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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day everyone and welcome to the Envestnet Fourth Quarter 2018 Earnings Conference Call. Today's call is being recorded.
At this time, I'd like to turn the conference over to Mr. Chris Curtis, Division CFO and Head of Investor Relations. Please go ahead sir.
Thank you. Good day everyone and welcome to the Envestnet fourth quarter 2018 earnings conference call. Today's call is being recorded. At this time, I would like to turn conference call over to me. Sorry about that.
Thank you and good afternoon. With me on today's call are Jud Bergman, Chairman and Chief Executive Officer and Pete D'Arrigo, Chief Financial Officer.
Our fourth 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 will 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 could 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 one 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 this afternoon. Thank you for joining us today. Envestnet's integrated financial wellness platform empowers enterprises and advisers with actionable intelligence to attain better financial outcomes. We continue to grow our business while enhancing the emerging financial wellness network through innovation and acquisition to help firms, advisers, and their clients achieve better financial outcomes and improve their lives.
Envestnet delivered solid results in the fourth quarter and for the full year of 2018. During the fourth quarter, we grew revenue 15%; adjusted earnings before interest taxes, depreciation, and amortization grew 22%; and adjusted earnings per share grew 53% over the prior year period.
For the year, we grew revenue 19%, adjusted EBITDA 22%, and adjusted earnings per share 47% over the prior year. Revenue was in line with our guidance and we outperformed on earnings for the quarter and the year.
In wealth solutions, gross sales excluding conversions were $33.6 billion in the fourth quarter. We added over $23 billion in asset-based conversions and onboarded an additional $72 billion in subscription-based conversions bringing total conversions for the quarter to $95 billion.
During the quarter, redemptions were 1.8% per month, resulting in net flows of almost $28 billion. We ended the quarter with more than $2.7 trillion and more than 10.8 million investor accounts.
More than 96,000 advisers now use Envestnet's wealth management technology, up 4% from the past three months. We expect to surpass the 100,000-adviser milestone that's advisers using our solutions sometime during 2019 and we look forward to reporting that milestone.
In data and analytics revenue grew 15% in the fourth quarter to nearly $48 million and 15% for the year to nearly $180 million. Adjusted EBITDA for data and analytics grew 26% for the quarter to $11 million and 25% for the year to nearly $37 million.
During the year we made progress in fulfilling our vision for financial wellness. As a reminder, financial wellness begins with financial planning and includes budgeting, investing, managing credit and protecting capital.
The foundation for our delivering on this vision is our industry-leading capability and data aggregation and reporting and our market-leading wealth management operating system which supports firms and advisers ability to implement the elements of financial wellness.
Recently an independent wealth management firm 1st Global based in Dallas expanded their use of Envestnet to now include Envestnet Vision, our enterprise data management solution. Envestnet Vision provides the enterprise with a client-centered portal that provides a full picture of the clients' financial wealth and the opportunity for the enterprise to get closer to that client.
We are also making great progress with the insurance exchange we formed one year ago. Today we have six leading insurance carriers under contract. They will be offering annuities and other insurance products through the exchange to Envestnet's adviser base as part of the proposal process. We expect the insurance exchange will be a solid contributor to our growth in subscription based revenue in 2019.
And FolioDynamix has now been part of Envestnet for a year. We made significant progress integrating Folio's clients into the Envestnet environment, while improving the operating efficiency of the business, as we leverage our core operating expertise in doing large-scale conversions.
We are on track to deliver the expected contributions in both earnings and revenue in 2019 and beyond. Much has been accomplished already as we begin 2019. We began the year with an alignment of our organization into two business units down from four to better position the company to fulfill our vision for financial wellness.
Bill Crager leads our wealth solution business which includes Enterprise, Tamarac and Retirement. And Stuart DePina previously President of Tamarac now leads our data and analytics business which include Yodlee offerings as well as Envestnet Analytics.
At the same time Anil Arora announced his plans to step down for his operating and leadership role at the end of February. And I want to thank Anil for his many contributions and for building Yodlee into the leading data aggregation and analytics platform in FinTech. I look forward to his continued involvement with Envestnet as a member of our Board of Directors.
