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Dec. 3, 2021, 6:09 a.m. EST

10-Q: ENFUSION, INC.

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This discussion and analysis reflect historical results of operations and financial position. The following discussion and analysis is intended to highlight and supplement data and information presented elsewhere in this Quarterly Report on From 10-Q, including our unaudited condensed consolidated interim financial statements and related notes and other financial information, and should be read in conjunction with our final prospectus for our initial public offering, or IPO, dated as of October 20, 2021 and filed with the Securities and Exchange Commission, or the SEC, on October 22, 2021 pursuant to Rule 424(b) under the Securities Act, or the Prospectus. To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of our future financial outcomes. In addition to the historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could results to differ materially from management's expectations. Factors that could cause or contribute to such differences are discussed in the sections titled "Special Note Regarding Forward-Looking Statements" and "Risk Factors." We assume no obligation to update any of these forward-looking statements. All subsequent written or oral forward-looking statements attributable to us or persons acting on Enfusion's behalf are qualified in their entirety by this paragraph.

Overview

Enfusion is a global, high-growth software-as-a-service provider focused on transforming the investment management industry. Our solution is designed to eliminate technology and information barriers, empowering investment managers to confidently make and execute better-informed investment decisions in real time. We simplify investment and operational workflows by unifying mission critical systems and coalescing data into a single dataset resulting in a single source of truth. This allows stakeholders throughout the entire client organization to interact more effectively with one another across the investment management lifecycle.

We believe, by means of our purposefully designed interconnected systems underpinned by one dataset, we are the only solution that allows clients to see and interact with all parts of the investment management lifecycle ranging from portfolio construction, trading, risk management, accounting and operations through to investor reporting seamlessly in real time, in one screen, in one solution. As a result, our solution enables clients to better align teams, optimizing their investment decision-making operations and technology footprint and lowering operating costs. By harnessing the efficiencies, agility and scale inherent to our cloud-native, multi-tenant software that is integrated with a suite of technology-powered services, we believe we have created the industry's most compelling investment management solution, capable of shaping and addressing evolving demands of the global investment management landscape.

Our Business Model

By virtue of our flexible and open architecture solution, we offer clients the ability to either replace their investment management systems using the end-to-end Enfusion solution integrated with technology-powered services or supplement their legacy systems with select Enfusion systems such as portfolio management or accounting and over time, expand into using our full solution offering.

Additionally, our solution's nimble single codebase architecture allows us to dedicate resources to our clients holistically, driving a superior client experience that is critical to our business model. When our clients subscribe to the Enfusion solution, we assign each client a dedicated service team that works with them from the moment of onboarding and throughout their contract lifetime. The continuity in the servicing team assigned to each client ensures that our clients are continuously interfacing with dedicated Enfusion employees that understand their needs, workflows and product use. It also fosters a partnership built on ongoing communication and feedback, which continuously informs the weekly upgrades and functional enhancements that we deliver to each of our clients. As we continue to scale and add clients, we benefit from an evolving solution that mirrors the needs and demands of our clients and the market, leading to a compelling competitive advantage and in turn increased client retention and revenues from expanded and new business.

Our total net revenues were approximately 99.9% and 98.3% recurring subscription-based during the three months ended September 30, 2021 and 2020 and approximately 99.6% and 98.1% during the nine months September 30, 2021 and 2020, respectively. Generally, we charge our clients fees comprised of various components such as user fees,

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connectivity fees, market data fees and technology-powered service fees, all of which consider client complexity and that is subject to contract minimums. The weekly enhancements and upgrades that we deliver, and the dedicated client service are included in the price of the contract.

To support our growth and capitalize on our market opportunity, we continue to invest across all aspects of our business. In research and development, we are focused on developing additional system functionality that will open revenue opportunities across alternative and institutional investment managers. We have also further institutionalized and increased spend in our sales and marketing efforts, both in the United States and internationally. In the fourth quarter of 2021, we plan to open offices in mainland China and Australia to build on our success in the APAC region and continue to expand our global reach. We continue to be disciplined and strategic about our investments and as a result have been consistently profitable while achieving significant growth.

