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Good day, everyone, and welcome to the Envestnet Third Quarter 2018 Earnings Conference Call. Today's call is being recorded.
At this time, I would like to turn the conference over to Mr. Chris Curtis, Division CFO and Head of Investor Relations. Please go ahead, sir.
Thank you, and good afternoon. With me on today's call are Jud Bergman, Chairman and Chief Executive Officer; Pete D'Arrigo, Chief Financial Officer; and Anil Arora, Vice Chairman and Chief Executive of Envestnet | Yodlee.
Our third quarter 2018 earnings press release and associated Form 8-K can be found at envestnet.com under the Investor Relations section.
During this conference call, we'll be discussing certain non-GAAP information, including adjusted EBITDA, adjusted net income and adjusted net income per share. This information is not calculated in accordance with GAAP and may be calculated differently than similar non-GAAP information for other companies. Quantitative reconciliations of our non-GAAP financial information to the most directly comparable GAAP information appear in today's press release.
During the call, we will also be discussing certain forward-looking information. These discussions are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements are subject to numerous risks and uncertainties that can cause them to differ materially from what we expect. Please refer to our most recent SEC filings as well as our earnings press release, which are available on our website for more information on factors that could affect these matters.
This call is being webcast live and will be available for replay for 1 month on our website. All remarks made during the call are current at the time of the call and will not be updated to reflect subsequent material developments. We will take questions after our prepared remarks. And with that, I will turn the call over to Jud.
Thank you, Chris. I add my own welcome to everyone. Thank you for joining us today. Envestnet's operating system for financial wellness empowers clients with better intelligence in order to attain better financial outcomes. And we continue to strengthen our financial wellness network as we deliver on our plans for organic growth, enhance relationships with enterprises, advisers and important network partners and enter new alliances and pursue complementary and accretive acquisitions.
In the third quarter, we grew revenue 16%, adjusted EBITDA 22% and adjusted earnings per share of 43% over the prior year period. Revenue was in line with our guidance, and we outperformed on earnings.
In wealth management, nearly 93,000 advisers now use Envestnet's wealth management technology, up 5% from the past quarter alone, and we ended the quarter with more than $2.8 trillion in over 10 million investor accounts on our platform. Gross sales, excluding conversions, were $38 billion. We also completed $9 billion in asset-priced conversions.
During the quarter, redemptions were 1.8% per month on average, contributing to net flows of $19 billion. These strong net flows were nearly twice what we saw in the second quarter, although they were skewed towards assets under administration and lower-priced assets under management than we had anticipated.
In addition to the continued success we're seeing in wealth management, we're pleased to announce 2 new channel partners that expand the reach and penetration of Envestnet | Yodlee services.
We recently secured an expanded partnership with Alkami Technology, the fastest-growing digital banking solution in the United States. Our platform provides Alkami with more robust real-time access to financial account and transaction data enrichment, necessary to power innovative banking solutions for their clients. This partnership will also help Alkami develop more personalized and holistic banking services and further extend their leadership position.
We also entered into a partnership with Apiture, a full-featured, fully integrated digital banking platform that allows consumers and business customers to bank more efficiently in the digital world. With a full suite of Envestnet | Yodlee APIs, our platform enables Apiture to power their digital banking platform with both personalized and real-time access to financial account and transaction data. This partnership will help Apiture deliver more comprehensive banking solutions, improve customer engagement and quickly deploy new online banking features that customers have come to expect from this market leader.
As we think about our long-term opportunity, it's important to understand where we started. Envestnet's wealth technology leadership was founded on a simple premise, and that was to help enterprises and advisers compete more effectively. Our business began as a TAMP, a turnkey asset management platform. However, we soon found that advisers in the independent channels value the freedom to select options that they believed were in their client's best interests and asked for more. And so early on, we introduced third-party investment solutions. And as advisers embraced our open-architecture approach, they also benefited from the value of a deeply integrated and unified solution.
Today, we offer more than 18,000 investment products including our own. Additionally, we expect growth will be driven by registered investment advisers as well as advisers across all channels, who act as a fiduciary and incorporate a data-centric advice model into their practice, as well as the growing market among traditional providers as well as Internet innovators for digital advice solutions.
Our commitment to a unified and open architecture is a key to our growth strategy. We operate on a complex industry, and depending on the opportunity, a firm can be a competitor or a partner or a customer. Sometimes, all 3. But over time, we have cultivated a reputation of serving the best interests of our clients and our customers, and this reputation has served us and our customers well.