I'd also like to highlight three developments that aligned very well with our financial wellness vision. First, this afternoon we announced an agreement to acquire PortfolioCenter from Schwab Performance Technologies. PortfolioCenter has helped power Tamarac's award-winning suite of portfolio reporting, trading, client portal and CRM applications. More than 3000 RIA firms use PortfolioCenter today, including many of the 1000-plus firms Tamarac already counts as customers. This acquisition will enable us to support more of the registered investment adviser marketplace and help them power advisers using PortfolioCenter with a broader range of solutions.
Overall, this combination yield access to more advisers who can use our technology and also importantly, a deeper partnership with Schwab. Last month we announced the acquisition of Abe AI. Abe's transformative conversational artificial intelligence capabilities paired with Yodlee's industry-leading financial data aggregation platform and personal financial management apps, allows institutions across retail banking and wealth management to engage, support and assist consumers on their path towards financial wellness.
Also we announced the formation of Apprise, a partnership between Envestnet, PIEtech, the parent firm behind MoneyGuide, the leading goals-based financial planning application in the market, and Edmond Walters the founder of eMoney. Apprise is building software to address sophisticated high-end estate planning, lifetime cash flow, tax and other client retirement needs. This next-generation software will add detailed short-term cash flow and tax planning capabilities to the financial planning solutions offered by both Envestnet Logix and MoneyGuide and will strengthen the interactive relationship between adviser and client in the sophisticated financial planning process.
Our investment in this partnership underscores our view that financial planning is the cornerstone of our financial wellness vision. Envestnet is uniquely positioned to build the premier financial wellness network. Our wealth management platform offers advisers choice and retains the benefits of an integrated offering across the entire application stack of wealth tech, which we provide and includes aggregated data, client on-boarding proposal generation, financial planning, extensive managed account solutions and client reporting.
I will turn it over to Pete at this point and I'll be back in a few moments with some closing remarks.
Pete D'Arrigo
Thanks, Jud. I'll review our fourth quarter results and our guidance for the first quarter and full year of 2019. Briefly summarizing Envestnet's fourth quarter 2018 results compared to the fourth quarter of 2017, total revenue grew 15% to $210 million. Recurring revenue was 96% of total revenue unchanged from 2017. Our recurring revenue is a combination of subscription-based recurring revenue and asset-based recurring revenue.
Subscription-based recurring revenue grew 19%, reflecting continued strength relative to other subscription-based FinTech providers. Contributions to growth of subscription-based recurring revenue were relatively balanced between the wealth solutions and data and analytics business units. Our asset-based recurring revenue increased 11% year-over-year, which is entirely in our wealth business. Despite a drop in equity markets in the fourth quarter, conversions in net flows remain strong. And I'll speak more about the implications of the market activity in our guidance section. Professional services revenue increased 35% from the prior year period, driven largely by activity in our data and analytics business relating to customer deployments and upgrades.
Adjusted EBITDA was $47.5 million, a 22% increase over last year as we have continued to manage the business to balance profitability with reinvestment in growth. Adjusted earnings per share was $0.61 for the fourth quarter, $0.21 or 53% higher than the fourth quarter of 2017, again driven by the revenue growth and favorability in operating expenses.
Moving onto our outlook for the first quarter and full year of 2019, you will find our guidance detailed in full in the earnings release. For the first quarter, we expect total revenue to be between $200 million and $202 million. Of that asset-based recurring revenue between $110.5 million and $111.5 million.
The implied effective fee rate on our end of December assets under management or administration is 10 basis points to 10.1 basis points. Subscription-based recurring revenue we expect to be between $82.5 million and $83 million. Professional services and other revenue between $7 million and $7.5 million. Cost of revenue, we expect between $62.5 million and $63 million.
Similar to prior years, we expect operating expenses to increase sequentially from the fourth quarter due to the seasonal nature of certain items particularly in personnel expenses, namely, payroll taxes and other benefits all of which are significantly higher in the first quarter compared to the fourth quarter.
Adjusted EBITDA for the first quarter should be between $32.5 million and $33 million. And we expect our normalized long-term effective tax rate to be 25.5% down from the 27% we assumed in 2018 due to a slight change in our state income tax apportionment. Assuming approximately 50.1 million diluted shares outstanding, this translates into adjusted earnings per share of $0.38.
For the full year 2019, we expect revenue in a range of $868 million to $880 million. We expect adjusted EBITDA in a range of $170 million to $175 million and adjusted earnings per share in the range of $2.05 to $2.12. And again, this is all summarized in the earnings release.