We operate as a single operating and reportable segment, which reflects the way our chief operating decision maker, or CODM, reviews and assesses the performance of our business.

Our total net revenues were $29.0 million and $19.8 million for the three months ended September 30, 2021 and 2020, respectively. Platform subscriptions and managed service revenues were $29.0 million for the three months ended September 30, 2021, or approximately 99.9% of total net revenues, up approximately 49.2% from $19.5 million for the three months ended September 30, 2020. We had net income of $3.3 million and $5.6 million in the three months ended September 30, 2021 and 2020, respectively.

Our total net revenues were $79.8 million and $56.9 million for the nine months ended September 30, 2021 and 2020, respectively. Platform subscriptions and managed service revenues were $79.5 million for the nine months ended September 30, 2021, or approximately 99.6% of total net revenues, up approximately 42.4% from $55.8 million for the nine months ended September 30, 2020. We had net income of $11.7 million and $16.2 million in the nine months ended September 30, 2021 and 2020, respectively.

Key Factors Affecting Our Operating Results

Breadth of Our Client Base

Our future revenue growth depends, in part, on our ability to expand our reach to new clients. There are significant opportunities to expand our client base across the various client segments we serve today. We believe we are the leading cloud-native, SaaS provider to the global emerging fund and hedge fund sector and expect that as the alternative investment sector grows, we will continue to extend our position. We expect that our efforts in signing new clients in this sector benefit from referrals from our existing clients, client stakeholders when they transit to other or launch new organizations, industry channel partners and strategic partners. In addition, we continue to extend this growth through increasing adoption by larger institutional asset management clients due to increasing acceptance of cloud technology and the robust capabilities of our solution that better meet their evolving needs and address their existing pain points. Taking advantage of the unique position that allows us to sell our products and services through shorter sales cycles and on faster client implementation timelines, we expect to continue to expand and invest our sales efforts to capitalize on opportunities in this client segment.

Expansion of Usage with Existing Clients

We believe there is a significant opportunity to further expand our relationships with existing clients as they continue to evolve and grow in size and expand into new markets and strategies or as we provide new functionality or release new systems or services. We also believe we have a significant opportunity to expand our relationship with existing clients that were not in a position to replace all of their systems at once when they first engaged with us. For those clients that elect to initially utilize some portion of our solution or only use our solution for a particular strategy or fund, we find that once they experience the advantages of our end-to-end solution, many seek opportunities to expand the breadth of their relationship with us to further help improve their investment management workflows and technology infrastructure. We expect our revenues from existing clients to continue to increase as they broaden their use of our solution and expand utilization into other investment groups within the firm.

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Existing Client Retention and Renewals

The growth of our revenues base from expanding relationships with our existing clients is driven by our ability to retain these clients. Our client retention also strengthens the stability and predictability of our revenue model, facilitating better management of business. Our Net Dollar Retention Rate was 122.0% and 104.0% as of September 30, 2021 and 2020, respectively. We believe that our delivery of excellent ongoing innovation together with superior client experience is critical to our client retention and we expect to continue to invest in both areas.

Geographic Expansion

Our future growth depends, in part, on our ability to grow our client base through geographic expansion and build on the success internationally. For the three months ended September 30, 2021, we generated approximately 64.8% of our total net revenues in the Americas, and approximately 35.2% of our total net revenues outside of the Americas. For the nine months ended September 30, 2021, we generated approximately 65.4% of our total net revenues in the Americas and approximately 34.6% of our total net revenues outside of the Americas. We are globally situated in nine offices in Chicago, New York, S�o Paulo, London, Dublin, Hong Kong, Singapore, Mumbai and Bangalore. We continue to invest in expanding our presence and capitalize on opportunities in markets such as Latin America and Asia Pacific. We continue to make investments in our sales and marketing efforts in regions outside of the Americas to capture the sizeable revenue opportunity.