Firms and advisers want a comprehensive offering to serve their clients, but not every firm or every adviser wants the same offering. And our configurable platform technology and seamless connectivity to other platforms to our open ENV APIs support virtually every conceivable practice pattern or use case.
Today, advisers are competing against one another, but also against do-it-yourself digital advice offerings, and we are helping them compete not only today but into the future. Our clients win when they deliver value across all elements of financial wellness: planning, budgeting, investing, managing credit and protecting capital.
Envestnet is uniquely positioned to help create this premier financial wellness network by focusing on delivering unified, open-architecture wealth tech applications. Our operating system offers our clients choice yet retains the benefits of full integration across the entire stack of wealth tech apps, including aggregated data and analytics, financial planning, investment solutions, portfolio management rebalancing and reporting, digital advice and clearing and custody. I believe the growth and value creation opportunities for Envestnet, both organic and strategic, have never been greater than they are today.
I'll turn it over to Pete and be back in a few moments with some closing remarks.
Thank you, Jud. I'll give a brief review of our third quarter results and our guidance for the fourth quarter of 2018.
Summarizing Envestnet's results compared to the third quarter of 2017. Revenue grew 16% to $203.2 million.
Asset-based revenue was 59% of total revenue for the quarter, and subscription-based revenue was 38% of total revenue for the quarter. Recurring revenue, which comprises both asset-based and subscription-based revenue, was again 96% of total revenue.
Subscription-based recurring revenue grew 21%, reflecting continued strength relative to other subscription-based fintech providers. Our asset-based recurring revenue increased 12% compared to last year.
Professional services revenue increased 21% from the prior year period due to continued strong renewal and upsell activity at Yodlee in anticipation of new and enhanced customer deployments.
Adjusted EBITDA was $42.6 million, a 22% increase over last year. Both the core business and FolioDynamix contributed to this growth.
Adjusted earnings per share was $0.53 in the third quarter, $0.16 or 43% higher than the third quarter of last year, driven by favorability and operating expenses.
Overall, revenue was within our guidance range, and adjusted EBITDA and adjusted EPS were ahead of guidance.
Now I'll summarize our outlook, which is presented in full in our earnings release. For the fourth quarter, we expect total revenue to be between $209.5 million and $211 million, up 14% to 15% compared to the prior year, made up of asset-based recurring revenue between $123.5 million and $124 million or 11% to 12% higher than last year.
The implied effective fee rate on our end of September assets under management and administration is 9.1 to 9.2 basis points.
Subscription-based recurring revenue between $78.5 million and $79 million, up 20% to 21% compared to last year.
Professional services and other revenue, between $7.5 million and $8 million.
We expect cost of revenues to be between $68 million and $68.5 million, and we expect adjusted EBITDA to be between $46 million and $47 million.
Using a normalized long-term effective tax rate of 27% and assuming approximately 47.6 million diluted shares outstanding, this translates into adjusted earnings per share of $0.59 for the quarter.
For the full year 2018, we are tightening the range of our revenue guidance, now expecting revenue to grow 19% to a range of $812 million to $813 million.
We are increasing our prior guidance on adjusted EBITDA, expecting adjusted EBITDA to grow 21% to 22% to a range of $156 million to $157 million. We are also increasing our prior guidance on adjusted earnings per share, expecting it to grow 46% to $1.91. EPS is higher than our beginning-of-year guidance due to the expectation of continued operating favorability and lower interest expense from our refinancing in the second quarter.
The contributions to our financial performance this year from the core business, FolioDynamix and the recently launched insurance exchange platform are generally in line with the guidance we established at the beginning of the year.
Finally, our priorities for cash flow for the remainder of 2018 continue to be to invest in the business to support our long-term growth whether through acquisitions or new initiatives.
Thank you for your support of Envestnet, and I will turn it back to Jud for his closing remarks.
Thank you, Pete. We are pleased with our results for the first -- for the third quarter and our continued execution on our 2018 priorities and our ability to tighten revenue guidance and raise our earnings guidance for the year. While we expect to provide detailed guidance for 2019 during our February earnings call, we expect core business growth to continue to be strong relative to the industry, and we expect growth in adjusted EBITDA and adjusted earnings per share to be 120% or more of our top line growth rate, targeting EBITDA and EPS growth to be in the mid- to high teens. We also expect to accelerate the top and bottom line over time through disciplined acquisition activity.
