Envestnet Inc
NYSE:ENV
Earnings Call Analysis
Q4-2023 Analysis
Envestnet Inc
The company wrapped up the year with $1.246 billion in revenue, a testament to its growth trajectory. This annual performance was underscored by an impressive fourth quarter, delivering $317.6 million in revenue, reflecting an 8% hike over the same quarter in the previous year. This growth is coupled with a significant increase in adjusted earnings per share (EPS), moving from $0.45 in Q4 2022 to $0.65 in Q4 2023, a notable 44% jump.
Envestnet showcased its operational prowess with a 24% adjusted EBITDA margin in Q4, revealing a margin expansion of approximately 600 basis points compared to Q4 2022, and an impressive margin increase when considering the yearly trajectory from a margin of 20% to nearly 24% in just a few quarters.
A testament to Envestnet's enduring client relationships is the statistic that the top 25 clients have stuck around for an average of 15 years, reflecting both client satisfaction and the company’s dependable revenue stream. This bond with clients was further strengthened as a notable $15 billion RIA client amplified their engagement, tripling recurring revenues through new managed account capabilities adopted in Q4.
Envestnet is banking on its wealth business and strategic growth initiatives, extending their advantage in areas such as direct indexing and high net worth services. They aim to accelerate pricing initiatives, especially in the RIA channel, while leveraging partnerships in the retirement and asset management sector to induce further scaling and enhancement.
Looking forward, Envestnet provided a wealth revenue growth guidance of mid- to high-single-digits for 2024, a reflection of their confidence in their growth strategy and platform investments. They also forecast a continuation of the margin expansion witnessed over the past quarters.
Envestnet's unique position in addressing various advisory business models positions them favorably amidst industrywide trends of platform scale, personalization, and consolidation preference. While the company has benefited from these trends, they've also navigated challenges, such as client shifts towards cash holdings due to an inverted yield curve scenario. Despite this, Envestnet has a track record of consistent asset growth, as evidenced by $58.5 billion in net inflows in AUMA accounts, marking 54 straight quarters of inflows since going public.
The company's balance sheet is poised to support further growth, leveraging consistent operating leverage and free cash flow generation. Envestnet aims to fuel this growth through disciplined management and revenue expansion in both their Wealth Solutions and Data and Analytics segments.
The Data and Analytics (D&A) segment encountered setbacks, leading to a 14% decline in revenue and a noncash impairment charge of approximately $192 million. However, strategic and operational initiatives are underway to navigate commercialization hurdles and align the segment for future success.
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Greetings and welcome to the Envestnet Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.It is now my pleasure to introduce your host, Josh Warren, Senior Adviser. Thank you. You may begin.
Good afternoon, everyone. I'm Josh Warren, Chief Financial Officer of Envestnet. Thank you for joining us on today's fourth quarter 2023 earnings call.Before we begin, I'd like to point out that our earnings press release, supplemental presentation and associated Form 10-K can be found under the Investor Relations section of our website at envestnet.com. This call is being webcast live and a replay will be available for 1 month under the Investor Relations section of our website as well.During the call, we will be discussing certain forward-looking information. This information is based on our current expectations and is not a guarantee of future performance. I encourage you to review the cautionary statement on Slides 2 and 3 of the supplemental presentation for the potential risks, uncertainties and other factors that could cause actual results to differ from those expressed by the forward-looking statements. Further information can be found in our regular SEC filings. During this call, we'll be referring to certain as adjusted financial measures. Please refer to the appendix in our supplemental presentation for a reconciliation of these as adjusted financial measures to the most directly comparable GAAP measures.Joining me on today's call are Bill Crager, Envestnet's Chief Executive Officer; and Tom Sipp, Executive Vice President for Business Lines. On our call this afternoon, we will provide a company update as well as an overview of the company's fourth quarter and full year 2023 results. After to our prepared remarks, we will open the call to questions. During the Q&A, please limit yourself to one question plus one follow-up. You may get back into the queue if you have additional questions.I'd like to start the call today with a review of our Q4 and full year 2023 results. Our results in Q4, each of which were above the high end of our range, represent our focus on disciplined execution. Q4 revenue was $317.6 million, representing 8% growth over Q4 2022. Adjusted EBITDA was $75.5 million, representing a 24% adjusted EBITDA margin and nearly 600 basis points of margin expansion when compared to Q4 2022. Our adjusted EPS for Q4 was $0.65, up 44% from the $0.45 we reported in Q4 2022.For the full year 2023, our revenue was $1.246 billion. Adjusted EBITDA was $251 million, representing a 20% overall adjusted EBITDA margin and our adjusted EPS was $2.12. As we enter 2024 and the next chapter at Envestnet, we have a set of strong fundamentals that we will discuss on today's call that position us well.I'd now like to turn the call over to Chief Executive Officer, Bill Crager. Bill?