Below the guidance summary we also included a table that bridges our normalized growth assumptions to our guidance by revenue line. A point of emphasis that emerges in the table not necessarily apparent in the guidance is a continued shift towards subscription-based recurring revenue. In 2019, subscription-based recurring revenue will likely exceed 40% of total revenue, up from 36% in 2018.
Additionally, guidance for 2019 includes the following assumptions; first is the fourth quarter market impact. The fourth quarter market decline had a significant impact on our asset-based recurring revenue run rate coming into 2019. We have partially offset that impact in our guidance by updating our models to be market neutral as of January 31, but the January capital markets impact will have little impact on the first quarter. The implication is that the last three quarters of the year will reflect this assumption. And we believe this is the most accurate view of how we are running the business today and for 2019.
Next is a reclassification of accounts to subscription. During the fourth quarter several large clients shifted from an asset-based model to a subscription-based recurring revenue model. Approximately, $78 billion and 400,000 accounts were reclassified from AUA to subscription, as noted in our asset roll-forward in the earnings release.
While this does not impact total platform assets accounts or revenue, the billing arrangements for this business in future periods are subscription-based rather than asset-based. We believe this will help stabilize our effective fee rate to some degree going forward.
The third item is third-party manager fees. During the fourth quarter certain managers on our platform lowered their fees to their end-clients, which in turn lowers the revenue, as well as the cost of revenue to Envestnet, having no impact on our profitability. This impact will carry throughout 2019.
The just announced acquisition of PortfolioCenter. PortfolioCenter's expected contribution to Envestnet's 2019 financial results are included in our guidance, due to the likelihood of our expectation the flow of the transaction closing in the near term. Revenue from PortfolioCenter will be 100% subscription-based and we expect PortfolioCenter to contribute modestly to our 2019 revenue and earnings.
And finally, FolioDynamix. Consistent with previous consolidating acquisition, it takes several years for clients of the acquired business to begin to realize growth rate similar to the rest of our business. For 2019, FolioDynamix revenue is expected to be flat and with the market down slightly, possibly even down, while the integration activity continues.
As I mentioned, the details are quantified in the table in the release. The full year revenue guidance reflects the combination of basically flat asset-based revenue, robust growth and subscription-based recurring revenue and a modest decline in professional services non-recurring revenue.
Our normalized growth assumptions include asset-based revenue of 9% to 11%, subscription-based revenue of 16% to 18% and a modest decline in professional services revenue, translating to total revenue growth between 11% and 13% for the year. The items noted above connect these assumptions to our revenue guidance range.
So thank you for your support of Envestnet. And at this point, I will turn it back to Jud for his remarks.
Thank you, Pete. We are pleased with our results for the fourth quarter and the year with our progress in expanding our financial wellness platform and our ability to maintain revenue and raise our earnings guidance throughout 2018.
Looking forward to 2019 we expect, as Pete indicated, robust growth in our subscription-based recurring revenue and continued growth in asset-based recurring revenue following a dip in the first quarter that resulted from lower December 31 capital market valuation levels.
Customers continue to adopt our wealth management and data solutions and we expect to grow revenue throughout the year from our first quarter baseline.
Over the longer-term our growth targets in a stable market environment are as follows; low double-digit growth in asset-based recurring revenue weaker in difficult markets and accelerated in stronger markets; mid to high-teens growth in subscription-based recurring revenue; and total revenue growth at a premium to publicly-traded FinTech peers. Again, over the longer term our target is to maintain a 1.2x relationship between the growth rate of revenue and the growth rate of adjusted EBITDA.
We also plan to accelerate the top and bottom-line growth over time through disciplined acquisition activity. And I will add that the pipeline for deals is full and active in our space and we are seeing a number of attractive opportunities. In short, we see a very long runway for growth, as we fulfill our vision for financial wellness and we see this vision as driven by several forces. I've mentioned them before. Specifically, we expect registered investment advisers with a fiduciary responsibility will continue to gain share from other adviser channels. We will both benefit and enable this growth.
Second, we expect data and analytics to continue to open the door to delivering actionable intelligence and improving real outcomes. Third, outsourced technology in general and improved digital solutions with respect to advised and financial planning in particular will be an increasingly important source of growth for our advisers and enterprises. Fourth, fee-based compensation for advisers over transaction-based compensation will continue to grow.