Leading in Ongoing Innovation & Pursuing Growth Investments

We continuously evaluate opportunities to advance our solution through increased breadth and depth of functionality to better enable our clients to achieve their investment goals and solve for a broader array of business, operational and technology challenges. Our ability to lead and compete with a differentiated solution is dependent upon our pace of innovation. We remain committed to investing in ongoing innovation which may require increased spend in technology and development.

Costs of Being a Public Company

As a newly public company, we will implement additional procedures and processes to address the standards and requirements applicable to public companies. Specifically, accounting, legal and personnel-related expenses and directors' and officers' insurance costs will increase as we establish more comprehensive compliance and governance functions, establish internal controls over financial reporting in accordance with the Sarbanes-Oxley Act and prepare and distribute periodic reports in accordance with SEC rules. Our financial statements for the year ending December 31, 2021 onward will begin to reflect the impact of these expenses.

Impact of the COVID 19 Pandemic

While the COVID-19 pandemic has significantly affected the global economy, it has not significantly affected financial results for the three or nine months ended September 30, 2021. While COVID-19 had a temporary nominal impact on client dialogue, it altogether reinforced our value proposition and amplified the need for our clients to be able to operate systems remotely. In terms of demand, while general economic headwinds have adversely impacted budgets of clients, we believe actions and restrictions in response to COVID-19 have served to highlight the criticality of our products, which we expect to drive increased demand over time as evidenced by a record number of new clients through the end of September 30, 2021.

As the situation surrounding the COVID 19 pandemic remains fluid, we are actively managing our response. The extent of the effect on our operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic and governmental, regulatory and private sector responses, all of which are uncertain and difficult to predict.

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Effects of the Reorganization Transactions on our Corporate Structure

We were incorporated as Enfusion, Inc. on June 11, 2021 and formed for the purpose of the IPO. Following the completion of the Reorganization Transactions (as defined in Note 4 to our Balance Sheets included elsewhere in this report), we became a holding company and our sole material asset is an indirect ownership interest in Enfusion Ltd. LLC (the "LLC"). Through our ability to control the sole member of the LLC, we control all of the business and affairs of the LLC. All of our business is conducted through the LLC and its subsidiaries and the financial results of the LLC will be included in the consolidated interim financial statements of Enfusion, Inc.

The historical results of operations discussed in these sections are those of the LLC prior to the completion of the Reorganization Transactions, including the IPO, and do not reflect certain items that we expect will affect our results of operations and financial condition after giving effect to the Reorganization Transactions and the use of proceeds from the IPO.

The LLC has been treated as a pass-through entity for U.S. federal and state income tax purposes and accordingly has not been subject to U.S. federal or state income tax. After the IPO, the LLC will continue to be treated as a pass-through entity for U.S. federal and state income tax purposes. As a result of our ownership of Common Units in the LLC, we are subject to U.S., federal, state and local income taxes with respect to our allocable share of any taxable income of the LLC and will be taxed at the prevailing corporate tax rates. In addition to tax expenses, we also will incur expenses related to our operations and we will be required to make payments under the Tax Receivable Agreement. Due to the uncertainty of various factors, we cannot estimate the likely tax benefits we will realize as a result of LLC Common Unit exchanges and the resulting amounts we are likely to pay out to LLC Common Unit holders pursuant to the Tax Receivable Agreement; however, we estimate that such payments may be substantial. We intend to cause the LLC to make distributions in an amount sufficient to allow us to pay our tax obligations and operating expenses, including distributions to fund any ordinary course payments due under the Tax Receivable Agreement.

Components of Our Results of Operations

Revenues

Platform subscriptions

Platform subscriptions revenues consists primarily of user fees to provide our clients access to our cloud-based solution. Fees consider various components such as numbers of users, connectivity, trading volume, data usage and product coverage. Platform subscription clients do not have the right to take possession of the platform's software and do not have any general return right. Platform subscription revenues are generally recognized ratably over the period of contractually enforceable rights and obligations, beginning on the date that the client gains access to the platform. Most platform subscription contracts have a one-year term and are cancellable with 30 days' notice. Installment payments are invoiced at the end of each calendar month during the subscription term. We have a limited number of contracts that are non-cancellable. We have determined the impact of these contracts is not material on our pattern of revenue recognition.