Thank you, Josh. As you know, this will be my final earnings call as Chief Executive Officer of Envestnet. For 25 years, it has been a privilege to be part of the amazing journey that is our company. From an idea and a good dose of courage by applying a lot of resilience and creativity, we built something that is extraordinary. I'm proud of what we've accomplished. And perhaps most proud of this, Envestnet is foundational to the financial guidance that advisers deliver to enhance the lives of millions and millions of families.Over the last couple of years, we've worked effectively to make Envestnet even better, taking the necessary steps to bring the company together to enable a highly connected, highly technology-driven, highly data-driven platform to serve the wealth management industry. Today, Envestnet is in a very strong position because of the work that we've done.The company is the industry leader by assets, advisers, accounts, market share leader across financial planning, our turnkey asset management offering and the data insights that we generate and offer to our clients. We are embedded with a great roster of clients and partners, driving the industry ecosystem that powers growth and delivers value.And we have an exceptionally talented and aligned leadership team to deliver the next phase of Envestnet. The Envestnet strategy is aligned to our clients' needs to drive the growth and productivity of advisers by providing the most comprehensive and capable wealth management platform for our industry. We've created scale and competitive advantage with technology, data and solutions. We've connected the pieces and we are able to serve all client workflows and business models.Doing this serves investors by delivering revenue growth, operating leverage and improving free cash flow conversion. I look forward to helping Envestnet continue its leadership while advocating for our industry, road mapping the future of financial advice and the essential impact that it has, while deepening relationships with our clients and our partners.I now want to turn the call over to Tom Sipp, who leads Envestnet's business lines for an overview of the drivers of our business and I'll be back at the end of the call for some closing comments. Tom?
Thank you, Bill. It has been an honor and one of the great experiences of my career to work alongside you. I am excited about the place we are in and where we are going. I'd like to spend our time today discussing 4 important topics: the market context and themes driving our business; our position and how it is translating into key metrics and financial results; recent proof points of our strategy winning with clients; and finally, the key growth initiatives that drive us ahead in the medium and long term.First, the market context. Envestnet is uniquely positioned to serve every type of advisory business model across the industry from stand-alone RIA to large institutional broker-dealer or bank. We understand better than anyone the themes driving the overall industry, the themes that shape our technology offering and how we bring solutions to market. First, there's a greater push to achieve platform scale for both the adviser and for the firms that support them. Integrated technology and service are keys to greater efficiency.Another key trend is personalization of portfolio management, investments and the digital experience. This is more important than ever. Personalization is driven by the fusion of data and insights, robust investment options and technology capabilities. Next, our research shows that 60% of advisers and firms prefer to buy Wealth Tech from a single provider. Streamlining technology and maximizing the benefits of an end-to-end platform is imperative to a successful strategy and ultimately drives customers to consolidate providers.And finally, there is a continued evolution towards a more holistic view of advice, powered by data and planning capabilities that serves all client types, which is then delivered through seamless connections to solutions. We've been at the forefront of these trends with the scale and scope of our technology and solutions in the market for years. Our competitors often talk about their vision or product road maps as demonstrated through static screenshots.Meanwhile, our platform is live, battle-tested and handling billions of dollars across millions of accounts every day with the most robust features. And we are not standing still. We've rolled out a continuous series of enhancements to our platform with true open architecture, both within the connectivity and integration of our native modern experience and as part of our rich API and data library. We are enhancing, connecting and delivering into the market. This has been our work over the last few years and it will continue to drive competitive advantages.Here's how that translates into key metrics and financial results. First and most importantly, our wealth business delivered Q4 revenue growth of 11% versus Q4 2022. Second, over the last 2 years, Envestnet delivered $116 billion of AUMA net inflows, representing an average growth rate of 8%. We have delivered more than 4x the net inflows of the second and third largest TAMs combined.Accounts grew 4% year-over-year, while AUMA accounts grew 8%. Our gross fee rate in Q4 was approximately 9.8. It's been stable between 9.5 to 10.5 with lots of short-term variables across millions of accounts.Finally, our client serving scores have gone from the low 40s to mid 60s over the last 2 years. Our leadership with a strong and stable client base is another competitive advantage. We have over 4,500 clients in the broker-dealer and RIA channels, including 