $7.3 million, or 43%, for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to timing of the completion of customer projects and deployments.
Direct expense
Direct expense increased $4.6 million, or 1%, for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to an increase in asset-based direct expense, which directly correlates with the increase in asset-based recurring revenue during the period.
Employee compensation
Employee compensation decreased $7.9 million, or 2%, for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to decreases in salaries, benefits and related payroll taxes of $9.8 million, which is primarily a result of 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 $3.4 million and other immaterial decreases within employee compensation, partially offset by an increase in severance expense of $4.0 million as a result of the reduction in force initiative and organizational realignment and an increase in incentive compensation of $3.4 million.
General and administrative
General and administrative expenses decreased $23.4 million, or 16%, for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to decreases in restructuring charges and transaction costs of $15.1 million, marketing costs of $4.9 million, occupancy costs of $2.5 million and other immaterial decreases within general and administrative expense, partially offset by an increase in software and maintenance charges of $4.0 million.
Depreciation and amortization
Depreciation and amortization increased $4.7 million, or 5%, for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to an increase in amortization related to internally developed software of $9.5 million, partially offset by a decrease in amortization related to intangible assets of $4.4 million.
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Year ended December 31, 2022 compared to year ended December 31, 2021
Year Ended December 31,
Amount
% of Revenue
Amount
% of Revenue
$ Change
% Change
(in thousands, except percentages)
Revenue:
Asset-based
Subscription-based
Total recurring revenue
Professional services and other revenue
Total revenue
Operating expenses:
Direct expense
Employee compensation
General and administrative
Depreciation and amortization
Total operating expenses
Income from operations
Asset-based recurring revenue
Asset-based recurring revenue increased $28.9 million, or 4%, for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to an increase in asset values applicable to our quarterly billing cycles, which are based on the market value of the customers' assets on our platforms at the end of the previous quarter, partially offset by existing customers switching from an asset-based pricing model to a subscription-based pricing model.
The number of financial advisors with asset-based recurring revenue on our technology platforms decreased from approximately 40,000 as of December 31, 2021 to approximately 38,000 as of December 31, 2022 and the number of AUM/A client accounts increased from approximately 2.6 million as of December 31, 2021 to approximately 2.7 million as of December 31, 2022.
Subscription-based recurring revenue
Subscription-based recurring revenue increased $30.1 million, or 11%, for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to new and existing customer growth along with additional revenue from existing customers switching from an asset-based pricing model to a subscription-based pricing model.
Professional services and other revenue
Professional services and other revenue increased $2.6 million, or 18%, for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to an increase in revenue 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.
Direct expense
Direct expense increased $44.3 million, or 11%, for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to an increase in asset-based direct expense of $36.6 million, which directly correlates with the increase in asset-based recurring revenue during the period and an increase in professional services and other direct expense of $7.0 million, primarily as a result of our 2022 Advisor Summit, which was held in-person.
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Employee compensation
Employee compensation increased $46.1 million, or 17%, for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to increases in salaries, benefits and related payroll taxes of $36.3 million, non-cash compensation of $9.7 million and other miscellaneous increases within employee compensation, primarily due to increased headcount as a result of growth and acquisitions, and an increase in severance expense of $8.6 million, primarily a result of an organizational realignment in the fourth quarter of 2022. These increases were partially offset by a decrease in incentive compensation expense of $10.4 million primarily due to lower revenue and profitability measures achieved in our incentive compensation program.
As a percentage of segment revenue, employee compensation increased 3% points for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to higher employee compensation related to increased headcount and higher severance expense primarily a result of an organizational realignment in the fourth quarter of 2022.
General and administrative
General and administrative expenses increased $35.6 million, or 33%, for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to increases in software and maintenance charges of $14.3 million, lease restructuring and transaction costs of $9.1 million driven by the closure of four offices, travel and entertainment expenses of $3.3 million, insurance, bank and payroll charges of $1.5 million and other immaterial increases within general and administrative expense. These increases were partially offset by decreases in occupancy costs of $4.1 million and professional services fees of $3.5 million.
Depreciation and amortization
Depreciation and amortization increased $7.6 million, or 8%, for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to increases in amortization related to internally developed software of $4.5 million and intangible assets of $4.5 million, partially offset by a decrease in deprecation related to fixed assets of $1.4 million.
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Envestnet Data & Analytics
Year ended December 31, 2023 compared to year ended December 31, 2022
Year Ended December 31,
Amount
% of Revenue
Amount
% of Revenue
$ Change
% Change
(in thousands, except percentages)
Revenue:
Subscription-based
Professional services and other revenue
Total revenue
Operating expenses:
Direct expense
Employee compensation
General and administrative
Depreciation and amortization
Goodwill impairment
Total operating expenses
Loss from operations
* Not meaningful
Subscription-based recurring revenue
Subscription-based recurring revenue decreased $28.3 million, or 17%, for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily attributable to a loss in access to data in the research business and continued impact from the regional banking crisis which led to our customer’s cost cutting initiatives.
As a percentage of segment revenue, subscription-based recurring revenue decreased 4% points for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to a decrease in subscription-based revenue compared to an increase in professional services and other revenue.
Professional services and other revenue
Professional services and other revenue increased $4.7 million, or 68%, for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to an increase in point in time revenue recognized on customer deployments.
As a percentage of segment revenue, professional services and other revenue increased 4% points for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to an increase in professional services and other revenue compared to a decrease in subscription-based revenue.
Direct expense
Direct expense decreased $2.0 million, or 8%, for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to a decrease in subscription-based direct expense, which directly correlates with the decrease to subscription-based recurring revenue during the period.