Managed services

Managed services revenues primarily consist of client-selected middle and back-office, technology-powered services. We recognize revenues monthly as the managed services are performed with invoicing occurring at the end of the month. Generally, invoices have a 30 day payment period in accordance with the associated contract. There is no financing available.

Other

Other revenues consist of non-subscription-based revenues, such as sponsor development of enhancements driven by a particular client but received by all clients and data conversion and services that integrate a client's historical data into our solution. We recognize revenues monthly as these services are performed with invoicing occurring at the end of each month.

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Cost of Revenues

Cost of revenues consists primarily of personnel-related costs associated with the delivery of our software and services, including base salaries, bonuses, employee benefits and related costs. Additionally, cost of revenues includes amortization of capitalized software development costs, allocated overhead and certain direct data and hosting costs. Our cost of revenues has fixed and variable components and depends on the type of revenues earned in each period. We expect our cost of revenues to increase in absolute dollars as we continue to hire personnel to provide hosting services and technical support to our growing client base. As a result of the IPO, we anticipate additional cost of revenues as a result of the stock-based compensation expenses incurred in the fourth quarter of 2021 associated with the future issuance of Class A common stock to former participants in our Change in Control Bonus Plan. The amount of stock-based compensation expense we expect to recognize within cost of revenues is not material.

Operating Expenses

We expect to recognize an aggregate amount of approximately $268.5 million in stock-based compensation expense in the fourth quarter of 2021 in connection with the future issuance of shares of Class A common stock to former holders of Award Units under our former Change in Control Bonus Plan and to a non-executive employee in exchange for the termination of the profit sharing agreement described above. In addition, we expect to recognize approximately $6.3 million, $25.1 million, and $10.9 million in the remainder of 2021, and in 2022 and 2023, respectively, in stock-based compensation expense related to restricted stock units granted in connection with the IPO. We present stock-based compensation expense within Cost of revenues, General and administrative, Sales and marketing and Technology and development based on the individual employees' department.

General and administrative

General and administrative expenses consist of personnel costs and related expenses for executive, finance, legal, human resources, recruiting and administrative personnel, including salaries, benefits and bonuses fees for external legal, accounting, recruiting and other consulting services. We expect these expenses will increase as we continue to expand our client base and our geographic footprint and as we incur costs associated with being a publicly-traded company, including additional legal, audit and consulting fees. As a result of the IPO, we anticipate additional general and administrative expenses as a result of the stock-based compensation expenses associated with the future issuance of Class A common stock to former participants in our Change in Control Bonus Plan, as well as additional stock-based compensation expense going forward related to the restricted stock units granted in connection with the IPO, and other equity awards to be made to service providers under our equity plans.

Sales and marketing

Sales and marketing expenses consist primarily of personnel and related costs associated with our sales and marketing staff, including base salaries, employee benefits, bonuses, and commissions. We expect our sales and marketing expenses to continue to increase as we implement new marketing strategies and build our professional sales organization to support our client base growth and geographic expansion. We anticipate additional sales and marketing expenses as a result of the stock-based compensation expense associated with the future issuance of Class A common stock to former participants in our Change in Control Bonus Plan, as well as additional stock-based compensation expenses going forward related to the restricted stock units granted in connection with the IPO, and other equity awards to be made to service providers under our equity plans.

Technology and development

Technology and development expenses consist primarily of research and development activities, non-capitalizable costs of developing content and certain overhead allocations. These costs include employee-related costs, consulting services, expenses related to the product design, development, testing and enhancements of our subscription services. We expect that our technology and development expenses will increase in absolute dollars and may increase as a percentage of our revenues as we continue to enhance our platform functionality and develop new content and features. Additionally, our technology and development expense may fluctuate as a percentage of our total net revenues from period

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to period depending on the timing of development. We will have additional technology and development expenses as a result of the stock-based compensation expenses associated with the future issuance of 2,047,064 shares of Class A common stock to a non-executive employee in exchange for termination of an agreement pursuant to which such employee was previously entitled to receive a percentage of our annual net profit. We also anticipate additional technology and development expenses as a result of the stock-based compensation expenses associated with the future issuance of Class A common stock to former participants in our Change in Control Bonus Plan, as well as additional stock-based compensation expense going forward related to the restricted stock units granted in connection with the IPO, and other equity awards to be made to service providers under our equity plans.