48 of the 50 largest wealth management and brokerage firms. Our top 25 clients have been with us for an average of 15 years. We have made fundamental improvements in both the technology and the service and delivery our clients' experience with us. That puts us in a position to capitalize on the trend of vendor consolidation.I will provide you a couple of specific proof points. A large regional broker-dealer with over $50 billion of assets started to transition away from our platform, but is now coming back because the promise of a custom platform with a fully integrated adviser ecosystem could not be delivered. Only Envestnet has the solution live and in market with the scale and maturity that can be relied upon. A $15 billion RIA and long-time client recently adopted our managed account capabilities in Q4, moved $400 million of assets onto the platform, including a majority in overlay services or direct indexing.As a result, the recurring revenues from this client has more than tripled with potential for significant growth. So we're very focused on our clients, delivering the platform that helps them grow. This is a better position than where we were a few years ago and one that we are leveraging to further our leading position.Before we move on, I'd like to address the impact of M&A across the industry. Typically, Envestnet has been a net beneficiary as our extensive client footprint with both RIA aggregators and enterprise clients has supported additional growth. However, consolidation over the last year or so has resulted in a negative impact to our wealth growth rate. Finally, I'd like to spotlight some of the important initiatives that will contribute to revenue growth over the medium term. Some of these are further along and included in our outlook. Others are underway and will start to contribute to our growth in 2025 and beyond.First, we have achieved robust year-over-year growth across several of our solutions business lines where personalization and technology drive differentiation including high net worth, direct indexing, tax overlay and managed accounts to RIAs. We believe these accelerated growth rates will continue for an extended period.Second, pricing initiatives are accelerating with specific progress in the RIA channel where we package our technology with a broad set of fiduciary solutions, analytics and planning, deepening our client relationships. Enterprise pricing initiatives will take longer due to the long-term nature of our contracts.Third, our strategy to deliver deeply integrated custody capabilities complete a missing piece in the fully digital and connected adviser and client experience. We are delivering the account opening, funding and servicing workflows between our wealth management platform and custody back office functions in one single experience. We will launch this solution as previously announced with FNZ. Finally, our retirement business continues to gain momentum. The team is focused on efficiently delivering retirement solutions to wealth advisers utilizing the best products, technology and user experience in the marketplace, essentially providing the easy button for wealth advisers.This business will then scale by leveraging distribution partnerships with retirement and asset management industry leaders. What we have in the marketplace is meaningful for our clients in driving results. The continuous delivery of enhancements of our technology, tools, solutions and service drive discrete revenue opportunities and furthers our competitively advantaged platform. We've connected the components to meet client needs and drive deeper relationships. That underpins our 2024 wealth revenue growth guidance of mid- to high-single-digits.Thank you. And I'd like to turn the call back over to Josh.
Thank you, Tom. I'll spend a few minutes discussing 3 things: first, our results; second, our balance sheet; and third, our outlook and focus.As we enter 2024 at a new chapter at Envestnet, we look forward to continuing to deliver our connected ecosystem and our unique capabilities. Our model supports our attractive growth algorithm and enables operating leverage and free cash flow generation. As of the end of 2023, Envestnet served over 108,000 advisers and those advisers are doing more business with Envestnet. During 2023, while our total number of advisers grew by nearly 3%, our number of accounts grew by over 4% to over $19 million, evidencing higher adoption.Taking a longer view, demonstrating the scalability of our platform, the number of accounts per adviser on Envestnet has grown approximately 50% between the start of 2020 and the end of 2023. While historically Envestnet expected to grow costs in line with accounts, the completion of our platform infrastructure investments means that account growth becomes increasingly beneficial to our ability to expand profitability and to generate consistent operating leverage to deliver growing and robust free cash flow. To achieve this framework, we'll focus on both revenue growth across both of our segments and disciplined expense management.First, let me focus on our recurring revenue dynamics. As a reminder, our Wealth Solutions segment generates both asset-based and subscription-based revenues, while our Data and Analytics segment generates subscription-based revenues only. In Wealth Solutions, asset-based and subscription-based pricing constructs provide the breadth of solutions to fit the industry and enable Envestnet growth. I'll start by reviewing the asset-based revenues of our Wealth Solutions segment. During Q4, Envestnet recorded net inflows of $7.9 billion into AUMA accounts.For the full year, Envestnet generated $58.5 billion in net flows into AUMA accounts, representing 8% organic asset growth. We believe consistent net flows are one of the most enduring attributes of our business. Envestnet has not had an outflow quarter since going public in July 2010, meaning that Q4 2023 was the 54th quarter of inflows consecutively.This is because flows on the Envestnet platform are among products within a portfolio and are underpinned by multiyear contracts. Amidst this backdrop of strong and consistent asset growth, Envestnet has faced some headwinds from clients allocating more of their portfolios to cash due to the inverted yield curve environment.Investors have responded to higher short-term rates by holding more of their money in deposit accounts outside Envestnet or in retail money market funds. Naturally, this has affected our results. We expect money invested in the debt or equity markets to produce a higher fee mix.During 2023, total asset-based revenue generated by Wealth Solutions was $745 million, representing a 1% increase over 2022. Our growth accelerated in the second half of the year. This was particularly pronounced during Q4 2023 when asset-based revenue grew 13% compared to Q4 2022 to nearly $189 million. The subscription-based revenues of our Wealth Solutions segments are generated by our software as a service offerings, which primarily serve RIAs and financial planning tools.First, I'd like to cover one reporting item. As announced on our last earnings call, to align our reporting with how we manage our business, we transferred our wealth analytics business, which generated about $4 million of revenue each quarter of 2023 to our Wealth Solutions segment. This contribution to Wealth Solutions -- the Wealth Solutions subscription business is reflected in the Q4 numbers provided. To facilitate comparability, I'll be describing our segment results on a recast basis and historical financial information is available in our earnings supplement.In 2023, subscription-based revenue in Wealth Solutions outgrew asset-based revenue, increasing 5% on a pro forma basis to $325 million. During Q4, our Wealth Solutions subscription-based revenue of over $84 million grew 4% on a pro forma basis over Q4 2022.On an overall basis, Wealth Solutions revenue grew by 3% during 2023. During Q4 2023, our Wealth Solutions revenue of $279 million represented 11% growth over Q4 2022. As we look ahead, while double-digit growth remains our goal, we expect to deliver a Wealth Solutions growth rate in the mid- to high-single-digits for the full year 2024. This growth outlook is premised on a flat market for the full year. As demonstrated by the margin expansion delivered during 2023, we believe we can continue to drive margins in 2024 as we leverage the investments we have made in our platform.Turning to our data and analytics business, which generates subscription-based revenues. In Q4, our revenue was $38.6 million. On a like-for-like basis, Q4 D&A revenue declined by 7% compared to Q4 2022, but was 3% higher sequentially versus Q3 2023. For the full year, our D&A segment generated over $150 million of revenue, declining by 14% on a pro forma basis. In connection with this performance, we are taking a noncash impairment charge of approximately $192 million during Q4 based on a reevaluation of Envestnet's goodwill related to the D&A segment.2023 had several commercialization challenges for this segment, including banking turmoil and client delinquencies. While performance was less than Envestnet had anticipated, there are a variety of strategic and operational initiatives in process that we believe will position the business well going forward. We believe the sequential results in Q4 provide early evidence of the returns on these initiatives.Now moving to expenses. The platform infrastructure investments we have made over the last few years enable us to achieve operating leverage by growing revenues ahead of costs to expand our profitability and grow our free cash flow. As announced on our November call, we have successfully reduced our annual expense run rate by $60 million across compensation-related, non-compensation expenses and CapEx since the start of 2023. We consider our cost to be manageable as those 3 general categories constitute the majority of our total cost base.Envestnet also has certain non-controllable expenses, which are common in the industry, consisting of payments to third parties for investment management, clearing, custody and brokerage services. As of Q4 2023, we expanded adjusted EBITDA margins nearly 600 basis points from Q4 2022 and nearly 700 basis points from our Q1 2022 margin. We expect to continue to expand margins and improve free cash flow generation in 2024. I'll note that we revised our accounting treatment of certain cloud hosting arrangements with third-party infrastructure providers to be operating expenses and not capitalizable.There is, of course, no cash impact from this adjustment and our historical reporting has been revised to reflect this change. In addition to adjusted EBITDA, as defined by our credit agreements, we're committed to providing greater transparency regarding our free cash flow. Three items that are not included in our 2023 adjusted EBITDA, but did impact free cash flow, were first, severance expenses of $35 million. Although we will continue to look for ways to optimize our organization, we do not anticipate these 2023 severance figures to be appropriate run rates going forward.Second, capitalized software development of $94 million. In aggregate, we expensed or capitalized $234 million of total technology development in 2023, including stock-based compensation. We expect