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Employee compensation
Employee compensation decreased $31.9 million, or 31%, for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to decreases in salaries, benefits and related payroll taxes of $25.9 million, which is primarily a result of the outsourcing arrangement with TCS 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, incentive compensation of $2.4 million, non-cash compensation expense of $1.7 million and other immaterial decreases within employee compensation.
As a percentage of segment revenue, employee compensation expense decreased 12% points for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to the outsourcing arrangement with TCS, partially offset by a decrease in segment revenue period over period.
General and administrative
General and administrative expenses increased $13.0 million, or 31%, for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to increases in software and maintenance charges of $25.0 million, which is primarily a result of the outsourcing arrangement with TCS, partially offset by decreases in restructuring charges and transaction costs of $3.1 million, research and data services expense of $3.0 million, occupancy costs of $2.2 million and other immaterial decreases within general and administrative expense.
As a percentage of segment revenue, general and administrative expense increased 13% points for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to the outsourcing arrangement with TCS as well as a decrease in segment revenue period over period.
Depreciation and amortization
Depreciation and amortization decreased $0.2 million, or 1%, for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to decreases in amortization related to intangible assets of $4.5 million and deprecation related to fixed assets of $1.6 million, partially offset by an increase in amortization related to internally developed software of $5.9 million.
Goodwill impairment
Goodwill impairment increased $191.8 million for the year ended December 31, 2023 compared to the year ended December 31, 2022 as a result of the recognition of a non-cash impairment charge to goodwill during the year ended December 31, 2023.
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Year ended December 31, 2022 compared to year ended December 31, 2021
Year Ended December 31,
Amount
% of Revenue
Amount
% of Revenue
$ Change
% Change
(in thousands, except percentages)
Revenue:
Subscription-based
Professional services and other revenue
Total revenue
Operating expenses:
Direct expense
Employee compensation
General and administrative
Depreciation and amortization
Total operating expenses
Loss from operations
* Not meaningful
Subscription-based recurring revenue
Subscription-based recurring revenue decreased $6.3 million, or 4%, for the year ended December 31, 2022 compared to the year ended December 31, 2021 which is primarily attributable to the equity market decline impacting our asset management customers in the research business.
Professional services and other revenue
Professional services and other revenue decreased $2.0 million, or 23%, or the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to the timing of the completion of customer projects and deployments.
Direct expense
Direct expense increased $2.4 million, or 10%, for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to additional expense related to entering into an arrangement with a third-party for the use of cloud hosted virtual servers.
Employee compensation
Employee compensation increased $1.9 million, or 2%, for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to increases in severance expense of $6.7 million, primarily a result of the outsourcing arrangement with TCS and an organizational realignment in the fourth quarter of 2022, an increase in salaries, benefits and related payroll taxes of $0.9 million and other immaterial increases within employee compensation, partially offset by decreases in incentive compensation of $7.6 million and stock-based compensation expense of $1.3 million.
As a percentage of segment revenue, employee compensation expense increased 4% points for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to higher severance expense related to the outsourcing arrangement with TCS and an organizational realignment in the fourth quarter of 2022.
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General and administrative
General and administrative expenses increased $6.5 million, or 18%, for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to increases in restructuring and transaction costs of $2.8 million, research and data services expense of $2.4 million, travel and entertainment expense of $1.8 million and software and maintenance charges of $1.7 million, partially offset by other immaterial decreases within general and administrative expense.
As a percentage of segment revenue, general and administrative expense increased 4% points for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to an overall increase in general and administrative expense as well as a decrease in segment revenue.
Depreciation and amortization
Depreciation and amortization increased $0.5 million, or 2%, for the year ended December 31, 2022 compared to the year ended December 31, 2021 primarily due to an increase in amortization related to internally developed software of $3.8 million, partially offset by decreases in deprecation related to fixed assets of $2.2 million and amortization related to intangible assets of $1.1 million.
Nonsegment
Year ended December 31, 2023 compared to year ended December 31, 2022
Year Ended December 31,
$ Change
% Change
(in thousands, except percentages)
Operating expenses:
Employee compensation
General and administrative
Total operating expenses
Employee compensation
Employee compensation decreased $6.1 million, or 9%, for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to a decrease in non-cash compensation expense of $4.2 million and a decrease in salaries, benefits and related payroll taxes of $3.0 million, partially offset by other immaterial increases within employee compensation.
General and administrative
General and administrative expenses increased $1.6 million, or 5%, for the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to an increase in software and maintenance charges of $2.4 million, an increase in governance related expense of $1.8 million as a result of expense associated with activist shareholder activity during the year ended December 31, 2023 and an increase in professional fees of $1.0 million. These increases were partially offset by decreases in restructuring and transaction costs of $3.4 million and other immaterial decreases in general and administrative expense.
Year ended December 31, 2022 compared to year ended December 31, 2021
For a discussion of the 2022 Results of Operations compared to 2021, see Part II, Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K filed with the SEC on February 28, 2023.
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Non‑GAAP Financial Measures
In addition to reporting results according to GAAP, we also disclose certain non-GAAP financial measures to enhance the understanding of our operating performance. We believe these non-GAAP financial measures are useful supplemental metrics that provide greater transparency into our results of operations and can assist both management and investors in understanding and assessing the operational performance of our business on a consistent basis, as it removes the impact of non-cash or non-recurring items from operating results and provides an additional tool to compare our results with other companies in the industry, many of which present similar non-GAAP financial measures. Those measures include “adjusted revenue,” “adjusted EBITDA,” “adjusted net income” and “adjusted net income per diluted share."
