Aug 9, 2013
Executives
Chris Curtis - SVP, Treasurer Jud Bergman - Chairman & CEO Pete D'Arrigo - CFO
Analysts
Alex Kramm - UBS David Grossman - Stifel Chris Shutler - William Blair Chris Donat - Sandler O'Neill Peter Heckmann - Avondale
Operator
Good day. And welcome to the Envestnet Second Quarter 2013 Earnings Conference.
Today's call is being recorded. At this time, I would like to turn the conference over to Mr.
Chris Curtis, Senior Vice President and Treasurer. Please go ahead.
Chris Curtis
Thank you, and good afternoon, everyone. With me on today's call are Jud Bergman, Chairman and Chief Executive Officer, and Pete D'Arrigo, Chief Financial Officer.
Our second quarter 2013 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 revenues, adjusted EBITDA, adjusted net income and adjusted net income per share.
This information is not calculated in accordance with GAAP and maybe calculated differently than other company's similarly titled non-GAAP information. 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 actual results 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. With that, I will turn the call over to Jud.
Jud Bergman
Thank you, Chris. Good afternoon.
I add my own welcome to everyone on today’s call. Wealth management is undergoing significant changes driven the powerful trends that Envestnet is enabling and benefiting from.
If will be Envestnet will continue to lead the fundamental transformation of wealth management as we unify the process to advisors and empower that to deliver better outcomes for their clients. The move toward advisor independence the superiority of a fee-based fiduciary standard.
And the accelerating use of outsourced technology solutions. These transformative trends are strong and have accelerated since we founded the business.
We expect that it will continue to change the wealth management landscape for years to come. Yet, while these powerful trends provide the baseline for our growth, they’re not the whole story.
Today, platform mobility and business intelligence for advisors and innovative investment and portfolio solutions can accelerate the transforming trends of our business. Some of these developments weren’t even contemplated 13 years ago when we started the business.
There I believe that they will have an impact as profound, and maybe even more so then the trends we identified very early on that set us on our mission more than a decade ago. Never before of so many positive forces aligned with our efforts to transform wealth management.
Our long term outlook for growth is as clear it’s evident and we continue to deliver on our near term priorities to drive growth to-date. In the second quarter we grew our top-line by 34% over a year ago and we grew adjusted cash flow or adjusted EBITDA by 75% over the same period.
Gross sales during the quarter were more than $23 billion included over $12 billion in assets under management or administration for new client conversions. In total, more than 25,000 advisors and $425.5 billion that is supported by Envestnet.
These numbers grow significantly larger in the third quarter as a result of our acquisition and inclusion of WMS metrics placing us in clear leadership in almost every league table for wealth management platforms. As we have emerged with the industry leaders we are motivated to accelerate a fundamental transformation of wealth management for the benefit of advisors and their investors.
Maximum mobility, advisor intelligence and investment innovation come in. Today, I’ll outline what we’re doing here and what it means for all advisor clients.
We continue to rollout a next generation wealth management platform. We believe that is at the industry’s first fully mobile end-to-end wealth management platform.
ENV2 as we call it, enables advisors to serve their clients whenever, wherever and however they want to be served. And our important work continues our Envestnet Intelligence which is our practice management, business intelligence offering for advisors and the enterprises we serve advisors.
Envestnet Intelligence despite of a long term strategy towards helping advisors achieve better outcomes for their clients. Envestnet, we believe, is uniquely positioned to both enable and encourage a fiduciary approach to advising investor clients who are supported by this intelligence.
We believe the opportunity to leverage real data on the behavior and investment performance of advisors and their end client outcomes will provide growth opportunities for the foreseeable future. And we look forward to leading these industry in advisor intelligence and then transforming data and information to usable intelligence.
And later this year we will be ruling out our Quantitative Portfolios or QPs as we’re calling them, by our PMC group this transformative investment product can add value beyond market performance. QPs will have many of the benefits of Exchange Traded Funds or ETFs but several very important advantages.
For example, like an ETF, QPs will provide low-cost access to market data. And like ETFs, QPs will have broad exposure to asset classes.