this overall total technology development spending to reduce in the mid- to high-single-digits year-over-year because of the investments already made, but will remain significant as part of our continued commitment to drive scale and ensure client success.Third, our 2023 CapEx was $19 million. CapEx for 2024 is expected to be approximately $10 million. When taken together, our free cash flow for Q4 2023 was $57 million, reflecting our strong performance and some working capital benefits. Envestnet's free cash flow during the first 3 quarters was negative. Following Q4, I'm pleased to report that for 2023, free cash flow was positive at $42 million. Our focus will be on improving this number in 2024.Turning to our balance sheet. Cash on hand increased nearly $50 million during Q4 to $91 million. Similar to the seasonality observed in previous years, we expect cash to decrease in the first quarter of 2024. Our first tranche of convertible debt, which we pay 75 basis points of interest on is due in Q3 of 2025. As of December 31st, our leverage ratio, defined as our total debt less cash over trailing adjusted EBITDA has been reduced to below 3.2x.In total, we believe our liquidity position gives us flexibility. We expect to continue to be disciplined and prudent with our capital allocation as we look to further reduce our leverage ratio during 2024. Looking ahead to the first quarter of 2024, consistent with how we've provided information previously, we expect revenues to be between $320 million and $326 million, representing 8% growth over Q1 2023, assuming the midpoint of the range, adjusted EBITDA to be between $64 million and $69 million. Using the midpoint of the range, this represents approximately 250 basis points of margin improvement over Q1 2023 and adjusted EPS to be between $0.52 and $0.57.As we enter a new chapter at Envestnet, we have 3 areas of focus. First, our clients. Our clients are our compass and our commitment is unwavering. Second, we are committed to a growth algorithm for delivering more value to those clients and Envestnet. And finally, operating leverage where we can optimally balance revenue and profitability, supporting execution excellence with scale. So when we grow, we will generate compounding free cash flow per share, which can be utilized to drive even greater shareholder value.I'd now like to turn the call back to Bill for closing remarks.
Thank you, Josh. The decisions that we've made, the work we have done over the last few years to expand and connect the ecosystem to align the organization has put Envestnet in a very strong position. We sit at the center of the wealth industry, creating unique opportunities for our clients, our partners and for our company to drive value and to grow.The bedrock of that position is the client relationships that we have. These are tenured. These are aligned in their very deep relationships. This is because Envestnet is built around our clients' needs to drive the growth and productivity of advisers by providing the leading wealth platform in the industry. It creates competitive advantage through connected technology, data and solutions. As we deliver, like we have for the industry, it enhances the strategic and economic profile of the company by increasing revenue growth, operating leverage and improving the free cash flow conversion.I'm incredibly thankful to all those who have been partners and my friends over this incredible journey that has been the history of Envestnet. Thank you to our clients who have supported us and have grown with us, to our partners who strengthen the ecosystem, to investors who have had long-term conviction in us and particularly to my colleagues at Envestnet, the thousands who have done such extraordinary work and made such a profound impact on our industry and I will say this, such a profound impact on me.It has meant so much and I have nothing but gratitude and immense pride. A 25-year journey. How can an idea, an effort become something so substantial? It's been the blessing of my professional life. It has been an extraordinary ride and I am incredibly grateful.I'll now turn it over to Josh and Tom and our operator, Camilla, for the Q&A session. Thank you very much.
[Operator Instructions] Our first question comes from the line of Michael Cho with JPMorgan.
Bill, first, it's been a pleasure interacting with you and always appreciated your insights. It's just a big picture --
Thank you, Mike.
-- question for you. Yes. Just a big picture question for you on your final earnings call here. As you look at your own transition, as you mentioned, after 25 years with Envestnet and the road map that's been implemented for Envestnet ahead, I mean where do you think the next leadership, the next CEO Envestnet, could be of most value and most impactful for the company in the years ahead?
Yes. Thank you, Michael and just appreciate your coverage and your support over the years very much. I think, Michael, my perspective is that we've built such an extraordinary position in the market. And as the most flexible scaled operating environment tied to now a broad network of solutions, the company has invested to become in this position to deliver on the holistic advice model. And so when I thought about my transition, I really thought about a transition point to time. And as on the heels of the investment cycle, this became a pretty clear moment as we flip the page into the next year.And so I think what we have ahead of us is an incredibly well-positioned company that has a very strong and deep and tenured client base with the solutions and the capabilities that we need to be successful. It's all about execution from here.