“Adjusted revenue” excludes the effect of purchase accounting on the fair value of acquired deferred revenue. On January 1, 2022, the Company adopted ASU 2021-08 whereby it now accounts for contract assets and contract liabilities obtained upon a business combination in accordance with ASC 606. Prior to the adoption of ASU 2021-08, we recorded at fair value the acquired deferred revenue for contracts in effect at the time the entities were acquired. Consequently, revenue related to acquired entities for periods subsequent to the acquisition did not reflect the full amount of revenue that would have been recorded by these entities had they remained stand‑alone entities. Adjusted revenue has limitations as a financial measure, should be considered as supplemental in nature and is not meant as a substitute for revenue prepared in accordance with GAAP.
“Adjusted EBITDA” represents net income (loss) before deferred revenue fair value adjustment, interest income, interest expense, income tax provision (benefit), depreciation and amortization, goodwill impairment, non‑cash compensation expense, restructuring charges and transaction costs, severance expense, accretion on contingent consideration and purchase liability, fair market value adjustment to contingent consideration liability, fair market value adjustment on investment in private company, litigation, regulatory and other governance related expenses, foreign currency, gain on settlement of liability, gain on insurance reimbursement, non-income tax expense adjustment, dilution gain on equity method investee share issuance, loss allocations from equity method investments and (income) loss attributable to non‑controlling interest.
“Adjusted net income” represents net income (loss) before income tax provision (benefit), deferred revenue fair value adjustment, non‑cash interest expense, cash interest on our Convertible Notes, goodwill impairment, non‑cash compensation expense, restructuring charges and transaction costs, severance expense, amortization of acquired intangibles, accretion on contingent consideration and purchase liability, fair market value adjustment to contingent consideration liability, fair market value adjustment to investment in private company, litigation, regulatory and other governance related expenses, foreign currency, gain on settlement of liability, gain on insurance reimbursement, non-income tax expense adjustment, dilution gain on equity method investee share issuance, loss allocations from equity method investments and (income) loss attributable to non‑controlling interest. Reconciling items are presented gross of tax, and a normalized tax rate is applied to the total of all reconciling items to arrive at adjusted net income. The normalized tax rate is based solely on the estimated blended statutory income tax rates in the jurisdictions in which we operate. We monitor the normalized tax rate based on events or trends that could materially impact the rate, including tax legislation changes and changes in the geographic mix of our operations.
“Adjusted net income per diluted share” represents adjusted net income attributable to common stockholders divided by the diluted number of weighted-average shares outstanding. For purposes of the adjusted net income per share calculation, we assume all potential shares to be issued in connection with our Convertible Notes are dilutive.
Our Board and management use these non-GAAP financial measures:
• As measures of operating performance;
• For planning purposes, including the preparation of annual budgets;
• To allocate resources to enhance the financial performance of our business;
• To evaluate the effectiveness of our business strategies; and
• In communications with our Board concerning our financial performance.
Our Compensation Committee, Board and our management may also consider adjusted EBITDA, among other factors, when determining management’s incentive compensation.
We also present adjusted revenue, adjusted EBITDA, adjusted net income and adjusted net income per diluted share as supplemental performance measures because we believe that they provide our Board, management and investors with additional information to assess our performance. Adjusted revenue provide comparisons from period to period by excluding the effect of purchase accounting on the fair value of acquired deferred revenue. Adjusted EBITDA provides comparisons from period to period by excluding potential differences caused by changes in interest expense and interest income that are influenced by capital structure decisions and capital market conditions, income tax provision (benefit), variations in the age and book depreciation of fixed assets affecting relative depreciation expense and amortization of internally developed software,
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amortization of acquired intangible assets, restructuring charges and transaction costs, severance expense, accretion on contingent consideration and purchase liability, fair market value adjustment to contingent consideration liability, fair market value adjustment to investment in private company, litigation, regulatory and other governance related expenses, foreign currency, gain on settlement of liability, gain on insurance reimbursement, non-income tax expense adjustment, dilution gain on equity method investee share issuance, loss allocations from equity method investments, and (income) loss attributable to non‑controlling interest. Our management also believes it is useful to exclude non‑cash compensation expense from adjusted EBITDA and adjusted net income because non‑cash equity grants made at a certain price and point in time do not necessarily reflect how our business is performing at any particular time.
We believe adjusted revenue, adjusted EBITDA, adjusted net income and adjusted net income per diluted share are useful to investors in evaluating our operating performance because securities analysts use adjusted revenue, adjusted EBITDA, adjusted net income and adjusted net income per diluted share as supplemental measures to evaluate the overall performance of companies, and we anticipate that our investors and analyst presentations will include adjusted revenue, adjusted EBITDA, adjusted net income and adjusted net income per diluted share.
Adjusted revenue, adjusted EBITDA, adjusted net income and adjusted net income per diluted share are not measurements of our financial performance under GAAP and should not be considered as an alternative to revenue, net income, operating income or any other performance measures derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of our profitability or liquidity.
We understand that, although adjusted revenue, adjusted EBITDA, adjusted net income and adjusted net income per diluted share are frequently used by securities analysts and others in their evaluation of companies, these measures have limitations as an analytical tool, and you should not consider them in isolation, or as a substitute for an analysis of our results as reported under GAAP. In particular you should consider:
• Adjusted revenue, adjusted EBITDA, adjusted net income and adjusted net income per diluted share do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;
• Adjusted revenue, adjusted EBITDA, adjusted net income and adjusted net income per diluted share do not reflect changes in, or cash requirements for, our working capital needs;
• Adjusted revenue, adjusted EBITDA, adjusted net income and adjusted net income per diluted share do not reflect non‑cash components of employee compensation;
• Although depreciation and amortization are non‑cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements;
• Due to either net losses before income tax expense or the use of federal and state net operating loss carryforwards, we paid net cash of $15.9 million, $12.1 million, and $7.9 million for the years ended December 31, 2023, 2022 and 2021, respectively. In the event that we generate taxable income and our existing net operating loss carryforwards for federal and state income taxes have been fully utilized or have expired, income tax payments will be higher; and
• Other companies in our industry may calculate adjusted revenue, adjusted EBITDA, adjusted net income and adjusted net income per diluted share differently than we do, limiting their usefulness as a comparative measure.
