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Analysts Trim Envestnet Forecasts Following $100M Lawsuit, CEO’s Warning

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Analysts cut their short-term earnings and revenue estimates for Envestnet after the company’s CEO, Jud Bergman, warned the firm’s revenue will be hurt as it looks to find a new solution and provider for credit decisioning analytics following the filing of a $100 million lawsuit against it by its former vendor, FinancialApps.

D.A. Davidson senior research analyst Peter Heckmann, for instance, lowered his 2019 and 2020 revenue forecasts for Envestnet 3%-4%, while dropping his 2019 adjusted EBITDA forecast for the company 1% to $193 million and his 2020 adjusted EBITDA forecast 6% to $233 million, he said Monday in a research note. He also dropped his 2019 adjusted earnings per share (EPS) forecast by 3 cents to $2.10 and 2020 adjusted EPS 12 cents to $2.54.

William Blair analyst Chris Shutler similarly lowered his 2019 adjusted EPS estimate for Envestnet by 4 cents to $2.11 and lowered his 2020 estimate 11 cents to $2.55.

Law firm Kasowitz Benson Torres LLP filed the lawsuit on behalf of FinancialApps on July 26 in U.S. District Court for the District of Delaware, accusing Envestnet and subsidiary Yodlee of committing an “egregious multi-year scheme” designed to “steal FinApps’ valuable proprietary information and trade secrets, in order to unlawfully develop software products that compete with FinApps.” The alleged scheme caused FinApps to sustain “substantial monetary damages, in an amount to be determined at trial, but no less than $100 million,” according to the suit.

In response, Bergman told analysts on his company’s second-quarter earnings call Aug. 7: “We believe the vendor’s allegations are false and without merit, and we will respond appropriately and defend ourselves vigorously.”

But he disclosed that Envestnet’s Data & Analytics business “experienced shortcomings in the technology provided by” that vendor, who “we relied on to deliver certain credit decisioning analytics to our banking customers.” The vendor, which he didn’t mention by name on the call, “suspended service, causing a disruption that affected several clients and prospects,” he said.

Envestnet continued to “see credit decisioning analytics as a big opportunity,” he said, but warned: “Our revenue will be negatively impacted at least through the remainder of this year, as we work to develop a new solution with a new provider.”

During the Q&A with analysts, he said he was “highly confident that eventually we will find a new solution with a new provider that enables us to address this market opportunity; whether that’s months or quarters, I can’t say right now, but my expectation is that it’s closer to months.”

Despite lowering his forecasts for Envestnet due to the “headwinds” cited by the company on its earnings call, D.A. Davidson’s Heckmann said in his note he believed the company was “well positioned to benefit from the trend of financial advisors migrating from large brokerage firms (wirehouses) to independent operations where they immediately require robust back-office systems.”

Although it “could take a few quarters to get” the Data & Analytics business “back on track” and “lawsuits naturally present uncertainty,” William Blair’s Shutler said in his note: “We believe this issue is likely temporary.”

Jefferies analyst Surinder Thind, meanwhile, said in a research note that he viewed “any stock weakness as a buying opportunity” for investors. He predicted Envestnet will “continue gaining market share given its scale, industry leading position, and expanding product offerings.”

In its news release announcing the FinApps lawsuit against Envestnet, Kasowitz Benson Torres pointed out that the complaint also alleged Yodlee “licensed FinApps’ proprietary software for a new platform known as ‘Risk Insight’ and falsely represented to FinApps that it intended to forge a long-term strategic partnership with FinApps, when instead, defendants’ sole intention was to misappropriate FinApps’ proprietary technology and trade secrets while defendants secretly entered into agreements with third parties to deliver credit risk software and services that rely on the stolen technology.”

FinApps developed technology that “disrupts the credit and lending market, allowing financial service companies to evaluate credit risk more effectively than ever before,” FinApps’ lead lawyer, Marc Kasowitz, said in a statement. “We look forward to proving that Envestnet and Yodlee are liable for significant damages to our client, and persuading the court to issue a permanent injunction enjoining defendants from further unlawful activity,” said the lawyer, who has also served as a personal attorney to President Donald Trump.

Bergman’s full statement about the lawsuit on the earnings call “seemed to be an admission” that the FinApps technology was of “central importance” to Envestnet, Kasowitz told ThinkAdvisor on Tuesday. Bergman’s claim that the suit had no merit was “belied by … facts that we’ve alleged in the complaint, which are that we have emails and other evidence demonstrating that Yodlee and Envestnet were engaged in a scheme to try to improperly take this technology.” He added: “There wasn’t much about the CEO’s earnings call that we didn’t like. We kind of liked all of it.”

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