But unlike ETFs, they will be tax manageable because the end client owns the bases in the underlying securities and tax-managed operates one of the most consistent ways sophisticated advisors can add value to high network portfolios. And unlike ETFs, QPs are customizable along concentrated stock positions.
Mobility Envestnet Intelligence and innovative investment solution like Quantitative Portfolios should see a continued growth for Envestnet that set path with the industry norms. We see this for the foreseeable future.
These offerings should help us extend the one way of opportunities to add more advisors and to do more business with each of them as we offer a truly unified wealth management platform that helps the achieve better outcomes for their clients. Before I turn the call over to Pete, I’d like to say a few words about WMS, the Wealth Management Solutions business we acquired from Prudential just last month.
For the strategic perspective WMS, further solidified our leadership in the banks and trust channel, it also strengthened our Canadian Presence and deepens our practice management capabilities bringing on a team of seasoned professionals who know how to build fee-based businesses for advisors and portfolio managers. Our teams are already hardened work with the integration efforts that will take anywhere from 12 to 18 months to complete.
Once completed we expect that WMS will exceed a discipline hurdle of at least 25% return on investment and this will equate to at least a $10 million annual cash flow within assumed purchase price of $33 million. I will conclude with a few remarks in a moment, but first I’m turning it over to Pete D'Arrigo, our Chief Financial Officer to discuss our financial performance in greater detail.
Pete D'Arrigo
Thank you, Jud. For the 2013 second quarter, revenue from assets under management or administration grew 33% to $41.2 million compared to $31 million in the second quarter of 2012.
Licensing and professional services revenue in the second quarter was $10.4 million, up 50% from $7 million a year ago on an adjusted basis. As a result, adjusted revenue increased 34% to $51.7 million in the second quarter from $38.6 million in the second quarter of last year.
Our cost of revenue increased to $19.6 million for the quarter from $13.5 million last year. As a percentage of revenue from assets under management and administration, cost of revenue was 47.6%.
We reported GAAP net income in the second quarter of $1.1 million which is $0.03 per diluted share. This second quarter’s GAAP net income includes approximately $900,000 of after-tax expense related to the audit of change.
On a non-GAAP basis, adjusted EBITDA was $9.3 million for the second quarter 75% higher than 2012’s second quarter. Adjusted earnings per share was $0.13 in the second quarter increasing 86% from $0.07 last year.
Looking forward, we expect our revenue from assets under management or administration to be up 76% to 78% in the third quarter compared to the third quarter of last year. This includes revenue from WMS which will be included for the entire quarter and reflects an effective fee rate of approximately 15.7 to 15.9 basis points on our effective beginning AUMA asset base of $149 billion which includes WMS.
Licensing and professional services revenue in the third quarter of this year will be up approximately 15% year-over-year on a GAAP basis. Beginning in the third quarter of 2013, we’ll be accounting for implementation revenue for certain Envestnet Tamarac clients differently than we have in the past.
This revenue is included in our licensing and professional services line. Beginning July 1, we have made a strategic decision to control all data migration and reconciliation related to client implementations.
In the past, some implementation activities were performed by third parties. This change requires us to recognize implementation revenue over the term of the customer’s license agreement instead of when the implementation is completed.
In the third quarter we expect the impact will be around $350,000 to $400,000. There is no economic impact as the customer contracts will have the same structure it’s the matter of when the revenue is recognized.
Adjusted revenues for the third quarter should increase between 61% and 63% year-over-year, again including a full quarter of WMS revenue in this year’s - in this year. We expect third quarter cost of revenues to be between 51.2% and 51.5% of AUMA revenue, this is up from previous quarters for two reasons.
The first is due to the continued trends we’ve seen in the high rate of adoption by advisors of several new programs with relatively higher cost of revenue compared to the AUMA products. The second reason is due to WMS which has a higher cost of revenue in percentage terms compared to our existing business.
We expect our adjusted EBITDA to increase 50% to 53% in the third quarter compared to the third quarter of last year. We expect our effective tax rate in third quarter to be approximately 42%.