Management compensates for the inherent limitations associated with using adjusted revenue, adjusted EBITDA, adjusted net income and adjusted net income per diluted share through disclosure of such limitations, presentation of our financial statements in accordance with GAAP and reconciliation of adjusted revenue to revenue, the most directly comparable GAAP measure and adjusted EBITDA, adjusted net income and adjusted net income per diluted share to net income (loss) and net income (loss) per share, the most directly comparable GAAP measures. Further, our management also reviews GAAP measures and evaluates individual measures that are not included in some or all of our non‑GAAP financial measures, such as our level of capital expenditures and interest income, among other measures.
The following tables set forth reconciliations of GAAP financial measures to non-GAAP financial measures. See "Footnotes to GAAP to Non-GAAP Reconciliations" below for further detail on adjustments.
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The following table sets forth a reconciliation of total revenue to adjusted revenue:
Year Ended December 31,
(in thousands)
Total revenue
Deferred revenue fair value adjustment (1)
Adjusted revenue
The following table sets forth a reconciliation of net income (loss) to adjusted EBITDA:
Year Ended December 31,
(in thousands)
Net income (loss)
Add (deduct):
Deferred revenue fair value adjustment (1)
Interest income
Interest expense
Income tax provision (2)(3)
Depreciation and amortization
Goodwill impairment (4)
Non-cash compensation expense (5)
Restructuring charges and transaction costs (6)
Severance expense (7)
Litigation, regulatory and other governance related expenses (8)
Foreign currency (9)
Non-income tax expense adjustment (10)
Accretion on contingent consideration and purchase liability (11)
Fair market value adjustment to contingent consideration liability (12)
Fair market value adjustment on investment in private company (13)
Gain on settlement of liability (14)
Gain on insurance reimbursement (15)
Dilution gain on equity method investee share issuance (16)
Loss allocations from equity method investments (17)
(Income) loss attributable to non-controlling interest (18)
Adjusted EBITDA
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The following table sets forth a reconciliation of net income (loss) to adjusted net income and adjusted net income per diluted share:
Year Ended December 31,
(in thousands, except share and per share amounts)
Net income (loss)
Income tax provision (2)(3)
Income (loss) before income tax provision (benefit)
Add (deduct):
Deferred revenue fair value adjustment (1)
Non-cash interest expense (19)
Cash interest - Convertible Notes (20)
Amortization of acquired intangibles (21)
Goodwill impairment (4)
Non-cash compensation expense (5)
Restructuring charges and transaction costs (6)
Severance expense (7)
Litigation, regulatory and other governance related expenses (8)
Foreign currency (9)
Non-income tax expense adjustment (10)
Accretion on contingent consideration and purchase liability (11)
Fair market value adjustment to contingent consideration liability (12)
Fair market value adjustment to investment in private company (13)
Gain on settlement of liability (14)
Gain on insurance reimbursement (15)
Dilution gain on equity method investee share issuance (16)
Loss allocations from equity method investments (17)
(Income) loss attributable to non-controlling interest (18)
Adjusted net income before income tax effect
Income tax effect (22)
Adjusted net income
Basic number of weighted-average shares outstanding
Effect of dilutive shares:
Convertible Notes
Non-vested RSUs and PSUs
Options to purchase common stock
Warrants
Diluted number of weighted-average shares outstanding
Adjusted net income per share - diluted
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The following tables set forth a reconciliation of revenue to adjusted revenue and income (loss) from operations to adjusted EBITDA based on our historical results for each segment for the years ended December 31, 2023, 2022 and 2021:
Year Ended December 31, 2023
Envestnet Wealth Solutions
Envestnet Data & Analytics
Nonsegment
Total
(in thousands)
Revenue
Deferred revenue fair value adjustment (1)
Adjusted revenue
Income (loss) from operations
Add (deduct):
Deferred revenue fair value adjustment (1)
Depreciation and amortization
Goodwill impairment (4)
Non-cash compensation expense (5)
Restructuring charges and transaction costs (6)
Severance expense (7)
Litigation, regulatory and other governance related expenses (8)
Non-income tax expense adjustment (10)
Loss attributable to non-controlling interest (18)
Adjusted EBITDA
Year Ended December 31, 2022
Envestnet Wealth Solutions
Envestnet Data & Analytics
Nonsegment
Total
(in thousands)
Revenue
Deferred revenue fair value adjustment (1)
Adjusted revenue
Income (loss) from operations
Add (deduct):
Deferred revenue fair value adjustment (1)
Depreciation and amortization
Non-cash compensation expense (5)
Restructuring charges and transaction costs (6)
Severance expense (7)
Litigation, regulatory and other governance related expenses (8)
Non-income tax expense adjustment (10)
Loss attributable to non-controlling interest (18)
Other
Adjusted EBITDA
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Year Ended December 31, 2021
Envestnet Wealth Solutions
Envestnet Data & Analytics
Nonsegment
Total
(in thousands)
Revenue
Deferred revenue fair value adjustment (1)
Adjusted revenue
Income (loss) from operations
Add (deduct):
Deferred revenue fair value adjustment (1)
Depreciation and amortization
Non-cash compensation expense (5)
Restructuring charges and transaction costs (6)
Severance expense (7)
Litigation, regulatory and other governance related expenses (8)
Non-income tax expense adjustment (10)
Accretion on contingent consideration and purchase liability (11)
Fair market value adjustment to contingent consideration liability (12)
Income attributable to non-controlling interest (18)
Other
Adjusted EBITDA
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Footnotes to GAAP to Non-GAAP Reconciliations
(1) Deferred revenue fair value adjustment represents the effect of purchase accounting on the fair value of acquired deferred revenue in accordance with ASC 606.