We see a long runway for growth as we expand our operating system for financial wellness, driven by several forces. Specifically, we expect that registered investment advisers and other advisers who act as fiduciaries will continue to gain share from other advisers, and we will enable and benefit from this growth. We expect a growing importance of fee-based compensation for all advisers. We expect an increasing demand for outsourced technology solutions in general and, specifically, improved digital advice solutions, data aggregation and analytics solutions and that these will be an increasingly important source of growth for our enterprises and advisers.
We expect the large wirehouses will continue to be a force in the industry as they fully embrace the fiduciary standard of care and continue to seek innovative technology. And we expect that data-centric advice and analytics will open the door to delivering better intelligence and better financial outcomes as we continue to fulfill our vision for financial wellness.
Success will require a full embrace of deep integration and open architecture as the industry evolves. Across the wealth tech vertical, there are tremendous opportunities to build, to partner with third parties or to acquire. And over the near term, we expect to be active in all 3 approaches as we create value for our clients and our shareholders.
I want to thank you, again, for your time this afternoon. I want to thank you for your support of Envestnet. And with the completion of this, our prepared remarks, Pete, Anil and I are happy to take your questions.
[Operator Instructions] We'll go first to Will Cuddy of JPMorgan.
Jud, you mentioned that flows are skewed to lower-priced AUM more than expected in the quarter. What type of AUM are you seeing demand for? And should we expect this trend to continue?
So we saw flows into both our assets under administration, our advisers portfolio manager, or the APM product, on the AUA side. And then in the assets under management side, we are seeing continued growth of third-party strategists, particularly strategists that are lower cost and feature ETFs as an important part or low-cost mutual funds as an important part of their underlying portfolio strategy. We're seeing less in the Envestnet | PMC offerings on managed accounts than what we had seen in the first half.
Okay. So we had an aggressive market pullback in October. How should we be thinking about that pullback as it relates to advisers choosing to onboard Envestnet technology products? I guess, is there a relationship between market volatility and technology onboarding? Or is that something that is relatively stable despite market cycles?
So our experience is that if there's a "normal" amount of market volatility, which I think we have not tripped the switch on that yet, so to speak. A normal amount of volatility will have a slow in account growth at the advisory level but not in the rate of technology adoption. The rate of market volatility has to increase from where we are right now to materially or significantly affect the rate of new adviser adoption at the technology level. But we expected in our last quarter's outlook that some of the flow's slowness may continue. It did not continue in the way we had expected. Flows did strengthen a bit. But as I mentioned, the product mix of those flows was not what we expected.
We'll now take a question from Alex Kramm with UBS.
I wanted to, I guess, start with where you left off. I guess, Jud, if you look at your press release, you had this comment in there about in the near term M&A and partnering and open architecture. Then you gave us the whole history lesson about where the company came from, and then you felt compelled to kind of like repeat what was in the press release at the end. So not sure how to answer the question, but it certainly sounds very curious. So maybe you can elaborate a little bit. It seems like you're bracing us a little bit for maybe something new and different or maybe an increase in M&A opportunities that you're seeing out there. So anything you can, I guess, give us a little bit more detail about what you're seeing in the marketplace that gets you, I guess, more excited about the opportunity set to do something here.
So thank you for the question. Let me try to answer that. We are not signaling anything in particular. Behind the comment, though, is the realization that the opportunities that we are looking at, that we're evaluating have increased, and the number of attractive opportunities that are out there has increased. We're also suggesting or reminding that disciplined acquisition activity has been an important part of our growth, both in top line and in bottom line. And it's been a bit of time since the last acquisition of size was announced or integrated. And so all of that's kind of a backdrop. Hopefully, a little bit more context to the comments that I am making, but the -- I did want to convey the strength of both our organic and strategic opportunities at this particular moment in time of Envestnet's evolution.
All right. Fair enough. And then secondly, you gave us, I guess, a quick early look into 2019 and I think, if I remember correctly, you said mid- to high teens in terms of EBITDA and adjusted EPS. Now I know that you usually don't guide or use market impact in your typical guidance, but considering that we just had a big market correction, at least until a few days ago, I guess -- I guess curious if we have this as a lower starting point here, if markets remain choppy, do you think you have enough, I guess, for Pete, ability to maybe pull back on pricing -- or, I'm sorry, on costs or on other things that you can make this mid- to high teens no matter what the market has kind of given you?
I wouldn't say no matter what the market. I would say, with what we have experienced through the first part of the quarter so far, as Jud said, that wouldn't trip the switch of being outside normal volatility. But if things get a lot worse, then we would have to reevaluate what we think next year can hold, but we're not specifically guiding about next year at this point.