I’ll also remind everyone of our higher diluted share count which averaged 35.2 million shares in the second quarter that’s up about 2 million shares compared to a year ago primarily due to the increase in stock price this year. Thank you again for your interest and support of Envestnet.
And I will hand it back to Jud for his closing remarks.
Jud Bergman
Thank you, Pete. Envestnet empowers advisors to deliver better outcomes for their clients, unify and fortify the wealth management process.
We believe Envestnet is well positioned to deliver substantial revenue and cash flow growth this year and beyond. Our long-term targets are to grow top-line revenue at 20% per year, to grow adjusted cash flow at 25% per year, reflecting improving operating leverage in our business.
As previously indicated, we expect to exceed these target significantly this year and we previously indicated we look to grow revenue by at least 30% this year and adjusted EBITDA by at least 50%. Following up on Pete’s comments, now with the inclusion of WMS full year revenue should be at least 50% higher than it was in 2012 and we expect minimal impact from WMS from a cash flow perspective in the second half of this year and are still expecting adjusted EBITDA to be at least 50% higher than last year.
I thank you again for your time this afternoon. Thank you, sincerely for your support of Envestnet and with the conclusion of these prepared remarks, we are happy to take your questions.
Operator
(Operator Instructions) We’ll take our first question from Alex Kramm with UBS.
Alex Kramm - UBS
Hey, good evening everyone.
Jud Bergman
Hi, Alex.
Chris Curtis
Hello.
Alex Kramm - UBS
So, maybe just to start on the WMS acquisition here, I know that you’ve owned this for a month. I think you just said this is a 12 to 18-month integration.
So, maybe you could give us a little bit more flavor about any sort of milestones we should be watching out here. Like how is integration going to take place?
What -- are there any cost synergies that should come over, over any sort of timeframe? And then I know it's early, but I mean what are the kind of cross-sell opportunities?
Are you actually already seeing some of that stuff happening, or when we should be looking for incremental upside other than just scaling up from a very big acquisition here?
Jud Bergman
So, a lot to that question Alex. I try to address what I can of it.
First of all we’re very busy right now in the building out the technology the platform capabilities to support to trust business that has been the strength of WMS and there are a few modifications that we need to a core portfolio accounting system to fully support the Canadian client base that they have. We expect that the integration will take place as we’ve done in other cases client by client with clients coming over in plans, conversions.
And we expect that those will take place beginning as early in the second quarter of next year but we’re likely our debt expectation of the middle point for all of them coming over would on 15 month date there is a some distribution of outcomes that could come around that if everything is great it could come in maybe in the third quarter of next year I don’t expect that, I think that it more likely to come in around the end of the third quarter and through the fourth quarter of 2014. So, with that said, that’s the primary focus right now of us from with respect to the integration and conversion of WMS the primary focus in an engineering focus and then an operations focus.
And then of course some intensive client management activity as well. We’re already seeing some very interesting opportunities to go deeper with some of these clients and well we haven’t identified that as something that’s encouraging, I have to say that’s something that we’re very encouraged about.
This specific cross-sells really can’t begin to happen on the platform until the integration occurs but there are some pockets of activity that we continue to look for. And I think we’ll be able to do some additional business with some of these firms even perhaps before the conversion is complete.
The question on whether the synergies realized before and well there very well maybe Alex, they would be marginal they would be minimal. This is - conversions are sort of a binary activity in that until all of the old systems are made obsolete because of the conversion there is still was an expense in maintaining all those old systems.
So, well we will begin the conversion process in a very planned sense client by client until all clients are successfully converted, you will not see significant accretion in terms of a financial performance. However, once that does happen, we expect to see very significant financial accretion as a result of this consolidating acquisition.
Well it is a consolidating acquisition, I don’t want to forget that there are several strategic value dimensions to it as well.
Alex Kramm - UBS
That’s very good color. Thank you.
And then I guess for Pete but also for you, you made the comment on the cost of goods sold ticking higher here. So, maybe you can just give us a little bit more detail.