And finally, we expect that wirehouses will continue to be a very strong force in the industry as they more fully embrace the fiduciary standard of care and seeks faster innovation in their own technology stacks.
I want to thank you again for your time this afternoon. I want to thank you for your support of Envestnet. And with this a completion of our prepared remarks, Pete and I are happy to take your questions.
Thank you. [Operator Instructions] We'll take our first question from Surinder Thind of Jefferies.
Hi, Surinder.
Hi, guys. I'll start with a big picture question here. Can you provide some color on the reorganization in the sense of why is the timing right now to kind of make the kind of changes that you guys did in terms of the organization into the two business units? And how you think that kind of drives things going forward?
So the timing was right because of our wanting to marshal resources along the lines of the financial wellness platform that we've outlined. We had four business units and we identified that we needed to improve our responsiveness to the markets. We were finding that that a number of firms were wanting a combination of solutions that we were offering could be data aggregation from Yodlee, rebalancing an adviser view from Tamarac, and managed accounts from Envestnet and the ability to do this efficiently and effectively. We believe that by organizing two business units rather than four, we're going to streamline development and be able to get to market faster with some of these solutions.
We also think that over time, we'll be able to marshal resources in a way that make bigger impact and we will eliminate certain redundant activities that did take place among four business units that won't when there are two.
That's helpful. And then maybe another big picture question on the competitive environment. Can you talk about more specifically Yodlee and the outlook for, I would say, the non-wealth management component of the business? And more specifically, I'm kind of thinking about the capital raise that was done by Plaid and their acquisition of Quovo. Is there a risk to Yodlee living up to its expectations outside of the Envestnet umbrella in terms of what used to maybe, let's say, the Yodlee Interactive business? And how that kind of shakes up into the big picture of where you guys are headed down the road?
So we're very pleased with Yodlee's results and we're pleased with the results within wealth management. We are also pleased with the results within FinTech more broadly. And today by our measure Yodlee has something like a 70% market share of data aggregation clients.
Now that said, there has been $60 billion flowing into FinTech in just the last year alone. So you're looking at a situation where private equity is seeing high single-digit growth that publicly traded FinTech companies are providing as a significant premium over what GDP growth is. And then they're looking at the market leaders in that space are growing at premiums to that FinTech average. So it's natural that you're going to have money flow in when there are high growth rates.
We're going to continue to focus Yodlee on wealth management and FinTech enterprising firms and the logo list is in our investor deck. We expect that we're going to be making additional investments with respect to credit. And we believe that as the market leader we're going to continue to hold our own.
Understood. I’ll get back into the queue for additional questions. Thank you.
We'll go next to Patrick O'Shaughnessy of Raymond James.
Hi, Patrick.
Hey. Good afternoon. So from what I understand, you guys are buying Schwab's call it their older generation technology PortfolioCenter, but not buying their next-generation Portfolio Connect platform. One is that understanding, correct? And if it is can you help us understand the difference between those two platforms and to extent that Schwab might continue to compete against the asset that you guys are buying?
So that is the -- that's precisely correct, Patrick. We're buying the old technology, if you will, but we're buying the established technology that supports some 3,000 firms. And we are, I think, in a -- in the best position to migrate those advisers to the solutions that Tamarac uses. We've already got -- of the 3,000 users of PortfolioCenter we have nearly a third of them, perhaps fully a third of them already using Tamarac.
The largest of those firms, those firms $500 million and up have adopted Tamarac to a much higher percentage, around a 50% market share of PortfolioCenter users. It's the mid-sized advisers that we have not traditionally focused on. And we see this as a tremendous opportunity for us to focus the Tamarac offerings on the mid-sized adviser which is a huge part of the market that we have not intentionally emphasized. That changes with this acquisition.
How the two technologies we expect will work is that that the new technology will be offered to users of Schwab as a custodian. We expect that all of these advisers that are part of PortfolioCenter will continue to use the custodians that they currently are using. And there is a predominance of that use towards Schwab, but there will be again another example of coopetition, not unlike we have experienced with all of the other custodians. And we will be offering our upgraded technology based on a new portfolio accounting engine, a web-based cloud-based accounting engine. And there will be in the marketplace something of a coopetition, but we consider Schwab a very strong partner. We're on the very shortlist of firms that are in their intelligent integration project and have been for a number of years. So, we expect that we will be able to leverage this opportunity very nicely.