Great. And just a follow-up for Josh and Tom. I think on the '24 guide, I think I heard mid-single to high singles on the Wealth Solutions in terms of revenue growth. Can you just talk through some underlying assumptions that you're embedding in there in terms of maybe flows and fee rate trends? I think you've talked through some puts and takes. So I was hoping you could flesh some of that out in the context of full year expectations.
Yes. Thank you, Michael. This is Tom. I think the fee rates, as I said in my comments, the gross fee rate has been between 9.5 and 10.5 and it's been relatively stable in that range. And we think that will persist through 2024. And then from here, what we -- it's really our flows, particularly our AUM flows, we did about $30 billion in AUM flows in 2023. We think AUM is gaining traction and those growth rates will persist and they'll deliver on a much higher average fee rate.And then our AUA flows, we did about $28 billion of AUA flows last year. We think that we've got some good momentum there as well. That will be impacted by one-off conversions or M&A activity as the year progresses. But the overall kind of underlying health at the individual firm level or at the per account level, our gross flows are very, very persistent. So that will help drive that growth.And then you look at all the other cross-selling our solutions. That continues. We've got a lot of good progress with RIAs, taking up managed account solutions. We've got continued growth with our MoneyGuide planning capabilities. We're cross-selling analytics and insights to RIAs. So that will start to come through the wealth growth rate next year. The retirement progress that I mentioned and the partnership would empower, that's going to start to kick in as we scale up those efforts.So it's really continued progress across the client base, strong AUM flows. Later in the year, you're going to see us get to market with our custody solution that we've been working on and it's continued to drive the overall ecosystem that will drive that growth rate throughout the year.
Our next question comes from the line of Devin Ryan with JMP.
And I would echo the remarks, Bill, really been a pleasure working with you and just want to wish you the best here going forward.
Thank you, Dev. Really appreciate you.
Yes. So I guess first question, just to appreciate the guidance and a little bit of a different structure here than we've seen. And so I guess I just want to understand, is this, Josh, is more just how you're going to be framing things moving forward? And so we're not going to have kind of a full year guide? Or is that something maybe for the incoming CEO? So just kind of tactically how to think about that.And then if it's possible, just given some of the puts and takes you guys just outlined and kind of growth commentary for 2024, is there a way to bridge to 2025? I know that's quite a ways out, but just you guys have put out, obviously, some growth targets and adjusted EBITDA margin targets and so people are still curious about how you're thinking about those. So is it possible to kind of hit on any of that yet and at least how you're thinking about kind of going from where we are today to something in 2025?
Sure. Devin, this is Josh. Happy to take that one. Look, we believe this is more appropriate with regard to full year guidance based on the nature of our business. As you know, you know Envestnet well, most of Envestnet's revenue is market-driven. To go a step further, one thing we wanted to make sure that we did was for Q1 to provide guidance the same way Envestnet had historically done it, same format, a pricing model-based format. But for the full year, we're providing our expected growth rate for Wealth Solutions premised on a flat market and that is the mid- to high-single-digits growth rate.With regard to the questions about 2025, long way to go. And as you know, it's difficult to speculate about the macro, particularly in an election year with an election in the second half of the year. But we believe our client foundation is strong. The flows, as Tom outlined, may be seasonal, may be episodic, may have a little bit of volatility, but we believe Envestnet is a structural grower. And we think we're incredibly well positioned to capitalize on that.
Yes, I would just add, Devin, you look at the progress we've made over the past couple of years from a margin progression perspective, we've gone from 17% to 20% to 23% in Q4. That did have some onetime benefits, but it's definitely a lot higher than the '20. And we're delivering more and more operating leverage as we grow and we think the margins will continue to expand. And it will lead into more free cash flow as Josh outlined.So I think we've got -- we've made a ton of progress. We brought the company together. We've integrated the firm and the client feedback is really positive from all that work. And I would expect our margins to continue to expand from here.
And maybe one just to be super, super clear on the point, Devin, to answer your question. But as Tom mentioned, we're continuing to make progress on our margin expansion, including our EBITDA margins. Q4 was a strong free cash flow result. And I don't know if we would -- I would not expect that -- quite that level to continue in Q1 given some of the seasonality.But the adjusted EBITDA targets, that's a milestone. That's a milestone on a journey to durable and robust free cash flow generation, not a destination, not an ultimate goal. We intend to continue to grow our margins and we believe what we've done in 2023 has demonstrated our ability to do that.