I think you said certain products being sold, and maybe that ties into just giving us a little bit more color in terms of where you are having success because obviously, you have a pretty broad product spectrum now. So, maybe just a little bit of an update on - when you see some of this AUM and AUA growing?
Like where is most of that coming from these days, so we can think about it in terms of the - for fee rate and cost of goods solds I guess in the future?
Jud Bergman
So, Alex, Pete’s got the numbers, I’d like to give an example just so that you’ll get a sense of what this is about. With this - with ENV2 for example we now are enabling not just the wealth advisor to access PMC and outside strategist products we’re allowing the portfolio manager or the advisor that has a core of their portfolio in a self managed portfolio to using our unified managed accounts structure had sleeves of outside managers of products.
This is a relatively - this is a relatively new for Envestnet and what that’s done is it’s opened the door to managers that we may not have full scale with for managers that have different cost structures. So, well we’re a mature company with respect to the Unified Managed Account or the UMA technology and well our product lines whether they’re separate accounts or advisors portfolio manager or rebalancing are all fairly mature.
The next generation of the UMA capability has opened up capabilities that are fairly new on the product life cycle and most of the sub advisors or the sub managers that are being chosen right now, we just don’t have the scale yet that we expect to have at some point where the scale that we have with more traditional in existing managers.
Pete D'Arrigo
Yeah, I’ll add to that. Just on the numbers, the middle to end of last year we were seeing that percentage cost of revenue as a percent of AUMA revenue in the mid 40s in the first quarter and second quarter of this year we’ve seen a creep up into the 46%, 47% range.
That trend is anticipated to continue with the flows that we’ve seen with the addition of WMS which had a cost structure which probably have that number closer to the high 50s. We are looking at a jump in the third quarter that’s going to be just over 51%.
Now, I do expect that a year from now or 18 months from now or 24 months from now that these newer products will begin to see some of the benefit of scale and we’ll some efficiencies. I will add that but this is a - this is from a market and from a presence standpoint, the adoption of this next generation product is a very good thing for our franchise.
Alex Kramm - UBS
Yeah, certainly. You actually answered my next question I would have had on that.
And just lastly, to move on here and give some other people some questions, but in terms of advisors in the pipeline there, just to add new advisors and firms to the platform, can you just give us an update where you’ve seen the most success in terms of what kind of IDBs or I remember you guys were talking about having even like sales guys focused on the smallest RA’s out there. Like where are you in terms of where you’re getting most of your new I guess your new advisors from that are joining -- not joining you but that are utilizing your products?
That's it for me. Thank you.
Jud Bergman
Alex, it’s a good question, we get it all the time. We are growing our core markets in a very similar rate but it’s coming from very different strategies.
So our two core channels are the independent broker-dealer channel and the registered investment advisor channel. We are gaining significant new advisors in each but the strategies are very different and maybe offline we can talk about that.
But the - I think the short answer to your question that we’re gaining significant numbers of new advisors both in the independent broker-dealer channel and the registered investment advisor channel. That said, we think that there is tremendous opportunity to begin what we’ve internally refer to as an S-curve opportunities within the bank and trust channel.
And eventually as we’ll fully rollout our retirement solutions later this year and in 2014, we expect that we’ll see a increase in advisors who do - who advise on retirement plans. So, today it’s coming very strong growth from the IDB on the RIA channels.
Alex Kramm - UBS
Okay, good. So, very consistent with the past, but maybe some other new channels in the future to be a little bit more optimistic I guess?
Jud Bergman
Exactly.
Alex Kramm - UBS
Thanks very much.
Jud Bergman
Exactly.
Operator
We’ll take our next question from David Grossman with Stifel.
Jud Bergman
Hi, David.
David Grossman - Stifel
Hi, Jud. Thanks very much.
So, I wonder if I could go to just the gross sales numbers? If I back out conversions, it looks like it was up sequentially and still well above the trend line last year, and perhaps even before that.
And I guess I'm just curious what it is that you think that’s driving that? Do you think that there is a kind of a cyclical component where AUMA is up within your client base and they’re feeling better about their business going ahead with capital expenditures?