Got it. I appreciate that. And then to maybe follow-up on that point. Given the contribution from PortfolioCenter that you expect or you implied in your 2019 guidance, I think that suggest that maybe the business is doing something to the tune of maybe $10 million of annualized revenue give or take. So is the opportunity for you guys to put those clients onto Tamarac and then it's basically an up-sell?
So, there is two -- yes -- basically, yes. There is a revenue potential that we see that will play out over years. It's great to get another 2,300 advisers that we can begin to work with and partner with and help build their business. And over time, we expect that a good chunk of Tamarac's current client base originally started on PortfolioCenter. So, this enables us to have access to a bunch more a number -- more to do the same and then over time to migrate them to additional services, financial planning, data aggregation, managed account.
Also there is -- we have a nice expense elimination because of our use of PortfolioCenter for supporting many of those Tamarac clients. So that cost will go away and that's the primary contributor to the earnings that this transaction will give us. And I can also confirm approximately your math is right on the revenue.
Great. I appreciate that. And then maybe one last one on a different topic. Does it surprise you how muted redemptions were during the fourth quarter given the volatility that we saw?
Yes.
Okay. Thank you.
Yes, it does. I don't know what else to add.
And our next question comes from Peter Heckmann of Davidson.
Hi, Peter.
Good afternoon everyone. Thanks for taking my call. In terms of the two acquisitions assuming PortfolioCenter closes in the first quarter, can you talk about what type of cash commitment that will avail?
A - Pete D'Arrigo
We're not disclosing that amount. It's determined to be immaterial in the overall view of our balance sheet. So the terms of that are not going to be disclosed until any further detail. We expect to close in the first half of the year for PortfolioCenter Abe has already closed. So those items will be in the subsequent events. But in terms of material terms of the deal not to be disclosed.
Okay. That's fine. And then you talked about 10 basis points effective fee rate in the first quarter. And I assume that step up from where we were is a big part of that is the reclassification of revenue AUM/A to subs. Would something close to 10 or just below it be kind of the right effective fee rate to think about for the full year?
A - Pete D'Arrigo
So two things. One the first part yes, that's exactly right. The impact of the increase is due to the reclassification. They're primarily lower type fee rate business in the AUA component that did move to subscription. So that part is right. I would say generally that trend that we've seen in the past where there is a very modest step down will be mitigated to some extent because some of those clients that have migrated to the subscription component were some of the big drivers. A lot of assets at lower fee rates that were causing that quarter-to-quarter decline that we've seen over the last year. So I think the trend is the same, but I think the magnitude of it is likely to be mitigated somewhat.
Thank you.
And our next question comes from Will Cuddy of JPMorgan.
Good afternoon, Will.
Hi, good evening. So on PortfolioCenter in addition to Tamarac, the PortfolioCenter support other third-party software with similar degree of Tamarac? And does that acquisition of PortfolioCenter potentially open up a suite of software providers? And will it make sense to acquire or partner with without having PortfolioCenter previously, especially in that mid-tier RIA space?
So PortfolioCenter integrates to other software providers. The use of PortfolioCenter as a portfolio accounting engine that then would power other reporting apps or other rebalancing apps does occur and we expect no changes in any of the existing integrations in PortfolioCenter in the near term.
Okay. And on the -- I got to the second part of this on the -- are there opportunities that maybe could involve more in the -- pivot a little bit more into the mid-tier RIA space?
Yes. That for us strategically -- the strategic importance and value of this is closer partnership with Schwab. Even though they will be having a competing product at some point. A access to the midsized adviser market which is huge in terms of dollars. And we're going to be accessing that with a product and a price point that we think is going to be very attractive to them.
Okay. Great. And then switching gears a little bit. So you raised capital from BlackRock late last year. Could you walk through the rationale of the transaction especially beyond the additional capital and the brand association what else does BlackRock bring from a product offering perspective and distribution perspective?
So we like very much BlackRock's commitment to financial technology commitment to advisers. We like the risk mitigation applications that they have and we look forward to having versions of that integrated into the Envestnet platform for the benefit of our user base. We also like what they've done in retirement. And we expect that we're going to be able to improve our retirement offering by including some elements of BlackRock's retirement technology.
Over time we expect that that advisers will opt for lower cost managed account solutions because of a deep integration with front to back including onboarding with them. All of these things were reasons for the commercial arrangement had nothing to do or very little to do with taking capital. We took the capital because we expect to be active acquirers over the coming quarters and years. And we felt that there was no better endorsement of our strategy than BlackRock's.