Got it. Understood. Appreciate all that color. Just as a follow-up on flows. Clearly, you guys are outperforming kind of the broader industry as you mentioned, I think, 4x kind of the peer camps. But at the same time, there's some environmental headwinds. And so I'd love to just maybe think about, if possible, if there's a way to quantify the effect of whether it's M&A and the dynamic you mentioned, Tom, or just interest rates.And to the extent interest rates start to move lower, how much of a tailwind that could create. Just trying to think about that because there's the core piece of investment, there's a lot of positive momentum in irons in the fire around new growth at the same time, environmental headwinds. So just trying to think about the effect of those environmental headwinds that hopefully do reverse here at some point?
Yes. I think to start with the cash point, that has been a headwind over the past couple of years for us with higher rates. The -- as more -- as rates come down and as more money moves back into the market, equity fixed income products, we realize a much higher fee rate on those assets. And a lot of those assets don't even sit on the Envestnet platform, they may be off-platform today and will come on as rates come down. So I think from here, it can only help would be our perspective as they move into more active products. So I think that will be a tailwind at some point as we go forward.And then I think the headwind around M&A, we -- historically, this has been an advantage because our footprint is so large. We have such great relationships with RIA aggregators, with enterprise clients and we've been a net beneficiary. It just so happens right now we've got some deal activity that's away from us and that will affect our growth rate. But let me be clear, that M&A activity, these clients that were affected were very, very happy clients. They were doing a lot with us because we're really well positioned.The feedback from our clients has really never been better and it's all off the back of the work we've done over the past couple of years. So the M&A activity, the recent activity will be dilutive to that growth rate, but the medium-term prospects for the business are very, very positive from our perspective.
Our next question comes from the line of Surinder Thind with Jefferies.
Like everyone else, Bill, I definitely echo that it's been a pleasure working with you. So wishing you all the best here.
Thank you, Surinder. Thank you very much.
I think from my perspective, I'd like to just take a step back and big picture here, one of the -- I think, the pillars that you guys talked about was just kind of the growth algorithm. Any just kind of color on how you're thinking about the -- the team is thinking about the growth algorithm on a go-forward basis? Is this driving more flows into the Wealth Solutions business? Is it more about the first-party managed assets and trying to get the fee rate up? How should we think about the various drivers just from a big picture perspective?
Sure. Surinder, it's Josh. I mean the growth algorithm, it's fairly simple. After all Envestnet, as you know, it's a relatively simple business. At the foundation, our wealth business is going to benefit from the combination of market appreciation and secular flows into the independent space.On top of that, our growth is built on our industry leadership. As Tom talked about, clients want to go deeper with a fewer number of trusted partners. That's a trend that should benefit us well as the industry leader and the way in which we capitalize on this growth opportunity through both of our pricing constructs, our asset-based and subscription-based pricing models help fit the needs of the industry and provide compounded growth for Envestnet.
Let me add, Surinder. I'll add a couple of examples. So you look at what we're doing with RIAs of our Tamrac platform, which is trading, reporting, CRM. We've invested a lot to connect that platform to our managed account infrastructure. So really cross-selling fiduciary solutions and that is really starting to take -- to get real traction.And then as the RIA, as we establish that fiduciary relationship, they then start to buy tax overlay services, direct indexing services. And then we're going and now we're bundling and cross-selling data and analytics. And when they start to use those data and analytics, especially through our client portal that we're rolling out, that will lead to further adoption of those solutions.So the way it will be evidenced would be more AUM, the -- especially AUM that requires personalization. So think of high net worth solutions, direct indexing, tax overlay. And then what we're doing is partnering more and more with the biggest asset management partners where we're going to integrate their products in a unique way to deliver that personalization.And then their sales teams, their distribution efforts, their marketing efforts will lean in to help drive overall growth of the platform. The -- so cross-sell AUM, bundle it, expand the relationship and then more personalization, the products where we have personalization are really growing at a very, very high growth rate and we think that will persist for a long time period.
Got it. And then I guess just as a point of clarification there. So as you think about what you're capable of in positioning, is it that you want to grow a certain basis points above the market? Or how are you guys assessing, I guess that was kind of what I was trying to get at in terms of as you think about what you're trying to do and what you're trying to accomplish here?
Sure. So Surinder, I would say double-digit growth is our goal and that comes from a combination of market growth plus simply delivering an integrated firm. Delivering an integrated firm that's now possible for us to show up as Envestnet and get the benefit of clients just wanting to go deeper, do more with us, clients that we already have.We don't have to go out and win new clients that we will continue to strive to, but we just have to go deeper with those clients that we have, monetize and serve our advisers more effectively and more capably. So for us, it's grow with the market and then add on top of that.
Got it. That's helpful. And then just, hopefully, as a quick follow-up. Just the outlook for the data and analytics business over the next year?