Or is there another phenomenon perhaps that apply? Because, again, I have the numbers right, it looks like we’re up at a different plateau than where we’ve been over the last two years.
Jud Bergman
Well it’s encouraging the numbers are encouraging. We have not deducted any game changing trends.
We are ready to yet say that this is the new plateau or the new trend. We have benefited year-to-date with lower redemptions and well that’s not directly appropriate or not directly apropos your question.
I do think it reflects in an environment where advisors are especially the advisors that we serve are gaining new clients at rates faster than their counterparts in the wire house channel. And I think that this an environment that’s very conducive to value proposition of the independent advisor who is unconflicted who has a fee-based practice, and who always follows a fiduciary standard.
So, I think these are all factors, David but I'm not ready to say that there is some new higher levels that we can count on in the future.
David Grossman - Stifel
Okay. Fair enough.
And maybe along those same lines then, Jud, the conversion activity obviously you had a big bump up this quarter. I guess a couple questions in that regards.
Number one, does that bump up reflect perhaps some easing of the backlog in the bottleneck that you had in conversions. And, if not, or maybe in addition to that, should we think of the conversion activity this quarter as being one account, or were there several that make up that number?
Jud Bergman
So, very good question. I’d like to be able to report that we will release the backlog on the conversion pipeline and that can’t report that yet.
We’re still managing, we’re investing appropriately in the onboard and resources we’ve - I believe we basically tripled the head count on implementation resources since we went public three years ago. And we’re expecting those resources to season and to become even more productive.
I think one of the things that’s happening is that I think there is a growing perception among our target market that we are the market leader. And so, I think that that’s benefiting us with respect to gaining at the other side of the pipeline so it’s fast as we’re able to bring them through the pipeline, other ones are queuing up with the other end.
We think this is a high-class problem to have. And so, we’re not overly concerned about it but we are concerned when that implementation timeline and the backlog if you will gets beyond seven to eight month period.
And then in terms of the conversion activity, there were two fairly large conversions that accounted for - it’s the two in total we’re over $5.5 billion but the balance were just a number of bread and butter conversion $100 million to $200 million conversions. And then several fairly large ones but there was not one gigantic conversion in the quarter.
There was one late in the quarter so almost $5 million but it was all reporting and that did not materially add to the revenue run rate in the quarter. I mean that’s probably more information than as useful but that’s all.
David Grossman - Stifel
No. So, that $5 billion is in the $12 billion then?
Jud Bergman
Yes, it is.
David Grossman - Stifel
Okay.
Jud Bergman
It was not quite $5 billion but it was coming up on that number, close to that number.
David Grossman - Stifel
Okay. And then just one last question I had was really just on the dynamic between the cost of goods increasing and the fee rate.
And I don't know that I have any algorithm in mind, in terms of what that relationship should be, but it seems like you’re taking up the cost of goods, roughly 500 basis points or so, and the fee rate we're taking from about 14.7, 14.8 up about a point - not a point, well, I guess one basis point. So, how should we think about that, particularly with WMS, so I assume it comes with a fairly high fee rate, given their mix of business?
Jud Bergman
So, I think - I’ll tell you how we think about it. This next generation Unified Managed Account platform will play out its own maturities the new products, it has a new economics.
We think if there is a market clearing rate for it we price to that, that level we want to demonstrate price leadership in the marketplace. We may - we maybe able to test that a little bit going forward but I would not - I certainly wouldn’t model it, I wouldn’t expect that.
But as we’ve seen the underlying cost of separate account managers declined from somewhere in the low 50 basis point range, ten years ago to something in the high 30 basis point range today. We see the same kind of change with fixed income managers traditional fixed income managers that were 10 years ago in the 40 basis point range and are now in the low to mid 20 basis point range.
And a number of these strategists they’re new they’ve got demonstrated tract records, our PMC group has approved them for inclusion and advisors are eager to work with them but I will tell you that their economics in no way look like the traditional more mature economics of the separate account one. And I expect that it will take not years but several quarters to begin to see the economies of scale that we’ll be able to generate on those products.