Great, thanks Jud.
And our next question comes from Chris Shutler of William Blair.
Hi Chris.
Hey guys, good afternoon.
Good afternoon
So first Jud on the -- on Yodlee, can you just talk about what Yodlee subscription growth was in the quarter? And what your outlook is for subscription growth there in 2019?
I'm going to hand that over two Pete.
Yes. So subscription growth for the quarter was about 12%, 12% for the year, outlook for 2019 is about 15% in that -- again I'm giving midpoints of what's in the table.
Okay. So 12% in the fourth quarter, 15% is midpoint for 2019. And then the -- on the PortfolioCenter deal, the EPS accretion that's in the 2019 numbers from the deal, could you give us that number?
A - Pete D'Arrigo
So PortfolioCenter is going to -- again that's -- it's about 3% to the revenue growth. And we haven't broken out the EBITDA contribution, the revenue growth for subscription-based and about 1% overall. And again EBITDA when we start talking about consolidating acquisitions it gets a little more harder to disclose based on the things. So, based on the need for allocations and absorption of -- integration of the business. So we will update that, the expectation is that it should be additive probably not materially driving the numbers any higher or lower.
Okay. So it's proportionate to…
A - Pete D'Arrigo
Proportionate to the revenue contribution in terms of margin.
Okay, got it. That's helpful. Let's see I guess lastly, the conversion pipeline Jud. I'm not sure that you talked about that but just -- can you give us the latest commentary there and remind us how far out you have pretty good visibility?
We've got good visibility out four to six quarters. And we completed some large conversions over this -- the past year. The conversion pipeline is still strong. I expect as we've seen before that during market volatility it slows down, a bit client related. I wouldn't be surprised if that happened again, but the market didn't seem to respond as negatively with respect to redemptions as what we would normally expect.
And then there has been some snapback in terms of the valuations. So we'll just have to see how that does play out. In the past, stable markets are our friend. Growing markets have caused some investors' expectations to get out ahead of what we actually can deliver. So we like stable markets. And weaker markets have caused some slowness in the past of some in the rate of growth, but we've been able to grow through good and bad markets with both our subscription based recurring revenue and our asset based recurring revenue, and so the conversion pipeline is very strong and looking out four to six months there are a lot of exciting opportunities for us to still bring on.
All right. Thanks, Jud.
Our next question comes from Chris Donat of Sandler O'Neill.
Good evening. Thanks for taking my question. First just a timing question on -- well, timing questions for both FolioDynamix and for the PortfolioCenter. Just in terms of if there are expenses coming out of those that's more of -- that's not going to be in 2019, sort of development right? That would be more of a 2020 issue right?
Well, with respect to Schwab PortfolioCenter there is kind of a one-time expense benefit we get because we will no longer be paying for the Schwab PortfolioCenter license. So there's going to be a benefit that is incorporated into our numbers already in the guidance. And the benefits from FolioDynamix is also incorporated into the guidance for this year. And there will be -- we expect that there will be continued benefit in the coming years already identified what those are for FolioDynamix.
And given the fact that the value in terms of consideration is not material, we've dimensionalized the revenue today around $10 million of contribution that would come on once the transaction is completed. And there's some impact for earnings and cash flow that comes from that $10 million, but really comes from the expense savings on the use of the software. Out years we expect that there will probably be a growing benefit for Schwab PortfolioCenter. But that will come from cross-sells getting those adviser firms to adopt Tamarac and other solutions and some greater efficiency in the operation.
Okay. That's very helpful. And then Jud just wanted to follow-up on your brief answer to Patrick O'Shaughnessy's question about redemptions and being surprisingly low. Anything else in the December market volatility that seemed unusual to you? Or has there been surprisingly normal customer behavior or adviser behavior and investor behavior? And then anything change in January? Or is it people behaving rationally and not moving their portfolios? Just curious what you're seeing.
Is that one question, Chris? So I didn't mean to shorten any response but we were surprised by the redemption activity. We normally would have expected that to pop and it didn't when volatility comes. I guess the one surprise was that in that marketplace -- in the market active managers -- the some of the capital appreciation losses were a little bit higher than what we might have otherwise expected under an all index portfolio. Now the flip side of that is that's come back stronger on the other side. So I guess that was a -- I don't know if that was a surprise but that was curious. And then with respect to 2019 all I can say is that we -- if we had experienced anything significantly different then that would presumably logically affect our guidance for the year.