(2) For the years ended December 31, 2023, 2022 and 2021, the effective tax rate computed in accordance with GAAP equaled (5.5)%, (9.0)% and 37.7%, respectively.
(3) As of December 31, 2023, we had net operating loss carryforwards, before any uncertain tax position reserves, of approximately $64 million and $225 million for federal and state income tax purposes, respectively, available to reduce future income subject to income taxes. As a result, the amount of actual cash taxes we pay for federal, state and foreign income taxes differs significantly from both the amount calculated in accordance with GAAP using the effective income tax rate and from the income tax effect amount calculated using the normalized effective tax rate.
(4) Goodwill impairment represents the recognition of a non-cash impairment charge to goodwill in the Envestnet Data & Analytics reporting unit. These charges are infrequent and outside the ordinary course of our continuing operations. We exclude these charges to facilitate a more meaningful evaluation of our current operating performance and comparisons to our past operating performance.
(5) Non-cash compensation expense represents expense related to stock-based awards made to employees and directors. We exclude stock-based compensation because the Company does not view it as reflective of our core operating performance as it is a non-cash expense.
(6) Restructuring charges and transaction costs represent third-party costs incurred related to significant, distinct enterprise-wide strategic initiatives such as the closure of certain offices in the United States, acquisition and transaction related expenditures and system integration costs related to implementation of a new Enterprise Resource Planning System. These third-party costs are infrequent and outside the ordinary course of our continuing operations. We exclude these costs to facilitate a more meaningful evaluation of our current operating performance and comparisons to our past operating performance.
(7) Severance expense represents severance and related costs associated with certain strategic initiatives that have reshaped our workforce such as an organizational realignment in the fourth quarter of 2022, post-acquisition integration activity and a reduction in force initiative in 2023. These are not reflective of future ongoing operations and affect comparability of the Company’s operational results across reporting periods.
(8) Litigation, regulatory and other governance related expenses represent certain third-party non-recurring litigation fees primarily related to litigation matters discussed in Note 24—Commitments and Contingencies as well as governance related expenses associated with activist shareholder activity. The litigation costs relate to two matters over a three-year time period and are not reoccurring expenditures.
(9) Foreign currency represents gains and losses from foreign currency denominated transactions and the remeasurement of foreign currency denominated balance sheet accounts. These adjustments can vary significantly from period to period and are not indicative of our core operating performance.
(10) Non-income tax expense adjustments relate to the remediation of historical sales and use tax issues and are not indicative of our core operating performance.
(11) Accretion on contingent consideration and purchase liability represents accretion related to the Company's contingent consideration. These adjustments are non-cash and are not indicative of our core operating performance.
(12) Fair market value adjustment to contingent consideration liability represents non-recurring gains and losses related to the Company's contingent consideration. These adjustments are infrequent and outside the ordinary course of our continuing operations.
(13) Fair market value adjustment to investment in private company represents non-recurring unrealized gains and losses related to the Company’s investments. These adjustments are infrequent and outside the ordinary course of our continuing operations.
(14) Gain on settlement of liability represents the gain related to the settlement of a contingent liability. These adjustments are infrequent and outside the ordinary course of our continuing operations.
(15) Gain on insurance reimbursement represents the gain related to an insurance reimbursement. These adjustments are infrequent and outside the ordinary course of our continuing operations.
(16) Dilution gain on equity method investee share issuance represents gains and losses related to the Company’s equity method share issuances. These dilution gains are infrequent and can vary significantly from period to period and are outside the ordinary course of our continuing operations.
(17) Loss allocations from equity method investments represents gains and losses from our various equity method investments. These investments are not part of our core business and the ventures associated with these investments generally are start-up or early-stage businesses where we have limited influence over their operational and financial policies. The results of operations for each of these investments can vary significantly from period to period and do not represent the Company’s ongoing operations.
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(18) (Income) loss attributable to non-controlling interest represents the loss attributable to the Company’s minority economic interest in a private company excluding the impact of non-cash or non-recurring items included within other line items. Although the Company consolidates its minority interest in a private company as a result of its ability to control this private company interest through majority representation on the board, the Company has excluded loss attributable to non-controlling interest as it owns a minority economic interest in the private company. This private company is a start-up business and the results of its operations vary significantly from period to period and are not representative of the Company’s financial performance.
(19) Non-cash interest expense represents third-party costs incurred in securing debt and are amortized over the term of the debt. We exclude non-cash interest expense because the Company does not view this expense as reflective of our core operating performance as it is a non-cash expense.
(20) For purposes of computing adjusted net income and adjusted net income per share, the Company always assumes the convertible notes to be fully converted for all periods presented. Therefore, cash interest for convertible notes is added to adjusted net income in accordance with the if-converted method.
(21) Amortization of acquired intangibles represents non-cash amortization expense from intangible assets acquired through acquisitions. The fair value of these acquired intangible assets are estimates and the Company does not view it as reflective of our core operating performance as it is a non-cash expense.
(22) Income tax effect represents the tax effect of Non-GAAP adjustments as described above and is calculated using an estimated normalized tax rate of 25.5% has been used to compute adjusted net income for all years presented.
Liquidity and Capital Resources
Our primary sources of liquidity include cash provided by operating activities, including fluctuations in working capital, and access to external capital. Our working capital is affected by the timing of payments related to fees receivable, investment manager fees, employee compensation, income tax, our annual Advisor Summit and various other items. Historically the first quarter of the year is our lowest quarter of cash provided by operating activities primarily due to the payment of annual bonuses during the first quarter of the year following the year they were incurred and prepayments made during the first quarter of the year associated with our Advisor Summit which is held during the second quarter of the year.