But they won’t fully be - they won’t fully play out I think for several years. So, I think it’s how we think about it as we get the business now, we make a meaningful impact on the advisors practice by offering new strategist ability to round out in a core satellite approach around the advisors business.
We think that’s a very good thing, we think it’s good for our franchise and we’re getting more AUM business than they would otherwise be. I think over time we’ll rationalize that.
And it’s a longer term opportunity that generates some additional margins but right now we’re focused on onboarding those advisors and opening up those new accounts.
David Grossman - Stifel
Great, got it. Thanks very much.
Operator
We’ll take our next question from Chris Shutler, William Blair.
Chris Shutler - William Blair
Yes, good afternoon.
Jud Bergman
Hi, Chris.
Chris Shutler - William Blair
Just a couple more on the conversions if you don't mind. So, the first of the $12 billion of conversions and licensing in the quarter, can you just give us some general sense how much of that was RIAs?
Jud Bergman
We don’t break it out like that, Chris but let me take a look at that. We can get back to that, Chris.
The - of the three largest, one was the large broker-dealer, one was a large RIA and the second was a large broker-dealer. And then on the conversions that happened on the license front, it’s a heavy preponderance of RIA conversions.
So, it’s a - on the AUM/A side I would say SKUs maybe 60-40 towards IBDs. And on the conversion on the licensing side it’s almost a 100% RIAs.
Chris Shutler - William Blair
Great. That’s very helpful.
And then secondly on the decision to move away from the third parties that are helping you guys with implementation, just any more color you can provide there?
Jud Bergman
So, Tamarac in particular, often used third parties for implementing. And it’s not a business practice that the Envestnet PMC or the Envestnet APM side of the business has used for several years.
We felt that from a quality control and from a - and from a speed of delivery it will - it made sense for us to develop those resources internally and we rely less on outside firms to do that. As a result that revenue, which we’ve been recognizing each quarter when it occurs because it’s on boarding its implementation revenue.
But we’ve not been - we’ve not been utilizing outside parties anytime in this calendar year as a result of the strategic decision earlier to bring that all in-house. So, we think it’s an important thing for our business from a QC from a controlling the advisor experience we think that it’s very important to develop that core competency and develop it even deeper because it is one of the things we do and it’s a differentiating advantage because large complex conversions are something that, that no organization wants to go through a conversion but they do want to rely on the expertise of the market leader to help them work through that process.
So, it was the right strategic decision and I think you can see meaningful changes in on boarding rates or shortening tremendously shortening the timeline in the immediate future overtime we’ll see some marginal improvement there. But the big impact was very good for our business in the third quarter it’s a $350,000 or $400,000 revenue hit.
But ultimately we’ll get back because we’ll be recognizing and ratably over the life of the contract but for the next three, four quarters it will have some impact on our P&L.
Chris Shutler - William Blair
Okay.
Jud Bergman
Pete, what would you - what would you add with that.
Pete D'Arrigo
No I think that covers it. I think economically we still get paid upon implementation so there is no NPV change here.
It’s a matter of recognition of the timing.
Chris Shutler - William Blair
Understood, okay. On redemption rates, I’m assuming you guys saw a little bit of a pickup in May and June like the rest of the industry but just curious if things have settled back down a little bit on that front kind of more in line with Q1 levels as we moved into July?
Jud Bergman
We saw a jump in April and May but by - but by June, we already seeing it settled down and it’s a little too early to make any claims for the third quarter but we’re expecting conversions excuse me, we’re expecting redemptions to be, to be below the levels that they were for last year and with our recent experience and we believe that’s good for the business.
Chris Shutler - William Blair
Yep. Okay.
Absolutely. And then just final question.
This is a bigger picture question Jud but as you guys think about the advisory industry over the long-term one of the big themes that I certainly read a lot about is just the aging of the advisor population. So, I realize nobody has a crystal ball and you guys have a number of secular tailwinds that are in your favor.
But just wanted to get your perspective on that dynamic, the aging dynamic and how you think that actually plays out over time for the industry and the implications for investment good or bad?