Right. Okay. And your guidance is as of January 31 date for the market so we can--
But January 31 date for the market there is -- the market is so far in February is up, but we're reflecting the guidance as of January 31st and market environment which I would not yet say it's a stable market environment. That's one of the reasons that our normalized assumption for asset-based recurring revenue is slightly below what our longer term target is for asset-based recurring revenue.
Understood. Thanks Jud.
Thank you
Our next question comes from Devin Ryan of JMP Securities.
Good afternoon Devin.
Great. Good afternoon guys. Maybe to follow-up on some of the comments on the last question around the guidance. I mean the fourth quarter market I think is always at least what we saw there's a good reminder of just to have business plans for a wide range of environments.
And so your clearly ongoing move to subscription should help relative to the past, but can you maybe just remind us that how much flex is in the model today like in expenses or other where -- just in an environment where the markets are lower, but in a more sustained fashion? And also how you would think about investing through a more challenging environment?
So, that's a great question. And so I'll answer it a couple of ways. We report revenue. We don't report net revenue, we report revenue. But I think the best indicator of what exposure to the market is for us is not the gross revenue mix, but probably more like the net revenue mix is probably more indicative of what the actual exposure is.
And if you look at just take revenue minus the cost of goods sold as a proxy for -- not pass-through expenses, but manager expenses and other variable expenses then you get a different picture of where we are.
Today, we're at like 42% on a net basis using that simple math. We're at about 42% asset-based recurring revenue and about 54% subscription-based recurring revenue and about 4% professional services, which I might add I didn't -- we expect will be deemphasizing in the future as the market for data aggregation and analytics is migrating to expect more work done as part of the ongoing subscription and less work done as part of the professional services.
So, that's another if you will offset this year because we are not expecting professional services to grow in 2019 at all. Over time we think that that will sustain our very high growth rates in subscription -- in subscription revenue -- subscription-based recurring revenue.
But in the near-term that will have an apparently adverse impact on year-over-year growth rates, but I just remind everyone on the call that those are not recurring revenue, that is professional services and usually one-time revenue. So, all of that on a net revenue basis where like 42% asset based recurring revenue, 54% subscription based, these that are approximate 4% professional services. That gives you an idea of the exposure from a revenue standpoint after pass-throughs, because those are variable. And then today where 58% to 60% of our asset based revenue is in equities, either domestic or international. And then there -- the balance is in fixed income. There are some alternatives, although not significant. And then cash balances generally are in the 3% range, although they have ticked up a bit lately.
And so that kind of gives a reminder these are not new numbers. Although, they are updated given the fact that subscription based revenue is growing faster in this environment than asset based revenue.
And then so in terms of the expenses, again, cost of good sold are variable. They go with the market. Market's up, it goes up. It goes down, it goes down. And we are disciplined in our expense management. We're looking to invest wisely in the financial wellness platform of the future. There are continued enhancements and expansions we want to make. We expect that if we have a prolonged period of difficult markets that that investment rate will probably slow as will our investment in human resources, that will also slow.
So, right now, we've given you a picture of how we're trying to manage through that in 2019. And we think, we've balanced the opportunity, the long-term opportunity with the short-term downturn in the first quarter of asset based revenue and what looks like it will be from a normalized growth rate of, let's say, call it 10%. We're really expecting flat revenue growth from asset based recurring revenue, but very strong growth from subscription based in part accelerated because of that reclassification.
Okay. Terrific. I appreciate all the details there. Just a follow-up on the PortfolioCenter acquisition. Is there anything to read into that you're buying an asset from a custodian? I'm just trying to think about whether this was an idiosyncratic opportunity, was there any reason to think there could be more capabilities that just don't fit anymore within some of the custodian or some are moving away from their own technology stack? And just try to think about whether that could create a pipeline of maybe more acquisition opportunities for you guys?
Well, in that regard this is not dissimilar from the WMS acquisition several years back where Prudential just concluded that they had a legacy technology that they did not have the -- they did not -- they concluded they did not have the market receptivity, nor the ability to do a complete rewrite and bring that into a cloud-based environment.