We believe our existing cash and cash equivalents and cash generated in the ongoing operations of our business will be sufficient to fund our current operations, including capital expenditure needs and debt service obligations, over the next twelve months and beyond. If the cash generated in the ongoing operations of our business is insufficient to fund these requirements, we may be required to borrow under our Revolving Credit Facility or incur additional debt to fund our ongoing operations or to fund potential acquisitions or other strategic activities.
We will continue to actively manage our cash balances by making decisions regarding the amounts, timing and manner in which cash is generated and used in order to ensure we are able to meet our cash, capital and liquidity requirements and maintain operations for both the short and long term.
As of December 31, 2023, we had total cash and cash equivalents of $91.4 million, no amounts outstanding under the Revolving Credit Facility and $500.0 million available to borrow under the Revolving Credit Facility, subject to covenant compliance.
Revolving Credit Facility
In February 2022, we entered into the Revolving Credit Facility, which provides for a $500.0 million revolving line of credit, including a sub-facility for a $20.0 million letter of credit, and is set to mature in February 2027. Outstanding loans under the Revolving Credit Facility accrue interest, at our option, at a rate equal to either (i) a base rate plus an applicable margin ranging from 0.25% to 1.75% per annum or (ii) an adjusted Term SOFR plus an applicable margin ranging from 1.25% to 2.75% per annum, in each case based upon our total net leverage ratio, as calculated pursuant to the Revolving Credit Facility. The undrawn portion of the commitments under the Revolving Credit Facility is subject to a commitment fee at a rate ranging from 0.25% to 0.30% per annum based upon our total net leverage ratio, as calculated pursuant to the Revolving Credit Facility.
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.
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On February 20, 2024, the Company entered into a Waiver with respect to the Revolving Credit Facility, between the Company, the Guarantors party thereto from time to time, the Lenders party thereto from time to time and Bank of Montreal, as administrative agent. Under the Waiver, the Lenders party thereto waived the events of default resulting from the non-compliance with the Total Leverage Ratio financial covenant for the fiscal quarters ended on March 31, 2023 and June 30, 2023. The Company was in compliance with all other covenants in the Revolving Credit Facility as of December 31, 2023.
Convertible Notes
As of December 31, 2023 we had Convertible Notes with an issuance amount of $575.0 million and $317.5 million related to the Convertible Notes due 2027 and Convertible Notes due 2025, respectively. The Convertible Notes due 2027 will mature on December 1, 2027, unless otherwise repurchased, redeemed or converted and bear interest at a rate of 2.625% per annum payable semiannually in arrears on June 1 and December 1 of each year. The Convertible Notes due 2025 are set to mature on August 15, 2025 and bear interest at a rate of 0.75% per annum payable semiannually in arrears on February 15 and August 15 of each year.
See Part II, Item 8, “Note 14—Debt” for further information regarding the terms of our Revolving Credit Facility and Convertible Notes.
Cash Flows
The following table presents a summary of our cash flows:
Year Ended December 31,
(in thousands)
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in financing activities
Effect of exchange rate on changes on cash, cash equivalents and restricted cash
Net change in cash, cash equivalents and restricted cash
Operating Activities
Net cash provided by operating activities increased $56.5 million for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to a an increase of $33.5 million in cash provided due to timing of payments within our working capital accounts and an increase of $23.0 million in cash provided by our business operations. Our working capital is affected by the timing of payments related to several items, including but not limited to, employee incentives, income tax payments and cash collections from our clients. For the year ended December 31, 2023 compared to the year ended December 31, 2022, the increase of $33.5 million in cash provided within our working capital accounts is primarily due to cash payment timing differences within accounts payable and accrued expenses and prepaid expenses and other assets as well as a $19.6 million decrease in accrued compensation and related taxes, which includes accrued incentive compensation, from December 31, 2021 to December 31, 2022 as a result of lower operating performance in 2022 compared to 2021. These increases were partially offset by an increase in cash used in fees receivable, net of $15.6 million as a result of an increase in fees receivable net, from December 31, 2022 to December 31, 2023 due to timing of cash collections from our clients.
Investing Activities
Net cash used in investing activities decreased $97.1 million for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to cash used related to acquisition of businesses of $104.1 million during the year ended December 31, 2022, a decrease in cash related to investing in private companies of $12.2 million, an issuance of note receivable to equity method investees of $6.4 million during the year ended December 31, 2022 and a decrease in cash used to acquire proprietary technology of $2.0 million. These decreases were partially offset by an increase in cash used related to an issuance of loan receivable to a private company of $20.0 million during the year ended December 31, 2023, an increase in capitalization of internally developed software of $5.2 million and an increase in cash used to purchase property and equipment of $2.8 million.
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Financing Activities
Net cash used in financing activities decreased $35.6 million for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to debt activity during the year ended December 31, 2022, including $312.4 million in cash used related to the repurchase of the Convertible Notes due 2023, $181.8 million in cash used related to the repurchase of Convertible Notes due 2025, $79.6 million in cash used to pay the cost of entering into Capped Call Transactions and $16.3 million in cash used related to issuance costs for Convertible Notes due 2027, as well as a decrease in cash used for share repurchases of $76.5 million and a decrease in cash paid related to tax withholdings for stock-based compensation of $4.5 million. These decreases were partially offset by $575.0 million in cash provided by the issuance of Convertible Notes due 2027 during the year ended December 31, 2022, $45.0 million in cash used for the settlement of Convertible Notes due 2023 during the year ended December 31, 2023 and $16.0 million in cash proceeds from capital contributions of non-controlling shareholders during the year ended December 31, 2022.