Jud Bergman
So, we began to do some research there Chris. We have not - we’ve not completed anything meaningful but we expect to - we expect to provide some meaningful insights into this whole dynamic, which is a bit of a wildcard.
Some of the early findings, we find that we’re realizing is that particularly in the wire house environment, advisors who retire have a less likely capability of retaining the clients as they pass that onto the successions plans within the firm then registered investment advisors, who have cleared transition and retirement plans. We expect that that this will be, this will be an important element as things go forward we were surprised by some of the data that we’ve discovered.
For example there are as many financial advisors in their 70s today as there are on their 20s and you would not expect that kind of thing to be the case. So, we think that this will be an opportunity for the right kinds of firms, who can, who can mobilize to meet this opportunity and we expect we’ll be able to comment on it more in the future.
Chris Shutler - William Blair
All right. Thanks very much.
Operator
We’ll hear next from Chris Donat in Sandler O'Neill.
Chris Donat - Sandler O'Neill
Hi, good afternoon gentlemen. Thanks for taking the call.
Pete D'Arrigo
Hi, Chris.
Chris Donat - Sandler O'Neill
One quick question on just the number of advisors you picked up about 2000 advisors, which it’s up 9% quarter-on-quarter. Was there anything lumpy and just with the advisors or anyway any color there?
Pete D'Arrigo
Yeah. There is - we did pickup a lot.
We had strong organic growth above planned organic growth of advisors but we also picked up a chunk of advisors through one of those large conversions. And so, that’s as we convert there were one was a lot of the advisors that came up.
Chris Donat - Sandler O'Neill
Okay. And then, should I think about the number of advisors as either a leading or lagging indicator for AUM, AUA or is it more coincident or do they just, is it all over the map really?
Pete D'Arrigo
Well eventually it’s very much is a leading indicator because our fundamental growth is primarily driven by organic growth and it is more advisors and then those advisors bringing more accounts. Now the advisor growth that we’ve targeted and have consistently been able to exceed in terms of our target is in the mid to high single digits per year.
It doesn’t sound like very many advisor headcount growth rates from an organic standpoint. But it actually is significantly higher than what the industry is experiencing in terms of headcount.
And then those advisors grow their accounts in the low double digit rate, 10% to 12% per year. We’ve research that shows that advisors who use investment are growing their practices at significantly higher rates than the rest of the industry is.
But if those two things that compound out to that mid teens level of base organic growth ex-conversions that we, that we, that we talk about. So, so as we add more advisors they provide the base on our AUM/A side of the business for growth of accounts.
And then as they, as they ramp up and use the investment, wealth management platform that’s what enables the, per account and the per advisor account growth to be the steady piece that it is in terms of our growth. So, it’s a leading indicator but it’s very hard to model and I’ll encourage, I’ll encourage you to think long and hard before you try to come up with a formula or an algorithm trying to capture that.
Chris Donat - Sandler O'Neill
I’ll certainly think long and hard and probably pester Pete and Chris on that issue but that might be another project for another day. I also wanted to ask one question on just looking at the market return for the AUM and AUA being negative.
And if you could comment a little bit on the mix, on the asset mix, in terms of equity and mixed fixed income and if there is any color you can give on the fixed income in terms of, if there is a lot of long duration assets in there particularly did WMS or is it going to change anything in the mix also?
Pete D'Arrigo
So, I think you hit the second quarter pretty, pretty accurately. The fixed income indexes down during the second quarter as we’ve seen interest rates come up and then have a negative impact.
We‘re still thinking that the overall mix is mid 50s for equities and mid 40s or so for fixed income so that‘s a big driver. Also the equity mix that we’ve seen again this is prior to the acquisition is more likely to reflect world indices that we’ve seen lately than some of the domestic indices.
And as there has been a bigger gap between world stocks performance with the domestic, we’ve seen a little bit more of a difference from the beta that we had talked about previously. So, those two factors look kind of drove the costs down about 1% for the quarter.