Okay. And then just a last quick one here for me, more of a technical one. But you've been breaking out for a few quarters now in your AUM, AUA walk the reclassification of subscriptions. And I think those numbers are actually starting to get a little bit -- slightly bigger. I don't know if you can just remind us, maybe you've done this already, like when somebody goes from AUM-base to subscription, is this -- like is this a neutral event? Is this a net loss? Like, again, these things are getting a little bit bigger so I just want to make sure that from a bottom line impact this is still not really a terrible thing. Like, how would you describe those transitions from a financial perspective?
So if I could just describe generically what a typical one of these looks like, this is an enterprise firm that starts out with a pay-as-you-go, no-minimum pricing that is recurring revenue but asset-based recurring revenue. And it's generally a combination of reporting solutions, adviser's portfolio, manager solutions and managed account solutions. And then a small percentage of these large enterprises grow to the point where they can consider a longer-term engagement, contract with Envestnet. And typically, what happens then is that the overall pricing of all of the offerings is taken into consideration, and that provides something of a baseline for the license and asset-based revenue going forward. But as inducement, there's usually some kind of headroom that's built into that license or subscription arrangement that enables them to get a little bit of growth at a reduced rate. And then there's almost always, over that longer term, an exchange of 4 or 5 years of subscription commitment for a lower marginal cost per product or per unit than there would be under the old agreement. And this is just a way that we are able to share the benefits of scale, our scale, with our largest enterprise clients. And the -- I think the first one that we had probably was a reclassification back in around 2008 or '09, and at that time, it was about a $5 billion book of business. Now these reclassifications are occurring at much higher levels, but when they occur, it's a testament to the success of our partnership and a proof of a client starting out as pay-as-you-go and then graduating to the point of being a very meaningful enterprise. Now this quarter's reclassification came in connection with a larger multiphase conversion, which you see in the subscription conversions number in the quarter, part of the $35 billion. There is a part 2 to that one that's still to come. So that was the -- that was what's behind this particular quarter's, but I thought you might want to understand the kind of the trend behind the numbers.
Our next question will come from Chris Shutler with William Blair.
I just wanted to come back to the acquisition topic, Jud. So could you reiterate the financial return targets that you have for M&A? Is it fair to think that the -- whatever you're looking at, that it's probably more consolidating in nature? I think that's been the recent commentary. I just want to make sure that's still the case. And lastly, net leverage, just how do we think about where you would be willing to take that up to?
Okay. Thank you, Chris. Great question. So -- and thanks for how you phrased that. So take a step back. We tend to group acquisition opportunities in 1 of 2 camps. One would be consolidating acquisitions that are primarily driven by financial considerations. There's almost always a strategic benefit to them and, of course, scale, and achieving superscale is its own business imperative, so there's a strategic benefit there. But consolidating acquisitions are -- as we consolidate in a technology or an application or an offering that we're already offering and gaining scale and we're able to acquire customers and a revenue stream, and then we're able to, over time, increase our operating effectiveness. And those, we expect, will have -- we will be seeing probably more of those than on the strategic side. On the consolidating side, we are looking to have a return on invested capital of mid-teens or higher within a fairly short period of time, 2 to 3 years. And then of course, the internal rate of return we expect would be higher than that, but we try to have the discipline of a fairly finite return on invested capital payback on the consolidating side. On the strategic acquisition side, we look to have a longer period to be value-accretive, and our time line on a strategic acquisition would be 4 to 5 to maybe even 6 years or longer. We would be looking at a returns profile that would be higher than what would be for a consolidating transaction, but it is IRR-based, not the simple return on invested capital base. And so we're seeing things that satisfy our requirements in both camps. Over the long term, we expect that we will be doing much more consolidating activity than we would be doing strategic activity.
And then the net leverage part of the question. Where would you be willing to take that ratio?
So we have restrictions on our current capital structure with the revolving credit facility with our bank group that limit us to go to 4.5x EBITDA in the -- for a short period of time, delevering down to below 4x EBITDA. We're very comfortable with that range, and we do like the capital structure that we have set up, the flexibility it provides. If there are opportunities that would require more capital, then we would explore potentially other avenues and maybe go slightly higher than that 4 or 4.5 that would certainly involve more work with the banks or restructuring in total what we currently have in place. But if there are the right acquisition opportunities, we think we could go slightly higher than that, if needed.