Commitments
We enter into unconditional purchase obligations arrangements for certain of our services that we receive in the normal course of business. As of December 31, 2023, the Company estimated future minimum unconditional purchase obligations of approximately $150 million.
As of December 31, 2023, we had $876.6 million in outstanding debt. For further details of our debt and the timing of expected future payments see Part II, Item 8, “Note 14—Debt.”
As of December 31, 2023, future minimum lease payments under non-cancellable leases were $140.0 million. These leases expire at various dates prior to 2033. See Part II, Item 8, "Note 15—Leases” for further details.
In connection with the Redi2 acquisition, we have entered into arrangements whereby we have agreed to pay up to $20.0 million in performance bonuses based upon the achievement of certain performance targets. As of December 31, 2023, the liabilities associated with these performance bonuses were immaterial.
We have also committed $8.8 million in future funding to certain of our equity method investees.
We include 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. We have experienced no previous claims and cannot determine the maximum amount of potential future payments, if any, related to these indemnification and guarantee provisions. We believe that it is unlikely that we will have to make material payments under these arrangements and therefore we have not recorded a contingent liability in the consolidated balance sheets.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in conformity with GAAP. The accounting policies described below require management to apply significant judgment in connection with the preparation of our consolidated financial statements. In particular, judgment is applied to determine the appropriate assumptions to be used in calculating estimates that affect certain reported amounts in our consolidated financial statements. These estimates and assumptions are based on historical experience and on various other factors that we believe to be reasonable under the circumstances. If different estimates or assumptions were used, our results of operations, financial condition and cash flows could have been materially different than those reflected in our consolidated financial statements. For additional information regarding our critical accounting policies, see Part II, Item 8, “Note 2—Summary of Significant Accounting Policies”.
Revenue Recognition
Revenue is derived from asset-based and subscription-based services and professional services and other sources. Revenue is recognized when control of these services is transferred to our customers, in an amount that reflects the consideration that we expect to be entitled to in exchange for those services. All revenue recognized in the consolidated statements of operations is considered to be revenue from contracts with customers. Sales and usage-based taxes are excluded from revenue.
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Asset-based recurring revenue— Asset-based recurring revenue primarily consist of fees for providing customers continuous access to platform services through our uniquely customized platforms. These platform services include investment manager research, portfolio diagnostics, proposal generation, investment model management, rebalancing and trading, portfolio performance reporting and monitoring solutions, billing and back office and middle-office operations and administration and are made available to customers throughout the contractual term from the date the customized platform is launched.
The asset-based fees we earn are generally based upon variable percentages of assets managed or administered on our platforms. The fee percentage varies based on the level and type of services we provide to our customers, as well as the values of existing customer accounts. The values of the customer accounts are affected by inflows or outflows of customer funds and market fluctuations.
The platform services are substantially the same over each quarter and performed in a similar manner over the contract period, and are considered stand-ready promises. The platform services that are delivered to the customer over the quarter are considered distinct, as the customer benefits distinctly from each increment of our services and each quarter is separately identified in the contract, and are considered to be a single performance obligation under ASC 606.
The pricing generally resets each quarter and the pricing structure is consistent throughout the term of the contract. The variable fees are generally calculated and billed quarterly in advance based on preceding quarter-end values and the variable amounts earned from the platform services relate specifically to the benefits transferred to the customer during that quarter. Accordingly, revenue is allocated to the specific quarter in which services are performed.
The asset-based contracts generally contain one performance obligation and revenue is recognized on a ratable basis over the quarter beginning on the date that the platform services are made available to the customer as the customer simultaneously consumes and receives the benefits of the services. All asset-based fees are recognized in the Envestnet Wealth Solutions segment.
For certain services provided by third parties, we evaluate whether we are the principal (revenue reported on a gross basis) or agent (revenue reported on a net basis). Generally, we report customer fees including charges for third party service providers where we have a direct contract with such third party service providers on a gross basis, whereas the amounts billed to our customers are recorded as revenue, and amounts paid to third party service providers are recorded as direct expense. We are the principal in the transaction because we control the services before they are transferred to our customers. Control is evidenced by being primarily responsible to our customers and having discretion in establishing pricing.
Subscription-based recurring revenue— Subscription-based recurring revenue primarily consist of fees for providing customers continuous access to our platform for wealth management and financial wellness. The subscription-based fees generally include fixed fees and or usage-based fees.
Generally, the subscription services are substantially the same over each quarter and performed in a similar manner over the contract period, and are considered stand-ready promises. Quarterly subscription services are considered distinct as the customer can benefit from each increment of services on its own and each quarter is separately identified in the contract, and services are considered to be a single performance obligation under the ASC 606.
The usage-based pricing generally resets each quarter and the pricing structure is generally consistent throughout the term of the contract. The fixed fees are generally calculated and billed quarterly in advance. The usage-based fees are generally calculated and are billed either monthly or quarterly based on the actual usage and relate specifically to the benefits transferred to the customer during that month or quarter. Accordingly, revenue is allocated to the specific quarter in which services are performed.
Certain subscription-based contracts contain multiple performance obligations (i.e. platform services performance obligation and professional services performance obligation). Fixed fees are generally recognized on a ratable basis over the quarter beginning when the subscription services are made available to the customer, as the customer simultaneously receives and consumes the benefits of the subscription services. Usage-based revenue is recognized on a monthly basis as the customer receives and consumes the benefit as we provide the services. Subscription-based fees are recognized in both the Envestnet Wealth Solutions and Envestnet Data & Analytics segments.