We don’t, we don’t see a big shift in that going forward with WMS but as we get further into that mix we’ll see how that impacts. We expect similar type of market reaction going forward for products and managers that we’ve are of- there is a high degree of overlap.
Chris Donat - Sandler O'Neill
Okay. And then just one last one to follow up on the earlier question about redemptions.
Just I’m curious with the fixed income volatility that your world sort of stabilized in June when for a lot of fixed income investors it was getting pretty scary. Just any thoughts there on trends or if you are ultimately the end customers are sort of agnostic to fixed income volatility?
Pete D'Arrigo
It’s very interesting. You mentioned it and I don’t know if this is I mean, it’s been a while I can’t remember the last time the bond markets fell off as much as it did in June.
What’s interesting is that, go ahead Chris.
Chris Donat - Sandler O'Neill
I was just going to say 1994 comes to mind, but…
Pete D'Arrigo
Okay. Yes.
Chris Donat - Sandler O'Neill
Yes. It’s been a while.
Pete D'Arrigo
It’s been a while. And so, we’re dealing in a situation, where the number of events are few and so I certainly don’t want to draw any conclusions from this.
But it was very interesting that to see the response of end investors as the bond market experienced a lot of disruption and compare what we’re seeing about what the end investors do because most redemptions in volatile times are investor driven not advisor driven. Advisors are the best advisors are in terms of volatility doing systematically their own thing.
They maybe doing some tactical adjustments here and there but the best advisors aren’t getting out of stocks after the stocks have taken a hit. So, it’s interesting to see and again, we serve advisors, advisors serve investors but the volatility in the bond market in June so far has not led to increased redemption rates in such a highly correlated manner as what we’ve seen in equities in the past.
So, again, we’re not going to draw any trends and that may change but that was, that was what the experience was through the end of the second quarter.
Chris Donat - Sandler O'Neill
Okay. Well, thanks.
That’s interesting to know.
Operator
(Operator Instructions) We’ll hear next from Peter Heckmann in Avondale.
Peter Heckmann - Avondale
Good afternoon gentlemen.
Pete D'Arrigo
Hey, Peter.
Peter Heckmann - Avondale
A question for Pete. I missed a little bit of your commentary on the third quarter guidance.
Could you just restate the commentary as regards to gross margins or cost of goods as well as some of the commentary you had on operating expense? My phone clicked out a little bit there.
Pete D'Arrigo
Since we did it already, why don’t we do it on a follow-up call.
Peter Heckmann - Avondale
Okay. Okay, great.
Okay, great. And then as regards I guess to the way that I’m perceiving it with WMS we take a little bit of a step back in EBITDA margins, we’ve got institution by institution conversions.
But certainly to the extent that these strong conversions continue we continue to leverage the base and granted we have some additional new product costs we should continue to see somewhat of a onetime reset there for WMS and we continue to see that steady EBITDA margin progression expansion as we go through the next several quarters?
Pete D'Arrigo
I think what we want to focus on that Peter is given the noise that the WMS transaction is going to, is going to require the fact that we’re supporting an additional larger platform. We want to emphasize for at least the next two or three or four quarters, we wan to emphasize growth in cash flow and growth in revenue I think that will be the tone and the focus of what our guidance is.
Peter Heckmann - Avondale
Okay, that helps. And then remind me, you talked about the diluted share count for the second quarter.
Did the exercise of the warrant was that going to add some additional shares to the third quarter count or are those already contemplated in the second quarter?
Pete D'Arrigo
No, that was already contemplated based on the way the diluted calculation works that it’s assume that they are exercised on a certain number of repurchase basically we just netted that out when the exercise happen and fixed that number. So, the exercise of the warrant itself doesn’t have a major impact.
Peter Heckmann - Avondale
Got it. All right.
Helpful. Thank you.
Operator
Jud Bergman
I would like to just thank everyone for their participation today. We have a tremendous opportunity to continue to transform wealth management and it’s been a very strong quarter and we expect that these results will continue for the foreseeable future.
We very much want to thank you for your time. Thank you.
Operator
Again, this does conclude today’s conference. Thank you all for your participation.