And as a perspective, today on a net basis, our effective leverage, about 2.4. It's about 2.4, and those would -- anything over 4, we would see not as part of a permanent capital structure, but would be something that could be incorporated if there's a fairly quick paydown in terms of what that leverage ratio would be.
All right. And then just one other one. On the Yodlee business, could you give us the Yodlee subscription revenue growth rate in the quarter? And how confident are you looking out to 2019 that Yodlee is still kind of mid- to high teens revenue growth business? It just feels like it's been decelerating a little bit.
Well we had some strong growth in the first half of the year, and there -- if you'll recall, there were -- there was a lot of concern this summer and into the fall around privacy on -- from -- primarily not from data aggregators but primarily from social networks and the use of individual private information. So we did see a bit of a slowing in the second half of the year on data. It's still double digit, but the -- for the year, we expect it to be in the high teens. And long term, we would expect it to still be in the mid-teens and maybe even at the high end of those mid-teens for our subscription-based revenue overall, of which the Yodlee business is -- fits in very nicely and, in some ways, leads our subscription-based revenue.
Our next question will come from Peter Heckmann with Davidson.
I wanted to follow up just on the competitive landscape, seeing as some custodians make some noise about trying to maybe consolidate more services on their own platforms and maybe, as part of that, doing some pricing moves. Do you find that, that is an increasing dynamic that you're watching? Or is it more kind of a normal state of business?
Yes. We've had this environment of coopetition, really, ever since we started the business. And the custodians have kind of gone almost in a pendulum. At different times, custodians have seemed to increase their interest in providing adviser-facing technology, and then only to be followed by periods of being less aggressive or less certain on the ability to deliver cloud-based adviser-facing technology. And I'm not sure there are -- any of the custodians have a strength or a demonstrated expertise in developing cloud-based, adviser-facing wealth technology. They've done a phenomenal job on back-end processing technology, trading technology, brokerage and now even, in many cases, client onboarding technology. So the dynamic of the coopetition is not new. We expect it to probably not only continue but probably strengthen because this area of fintech, even with GDP growth now most recent quarter, over 3%, fintech has a category that's consistently been growing in the high single digits as a category for publicly traded companies. And so that's an area that, I think, if you are a financial services provider, that's an attractive area. So we expect that the competition and the competitive dynamic will intensify, and that is why we are so focused on building some competitive advantage, and we see that competitive advantage, as I said today, about being in unified, open-architecture technology, expanding the base of adviser and enterprise users, expanding the base of Internet innovators and digital solution adopters as were highlighted in today's -- 2 of today's new clients, Alkami and Apiture. We also expect that the data centrality of our strategy, data-centric digital advice solutions, is going to be something that gains in competitive advantage and strengthens and fortifies Envestnet's competitive advantage in this wealth tech vertical. So expect the tech -- or expect the competitiveness to intensify like our positioning, and we've made our strategy pretty clear.
Great. Great. And shifting gears, just can you give us an update on the retirement subsidiary joint venture? How has that progressed? And can you talk about any milestones you may have hit there that are notable in terms of the growth of that part of the business?
So I don't believe this has been disclosed yet, but I think it will be disclosed. So in the -- we expect to exercise our option or have exercised our option. It's -- we have an option to acquire the minority shares, and we expect -- in our next filing, that will be -- that should be -- let me just take a...
Pete, were you asking about the insurance exchange or Retirement Solutions business?
Retirement Solutions. Just trying to see -- just trying to track if -- how that's contributing to the growth. And as we talk about exercising this option, I think it's currently grossed up in the numbers, but any thoughts about how that might change?
Yes. Okay. So -- yes, so on Envestnet Retirement Solutions, we will have disclosed a purchase of the remaining minority shares, and that was expected, and it will not affect materially revenue or EBITDA for the balance of this year.
Got it. And I would infer, given that, that the trends there are good, and the venture continues to grow and move towards its goals.
Trends are good, and then the timing, of course, a consideration because they're -- this is always a consideration. The business is about to go into the cash flow positive area after 2.5-or-so years of building and development.
Our next question will come from Chris Donat with Sandler O'Neill.
Pete, I wanted to ask about the projection for the fourth quarter effective fee rate. Looks like it's down 2% to 3% from where you were in the third quarter. And I'm just wondering, is that what you talked about earlier in the call on some of the pressures from a little shift in mix? Or is this -- I know that it's episodically down over time, but just wanted to get a little more color on what's driving that.