Professional services and other revenue— We earn professional services fees by providing contractual customized services and platform software development as well as initial implementation fees. Professional services contracts generally have fixed prices, and generally specify the deliverables in the contract. Certain professional services contracts are billed on a
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time and materials basis and revenue is recognized over time as the services are performed. For contracts billed on a fixed price basis, revenue is recognized over time based on the proportion of services performed. Initial implementation fees are fixed and are generally recognized ratably over the contract term.
Other revenue primarily include revenue related to the Advisor Summit. Other revenue is recognized when the events are held. Other revenue is not significant.
The majority of the professional services and other contracts contain one performance obligation. Professional services and other revenue are recognized in both the Envestnet Wealth Solutions and Envestnet Data & Analytics segments.
Reviews for impairment of goodwill and acquired intangible assets
Goodwill is tested for impairment at the reporting unit level on an annual basis and more often if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Based on the relevant GAAP authoritative guidance, we aggregate components of a single operating segment into a reporting unit, if appropriate. For purposes of performing the impairment tests, we identify reporting units in accordance with GAAP. The identification of reporting units and consideration of aggregation criteria requires management judgment.
In accordance with applicable accounting guidance, prior to performing a quantitative evaluation, an assessment of qualitative factors may be performed to determine whether it is more likely than not that the fair value of a reporting unit exceeds its carrying value. The selection and assessment of qualitative factors used to determine whether it is more likely than not that the fair value of a reporting unit exceeds the carrying value involves management judgment. If it is determined that it is unlikely that the carrying value of the reporting unit exceeds its fair value, a quantitative goodwill impairment evaluation is not required, and no impairment is recorded. If it is determined that it is more likely than not that the carrying value of the reporting unit exceeds its fair value, then a quantitative goodwill impairment test must be performed and if the carrying value of a reporting unit exceeds its fair value, then an impairment loss equal to the difference is recorded.
Due to lower revenue and profits in the Envestnet Data & Analytics segment in 2023 compared to prior years, the Company performed a quantitative goodwill impairment evaluation as part of the annual goodwill impairment analysis for each reporting unit as of October 31, 2023. Additionally, the Company implemented organizational changes that resulted in changes to its reporting units. The Company completed an assessment immediately prior to and after the organization change and determined it is not more likely than not that the fair value of the Company’s reporting unit is greater than the carrying value. As a result of these analyses, the carrying value of the Envestnet Data & Analytics reporting unit exceeded its fair value, which resulted in the recognition of a non-cash impairment charge to goodwill of $191.8 million during the fourth quarter of 2023.
As part of the ongoing monitoring efforts to assess goodwill for possible indications of impairment, we will continue to consider a wide variety of factors, including but not limited to the global economic environment and its potential impact on our business. There can be no assurance that our estimates and assumptions regarding forecasted cash flows of our reporting units, the current economic environment, discount rates, or the other inputs used in forecasting the present value of forecasted cash flows, as well as the selection of representative guideline public company’s will prove to be accurate projections of future performance.
Intangible assets are reviewed for impairment whenever events or changes in circumstances may affect the recoverability of the net assets. Such reviews include an analysis of current results and take into consideration the undiscounted value of projected operating cash flows. No material intangible asset impairment charges have been recorded for the years ended December 31, 2023, 2022 and 2021.
Income taxes
We are subject to income taxes in the United States, Australia, Canada, India, and the United Kingdom. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes.
We use the asset and liability method to account for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for net operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in our income tax provision in the period that includes the enactment date. We record a valuation allowance to reduce deferred tax assets to an amount that we determine is more-likely-than-not to be realized in the future.
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In our ordinary course of business, we may enter into transactions for which the ultimate tax determination is uncertain. In such cases, we establish reserves for tax-related uncertainties based on our estimates of whether, and the extent to which, additional taxes will be due. The reserves are established when we believe that certain positions are likely to be challenged and may not be fully sustained on review by tax authorities. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or refinement of an estimate. Although we believe our reserves are reasonable, no assurance can be given that the final outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will be reflected in our provision for income taxes. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.
The amount of income tax we pay is subject to audits by federal, state and foreign tax authorities, which may result in proposed assessments. Our estimate of the potential outcome for any uncertain tax issue is highly judgmental. We believe that we have adequately provided for the foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, audits are closed or when statutes of limitations on potential assessments expire. Additionally, the jurisdictions in which our earnings or deductions are realized may differ from our current estimates. As a result, our effective tax rate may fluctuate significantly on a quarterly basis.
Significant judgment is also required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.
Our effective tax rates differ from the statutory rates primarily due to the effect of goodwill impairment, the change in the valuation allowance the Company has placed on a portion of its U.S. deferred tax assets, the generation of R&D tax credits, the executive compensation deduction limitation, tax deficiency related to stock-based compensation, income related to the India partnerships, change in our permanent reinvestment assertion for our Indian subsidiary, and state taxes. Our provision for income taxes varies based on, among other things, changes in the valuation of our deferred tax assets and liabilities, the tax effects of non-cash stock-based compensation or changes in applicable tax laws, regulations and accounting principles or interpretations thereof.
We are subject to examination of our income tax returns by the U.S. Internal Revenue Service and other tax authorities. We assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these examinations will not have a material adverse effect on our results of operations, financial condition and cash flows.
Our Indian subsidiaries are currently under examination by the India Tax Authority for the fiscal years ended March 31, 2023, 2022, 2021, 2020, 2019, 2017, 2012, 2011 and 2010. Based on the outcome of examinations of our subsidiary or the result of the expiration of statutes of limitations it is reasonably possible that the related unrecognized tax benefits could change from those recorded in the consolidated balance sheets. It is possible that one or more of these audits may be finalized within the next twelve months.
Recent Accounting Pronouncements
See Part II, Item 8, “Note 2—Summary of Significant Accounting Policies” for a detailed description of Recent Accounting Pronouncements.
