Financial Engines Continuing Strong Business Trends

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Financial Engines reported first-quarter results that we believe indicated a continuation of strong business trends as assets under management were $92 billion at the end of the quarter, above our $90 billion estimate and up 30% year-over-year and 4.5% sequentially. However, EPS of $0.20, up 31% from the prior year, were below our $0.23 estimate. The shortfall was a result of timing of pricing of management fees and a higher “noncash” tax rate (39% versus 36% because of the R&D tax credit). Revenue of $66 million was short of our $68.5 million estimate as the revenue yield came in at 25.4% compared with our 26.7% estimate.

We are confident there were no material pricing strategy changes during the past several quarters as Financial Engines continues to add new services to avoid general asset management industry pricing pressures. Adjusted EBITDA came in at $22 million, up 31.5% from the prior year, but below our $23.5 million estimate. Revenue yield shortfall mechanics. Financial Engines professional management fees are calculated once a month based on the assets outstanding on that single day (not necessarily the same day for each provider partner). This quarter, these revenue days were unlucky on timing given market volatility.

There was also a slight increase in revenue from subadvised accounts to 52% from 50%. Subadvised provider gross revenue yield is half that of direct advised provider partners, though it has the same gross margin dollars. Financial Engines raised its top- and bottom-line guidance for revenue and adjusted EBITDA. Revenue guidance was increased to a range of $276 million-$281 million from $274 million-$279 million. Adjusted EBITDA guidance was increased from $92 million-$94 million to $94 million-$96 million. The increase in the guidance was generally in line with market movements since the prior update. We believe the guidance increase supports our belief that the miss in the first quarter was a timing issue, not a pricing issue. We reduced our estimates primarily to reflect the first-quarter timing miss and the higher noncash tax rate. Our EPS estimates go from $0.94 to $0.90 in 2014 and from $1.12 to $1.08 in 2015.

The higher tax rate reduces EPS by about $0.03 of our $0.04 annual reduction. Our 2014 adjusted EBITDA estimate goes from $97.7 million to $96.4 million and our 2015 estimate goes from $116.7 million to $117.1 million. Reiterate Outperform. Financial Engines shares have been great performers for longterm investors. However, they have declined 37% from the highs of a few months ago, along with other high-multiple stocks. With the sell-off, shares are now valued at 17 times 2015 and 14.5 times 2016 adjusted EBITDA and 6 times 2014 revenue.

We believe Financial Engines can grow EBITDA at around 20% for several years to come. Financial Engines has a unique business model with substantial long-term growth potential, in our view, adding significant value helping employees prepare for retirement. Financial Engines generates substantial cash flow and has a very strong balance sheet with no debt and nearly $5 of cash per share. 

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