Sure. So I think, look, for data and analytics, look, a couple of thoughts. The first is, as you know, that business has had a lot of challenges in 2023, a combination of the banking turmoil in March of 2023. It's also had some idiosyncratic issues with regard to a data loss, which we've now restored. We believe that there's a tremendous amount of -- we believe some of these initiatives that we put in place are going to bear fruit. And actually, the Q4 sequential results are early evidence of that. But our plan is to keep you updated on how those initiatives are going to play out over the course of the year.
But Surinder, if you look at our Q3 to Q4 sequential revenue growth was up in the data business. The -- and we think we're very focused on stabilizing that revenue base, which -- so you're up Q3 to Q4 and we think it will be stable as we look out at Q1. And then we're -- we've recovered the data set. So that issue we're in a much better place. And then we're launching new products to drive kind of medium-term growth. But I think the sequential revenue growth and the stable revenue base would be important milestones from our perspective.Surinder, the other thing I would add would be, we've done a lot of work to transfer the wealth data capabilities into our wealth segment. And what that means is, from an organization that's fully integrated and from a client, it's fully integrated. So we're now delivering data and analytics, where our clients want to receive them, where they want -- where they're doing business. And the response from our client base is really, really positive. I think we're delivering about 25 million insights off of the back of 80 or 90 use cases. And the reception from our client base from that fully integrated data and insight capability to wealth clients has been really positive.
[Operator Instructions] Our next question comes from the line of Pete Heckmann with D.A. Davidson.
I echo all the other analyst comments to you, Bill. It's going to -- we're going to miss working with you and I appreciated all your class and professionalism over the years.
Thank you, Pete. Back at you. Really enjoyed the relationship very much. Thank you.
Great. Great. Well, I think moving to the results and the outlook, I think all of the analysts are struggling a bit. The call format changed a little bit. Clearly, we're not giving as much guidance. I think the knee-jerk reaction is -- can sometimes be that there is no visibility in data analytics. And I don't want to walk away thinking that if that's not the case. I appreciate the adjusted numbers, down 7% year-over-year, up 3% sequentially.But can you flesh that out a bit more in terms of how long do you think it's going to take before the turn and at that turn, is that -- can that business resume growing and resume margin expansion? Or is there something fundamentally broken there?
Pete, I would just kind of go back to the sequential revenue growth is up Q3 to Q4. We think we have stabilized the revenue base. Recovering the data set is a big deal that we worked hard on throughout last year. That was a big driver of the decrease, especially in our research business. You hit issues in the banking channel. We had issues with fintech clients. So last year was a tough year with revenue down 14%, 15%. We believe it's now in a stable situation.The -- there's been a lot of work to develop and create new products. And now that you have a more robust fulsome data set, we're better positioned to do it. But it's not going to happen overnight either. So we are investing the -- and over the coming quarters and then 12, 18-plus months, we think the position will be much better -- the segment will be much better positioned from there.But it is off the back of a restore data set, stabilized revenue base and more efficient -- we've reduced the cost base as well. So a more efficient, better margin from there. But it's stabilized and then investing in new products and then medium term, back to growth.
Okay. I appreciate that. And then just back to custody, I think I've been paying attention pretty closely and I know that that's been delayed a bit, but you made a comment early on and I just want to see -- make sure that that's still on the table and see if there's been any further changes in the dates of the rollout or the sizing of the opportunity.
Yes. So it's extremely strategic. It's very important. It's a big priority to deliver. The -- so we -- as we've announced, we have partnered with FNZ, there's been a ton of work over a year-plus. They are doing the work to localize a international platform. And to localize the platform in the U.S. market is -- it takes time. It's complicated. They've hit some pretty important milestones to-date. They've converted a legacy platform onto their technology. The -- they're standing up their operations, their trading efforts and then they're getting the required regulatory framework in place. And all that just takes time to put in place as a new entrant into this market.The technology is fantastic. The -- and we've been working with them to integrate that technology throughout our ecosystem and that is really lining up to be in place by -- in the next couple of quarters. And then we'll be in market at some point this year. But it's very, very important, very strategic, that custody solution.
And then, Pete, just to add to that -- if I could, just -- and depending on the speed of adoption, the speed of the rollout, you should think about FNZ as representing upside both on the top -- to the top line guidance that we gave. Our expectation is this is a long-term bet.
Yes, this year is really outstanding up the capability and getting to market and then you'll start to realize the benefits beyond this year.
There are no further questions at this time. And with that, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.