No, I think that's it. I think it's just a reiteration of the things we've discussed, the mix and the fee rate and the fee rate on conversions, I should say, more specifically. If -- again, if you average out the impact of the conversions or put the conversions in the beginning number, then our fee rate for the third quarter was closer to 9.2 already, so this is just pretty consistent with what we've already -- Jud mentioned and what we talked about in terms of the activity.
Okay. And then just one small housekeeping question on the severance. It looked like you had a little larger number than normal at $4.4 million. Just anything notable there? Or anything with implications, also, for future expenses?
So again, I think severance tends to be episodic. We took some actions during the quarter that lowered the cost structure in certain areas, and that will happen from time to time.
[Operator Instructions] We'll take our next question from Patrick O'Shaughnessy with Raymond James.
So on M&A topic, I'm just curious, why is it that you're seeing more M&A opportunities right now? Have selling prices become more reasonable? Or are you casting a wider net in terms of things that you're willing to look at?
I wouldn't say that prices have necessarily become more reasonable. I do think that expectations have moderated, and that makes things a little easier. I also think that there's an increasing understanding that a single-point application provider, no matter how cool the technology is, how well it works, that without access to an adviser base or without access to a group of Internet enterprises, Internet innovators, without access to customers, whatever they might be, enterprises, innovators or advisers, it's hard to get traction. We're in a business to business to client world, and anything we'd be looking at is of that same ilk. We're not in the direct-to-consumer world, and so there's, I think, an increasing realization at this point that business-to-business applications don't do particularly well without a broader ecosystem or network or platform. And as we move from being the go-to operating system or the go-to wealth tech platform to something more valuable, a financial wellness network, we'll see on the margin, I think, a few more opportunities as well. So I think it's -- just to kind of recap, a little bit of maybe expectations have -- which had been sky high, have moderated a little bit. There's an increasing understanding of the importance of a network or a broader platform. And then as we go beyond our core tradition of investment technology to financial planning and budgeting and managing credit and protecting capital, there are going to be more ancillary or adjacency opportunities for us to look at.
Got it. I appreciate that summary. And then a couple of weeks ago or a few weeks ago, it was announced that UBS had decided to outsource its wealth management technology. Obviously, the contract went to a firm that was not Envestnet, but I'm curious, is that sort of opportunity -- is a wirehouse opportunity something that Envestnet feels like it's in a position to compete for?
So another very good question. I mean, when we started the business, even some of the large independent and regional firms that we are now working with would never have considered using an outsourced provider like Envestnet because they had huge investments in their own in-house technology. So we expect that the profile of financial services firm that will be looking at Envestnet is going to continue to become bigger, more successful, more powerful, more dynamic. And what I reasonably expect is not so much a full adoption of all capabilities as toehold or partial adoption of maybe one or more of the technology solutions we provide into, really, no longer a limit on the size of the firm or whether the firm has been traditionally 100% self-developed technology. Things are changing so rapidly in the wealth tech space that, at the very executive level, business decisions are being made to deploy choices rapidly in order to not lose share, rather than waiting, which is in some -- in many cases, a longer period of time for the internal resources to develop it internally.
We'll take our next question from Chris Shutler with William Blair.
So on the -- I wanted to go back one last time to M&A. Are you kind of okay buying something that's more market-sensitive where we are in the cycle? Or is it much more likely to be more of a licensing revenue opportunity that you're looking at? And then lastly, any color on the conversion pipeline?
So I mean, I'm regretting all of this preponderance of questions about merger and acquisition activity. What I will say, that in any market cycle, all else equal, we have -- we favor recurring subscription revenue to any other kind of recurring revenue. Although, over a market cycle, the asset-based revenue does serve us pretty nicely. Our recurring revenue on the subscription side is now about 40% of gross revenue. It's over 50% of our net revenue. But I would also say this, Chris, that at a market cycle like this, we would not rule out an asset-based recurring revenue business, but we would, in our analysis, factor in that revenue profile into what our required return would be. If that makes sense.
Yes, that definitely makes sense, Jud. And then lastly, can you just give us a quick commentary on conversions?
Very strong pipeline. Again, it's -- we've got some exciting stuff in the pipeline that -- some of which we expect to hit sooner rather than later. And a very, very, very robust pipeline.
And it appears there are no further questions at this time. I'd like to turn the conference back over to Jud Bergman for any additional or closing remarks.
I want to thank you again. We haven't quite gone the full hour, but I know it's earnings season and I know a number of you have to get to other work as well. So thank you, and we look forward to talking with you soon. So long for now.
This concludes today's call. Thank you for your participation. You may now disconnect.