So that was a kind of a prototype consolidating acquisition for us, where revenue was flat for several years of that client base, but we were able to make significant cash flow and earnings contributions due to efficiency.
And now that client base is growing at a rate equal to and in some cases faster than the rest of the asset-based recurring revenue business. But it takes time because you get them off of one system, you convert them, you lose some advisers in the process and then you build from a new base.
So we see these kinds of -- kind of carve out opportunities. They come along once in a while and we like them, especially when it's with a firm with whom we are doing business. And we see it as a way that there really can be a win-win.
Understood. Great. Thank you very much.
And our next question comes from Hugh Miller of Buckingham Research.
Good afternoon, Hugh.
Thank you so much. I appreciate you taking my questions. Just wanted to touch a little bit on the M&A pipeline that you had talked about which I guess from the commentary it sounds fairly robust. I was wondering, if you could just let us know what's kind changed over the year that's made it maybe a better environment, more opportunities? And if you could just talk about with the volatility in the marketplace what are you seeing in terms of pricing expectations? And would you categorize the opportunities more as consolidating or strategic?
So, first of all, something that's changed I think is that, just one factor is that, there was a lot of -- all this money from private equity that's flown into - that's flowed into fintech that hasn't stopped. But the whole private equity model is leveraged it up with bank debt. And that hasn't been as freely available the last six months.
And that, I believe, has had a very direct effect on prices that private equity firms have been willing to pay and some of the kind of excessive prices have moderated. That doesn't mean that things are cheap. Quality assets are going for multiples of cash flow that make our return on investment thresholds possible. And we're seeing opportunities that are both strategic and consolidating right now.
Great. That’s helpful. Thank you so much.
We'll take a follow-up from Surinder Thind of Jefferies.
Yes, Surinder.
Thanks for the follow-up guys. Just wanted to touch base on the reclassification in the AUM/A to the subscription licensing. If there is any additional color you can provide in the sense of how that conversation was initiated whether it came from you guys or from the clients or there's certain thresholds involved in terms of the assets? And maybe how we might -- if there's other clients that might be approaching those thresholds? Or just something that maybe those are the types of conversations you have once a year with clients. How should we be thinking about it?
So that's a good question. Let me try to give some context. So as enterprise clients grow the pay-as-you-go with low or no minimums asset-based pricing is the preferred methodology for 95% of enterprises and 95% of advisers because it's a variable cost for their -- basically their tech infrastructure.
As firms grow with us there comes a time when they look at well a long-term subscription-based arrangement maybe better for them we share more of the benefits of scale. With them we get a longer-term commitment. That's generally not a typically no revenue delta in the short run, but over time the growth of the subscription-based revenue is user or account or a combination of those two. So you don't get the ups or the downs if you will that a market-based thing provides.
Now a lot of investors and analysts like that dynamic. I'm much more neutral on it. We're trying to serve a market and we're offering our technology and our services in the way that makes the most sense for the adviser or the enterprise to pay. Some people pay cash for cars. Some people lease them. And I don't want to make it too homely of an analogy, but we want to be able to provide both.
And so the conversation is how do we get more benefit from using Envestnet as our business continues to scale. Well a long-term subscription or licensing arrangement is just something that people graduate to and so this is not a isolated occurrence. This is something that I expect will be a part of our business over time. And it's unbalance I think that it's neutral to positive for the financial profile of our business because we've helped create very successful managed account programs in enterprises and we've helped RIAs scale their business in ways that that would be hard for them to do without the use of our technology and we both benefit from that scale.
That's helpful. And then just really quickly related to that is that kind of an annual conversation that you would have then? And then are there a lot of other clients within that AUM/A range? Or how should we think about that?
So almost all of our enterprise clients are multiyear arrangement. So I think the average is today is probably 3.5 years on our subscription arrangement license arrangement. So these come up like every 3.5 years for those. And then of the annual evergreen renewal base which is asset based that comes up probably every two to three years for the very biggest of those clients. But 90% of the entities aren't big enough to even consider it.
Understood, that's helpful. Thank you.
Okay. I see that there are no more in the queue. We've reached a little pass the top of the hour. So I want to thank you for these follow-up questions. We were able to go a little deeper on a couple of things. And I think that that's helpful and valuable. So thank you again for your commitments to and your work and your support. Good afternoon.
And this conclude today's call. Ladies and gentlemen, we appreciate everyone's participation today and you may now disconnect.