Non-Operating Income (Expense)

Non-operating income (expense) consists of interest expense and other income (expense). Interest expense consists primarily of interest accrued or paid associated with our debt, including the amortization of debt issuance costs. We expect interest expense to vary each reporting period depending on the amount of outstanding indebtedness and prevailing interest rates. Other income (expense) consists primarily of foreign currency translation gains and losses.

Income Tax

Enfusion Ltd. LLC has historically been treated as a pass-through entity for U.S. federal tax purposes and most applicable state and local income tax purposes. Income tax provision represents the income tax expense or benefit associated with our foreign operations based on the tax laws of the jurisdictions in which we operate.

After consummation of the Reorganization Transactions, Enfusion, Inc. became subject to U.S. federal income taxes with respect to our allocable share of any U.S. taxable income of Enfusion, Ltd. LLC and will be taxed at the prevailing corporate tax rates. Enfusion, Inc. will be treated as a U.S. corporation for U.S. federal, state and local income tax purposes. Accordingly, a provision for income taxes will be recorded for the anticipated tax consequences of our reported results of operations for federal income taxes.

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                                     Results of Operations
        The results of operations presented below should be reviewed in conjunction with
        the consolidated interim financial statements and notes included elsewhere in
        this report. The following table sets forth our consolidated results of
        operations for the periods shown:
                                                     Three Months Ended September 30,           Nine Months Ended September 30,
        (in thousands)                                   2021                  2020                2021                  2020
                                                                 Unaudited                                 Unaudited
        REVENUES:
        Platform subscriptions                     $          27,136               18,282              74,323                52,753
        Managed services                                       1,890                1,170               5,184                 3,075
        Other                                                     19                  333                 340                 1,077
        Total net revenues                                    29,045               19,785              79,847                56,905
        COST OF REVENUES:
        Platform subscriptions                                 6,842                4,792              18,262                12,743
        Managed services                                       1,029                  428               2,847                 1,877
        Other                                                    224                  173                 572                   580
        Total cost of revenues                                 8,095                5,393              21,681                15,200
        Gross profit                                          20,950               14,392              58,166                41,705
        OPERATING EXPENSES:
        General and administrative                             8,546                4,509              22,385                12,574
        Sales and marketing                                    4,901                2,068              12,323                 6,615
        Technology and development                             2,600                1,642               6,844                 4,521
        Total operating expenses                              16,047                8,219              41,552                23,710
        Income from operations                                 4,903                6,173              16,614                17,995
        NON-OPERATING INCOME (EXPENSE):
        Interest expense                                     (1,485)                (365)             (4,287)               (1,092)
        Other income (expense)                                    29                    -                  29                     1
        Total non-operating income (expense)                 (1,456)                (365)             (4,258)               (1,091)
        Income before income taxes                             3,447                5,808              12,356                16,904
        Income taxes                                             154                  228                 704                   656
        Net income                                 $           3,293                5,580              11,652                16,248
        








                         Three Months Ended September 30, 2021 and 2020
        Revenues
                                        Three Months Ended September 30,
                                                           Increase (Decrease)
        ($ in thousands)            2021        2020        Amount       Percent
        Revenues:
        Platform subscriptions    $ 27,136      18,282         8,854        48.4 %
        Managed services             1,890       1,170           720        61.5 %
        Other                           19         333         (314)      (94.2) %
        Total net revenues        $ 29,045      19,785         9,260        46.8 %
        . . .
        


Dec 03, 2021

COMTEX_398223596/2041/2021-12-03T06:08:31

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