Revenue of $91.9m beat the $91.5m consensus, and GAAP diluted EPS of $0.10 beat the $0.079 estimate by 26%.
The 1% revenue growth is a standoff between two businesses: Investment Advisory revenue of $28.8m grew 31% on assets up 30% to $54.1bn, while cash management revenue of $61.8m fell 10% on a fee rate of 55 basis points, six lower than a year ago.
Earnings did not follow the EPS line: adjusted EBITDA of $38.1m fell 15% to a 41% margin, eight points below last year, on gross profit of $81.1m that was down 1%.
No full-year guidance was offered. Management gave a 55 basis point cash management fee run rate at the end of August and flagged $3m-$3.5m of one-time employer tax expense next quarter.
The one thing that matters: the rate cycle no longer shows up in Wealthfront's asset growth, it shows up in the margin, and the investing business is now carrying the whole revenue line.
Guidance & KPIs
Item
New guidance
Prior guidance
One-time employer tax expense on former-employee option exercises (next quarter)
roughly $3 million-$3.5 million
—
Cash management fee rate, annualized run rate at end of August
55 basis points
—
Adjusted EBITDA margin, long term
over 40%
—
Management commentary
Cross-product adoption was the framing for the quarter: asset-weighted adoption rose half a percentage point month-over-month to just under 64%, with roughly 7,500 new account openings attributed to the incentive.
The CFO declined to guide on the cash management fee rate, saying he "can't give you specific guidance for the rest of the year or into the future", and offered only the 55 basis point end-of-August run rate.
Home Lending is a stated near-term margin headwind; management still expects an adjusted EBITDA margin above 40% over the long term after 41% this quarter.
The Stock Investing Account moves to the broker-dealer in October as the Wealthfront Brokerage Account, adding more order types and a wider investable universe to compete for self-directed assets.
On rates, management said history shows increases help cash net deposits, while noting September quarterly tax payments and an APY-to-APR conversion worth roughly a basis point per 25 basis point move.
Quality of earnings
The EPS beat is the only line that improved. Revenue rose 1% to $91.9m, gross profit fell 1% to $81.1m, and adjusted EBITDA fell 15% to $38.1m -- margin compression, not a strengthening quarter, is what the income statement shows.
Reported cost growth overstates the deterioration, but only partly. GAAP expenses of $75.1m were up 45% against a pre-IPO base that excluded dual-trigger RSU expense; adjusted operating expenses of $58.7m, up 17% against 1% revenue growth, are the comparable figure.
Cash conversion is seasonally understated: adjusted free cash flow of $28.3m was 74% of adjusted EBITDA because 35% of annual cash bonuses are paid each July, against an 88% trailing-twelve-month ratio.
Gotchas & watch items
All $1.1bn of net deposits in the quarter came from Investment Advisory, so cash management added nothing on a net basis while still producing $61.8m of the $91.9m in revenue.
Cash management is contracting on both price and volume: assets of $44.9bn are down 4% year-over-year and the annualized fee rate of 55 basis points is down six basis points.
A $3m-$3.5m one-time employer tax charge hits next quarter on option exercises ahead of a September deadline, against $38.1m of quarterly adjusted EBITDA.
The 2023 and 2024 client cohorts are still net cash sellers, offset by other cohorts; the improvement management points to is measured in single months, not in the quarter's numbers.