Focus Financial Partners Inc.
Q1 2021 Earnings Call Transcript

Published: 8 May 2021

[Rusty McGranahan:]

Good morning, everyone. Before we begin, let me remind you that during the course of this call, we may make a number of forward-looking statements. We call your attention to the fact that Focus’ results may, of course, differ from these statements. These statements are based on assumptions made by and information currently available to Focus Financial Partners and involve risks and uncertainties that could cause the results of Focus to materially differ from these statements. Focus has made filings with the FCC, which lists some of the factors that may cause its results to differ materially from these statements, including without limitation, uncertainty surrounding the current COVID-19 pandemic. And finally, Focus assumes no duty and does not undertake to update any such forward-looking statements.

[Rudy Adolf:]

Thanks, Rusty and good morning everyone and thank you for joining our call. As always, we appreciate your interest in Focus. This morning, we announced another quarter of excellent results, reinforcing our clear leadership in the wealth management sector and the continuation of our long-term track record of exceptional financial performance. We generated $394.2 million in revenues, adjusted net income, excluding tax adjustments per share of $.80, and tax adjustments per share of $0.13. Our revenues were ahead of the top end of our Q1 expectations, reflecting strong year-over-year organic growth and further acceleration of our overall business momentum. Our cash flow also continued to grow rapidly. We saw Q1 last 12-month cash flow available for capital allocation of $219.9 million, up 51.8% year-over-year. We also reported our first quarter of adjusted EBITDA in excess of $100 million, which is a substantial milestone that further reinforces the benefits of scale to our business. Our partner firms remained agile in navigating the unsettled macro backdrop during Q1, delivering outstanding service to their clients and growing their businesses, with the 12.2% organic revenue growth we achieved this quarter as evidence of their strong performance partners. Our partners’ clients are sophisticated, ultra-high net worth and high net worth individuals and depend on their advisors to help them manage the complexities of their financial lives and legacies as market and economic conditions evolve. Providing highly personalized integrated advice is exceptionally valuable to these clients, especially during periods of market volatility and in evolving tax and estate planning landscape. Following the most active quarter in our history in Q4, our M&A momentum remains strong into Q1 and that is continuing into Q2. We have added three new partner firms year-to-date, including Prairie Capital, which is approximately $5 billion in client assets, extending our track record of adding excellent firms that are value accretive. We also completed four mergers on behalf of our partner firms, which included two for Connectus and one for SCS Financial, our partner firm in Boston that serves ultra-high net worth clients. We anticipate that our partners will take further advantage of the substantial industry growth opportunity to increase their scale and bolster their growth. Our pipeline is excellent and is building further with a good mix of new partner firm acquisitions and mergers, including Connectus, which has a solid pipeline of mergers both in the U.S. and internationally. As a reminder, Connectus is a Focus partner firm, with a hybrid acquisition alternative that expands our addressable market globally. Connectus is a semiautonomous model designed for teams who want to maintain autonomy over their client relationships, but utilize the shared infrastructure Connectus offers to optimize the efficiency and solve for growth.

[Jim Shanahan:]

Thanks, Rudy and good morning everyone. We delivered excellent Q1 results, outperforming our expectation across all measures and we are very pleased with the strong performance and growth of the business. As Rudy noted, we continued to enhance our presence in the ultra-high net worth space, expands our international presence and further build-out our value-added offerings, creating multiple levers for the future growth of our partnership. We are operating in a sector of the wealth management industry with strong underlying growth fundamentals, which the pandemic has further accelerated. Now, let me turn to the details of our Q1 P&L. Our revenues were $394.2 million, up 16.9% year-over-year and slightly ahead of our estimated range of $375 million to $385 million as organic revenue growth across the partnership of 12.2% was moderately higher than our estimate of 7% to 10%. Our Q1 adjusted EBITDA was $101 million, up 29.4% year-over-year. This result reflected in adjusted EBITDA margin of 25.6%, which was well ahead of our 24.5% expectation due to the higher organic revenue growth and lower operating costs relative to revenues. As Rudy noted, this is a significant milestone. The embedded operating leverage in our business reflects another benefit of the scale we have achieved to-date. While we anticipate that there will be some adjustment to our expenses as employees return to the office and certain invariable costs such as T&E will increase, we believe that our margins will benefit further from this operating leverage as the top line growth of our business outpaces the growth of our expenses over time. Our adjusted net income, excluding tax adjustments per share, was $0.80, 29% higher year-over-year and our tax adjustments per share were $0.13, up 8.3% for the comparable period. Our M&A momentum remained strong during Q1 and that continues into Q2. We closed one new partner firm, Hill Investment Group, on March 1 and two additional partner firms, Prairie Capital and Rollins Financial on April 1. There was no meaningful Q1 revenue or adjusted EBITDA contribution from Hill due to its late closing in the quarter, but we estimate that Hill, Prairie and Rollins will contribute in an aggregate of $7 million of revenues and $2.6 million in adjusted EBITDA in Q2. In Q1, we completed a merger in the UK for Connectus and year-to-date, we have completed four mergers, which included the Matthews Lane merger for our partner firm SCS Financial, and a merger in Australia for Connectus. This is our fourth Connectus merger in Australia since Connectus entered this market last December.

[Operator:]

Thank you. Your first question comes from the line of Craig Siegenthaler with Credit Suisse. Please proceed with your question.

[Craig Siegenthaler:]

Thanks. Good morning, Rudy. Hope you and the team are doing well.

[Rudy Adolf:]

Mr. Siegenthaler, how are you?

[Craig Siegenthaler:]

You pronounced it right. So, my first one is on taxes. Can you talk about how the prospects of higher capital gain taxes could impact the Focus business? And I am thinking mainly about an acceleration to RAA M&A but also how it could impact the underlying clients too, including flow trends?

[Rudy Adolf:]

Yes, absolutely. Craig, this is obviously a very complex question, because it has so many facets. In the short-term, clearly, we do believe it will have an accelerating impact on our M&A activity, not dramatically, but still I think meaningfully, because in so many discussions we are having, quite frankly, this is an important subject. It certainly will turn medium-term you are probably more into a headwind, because when you are in the wealth management business and more and more of the wealth is taking away from by the government, for sure, it will have some impact on just what we are managing. However, this probably is offset by really the need for high-quality advice. And our partners, quite frankly when I talked to them, they have never been busier with clients trying to anticipate what maybe coming out of Washington and the local governments and then ultimately understanding what is the impact for estate planning, what is the impact for tax planning? Quite frankly, where people want to live there is of course a major migration of people happening in the country right now, so net-net, hard to predict very long-term if it has an impact on the economy on the wealth generation, you have probably a headwind, short-term from an M&A perspective and most certainly from a need for advice, need for quality fiduciary advice, probably a major positive.

[Craig Siegenthaler:]

Got it. And then Rudy, sticking with M&A for a moment, can you comment on how valuation multiples have trended in the U.S. across your verticals, just given what it looks like much higher competition especially last year, and then also contrast this to the valuations you are seeing in international markets?

[Rudy Adolf:]

Yes, yes, absolutely. Of course, we have a very unique position, because ultimately our value proposition of evaluate, entrepreneurship, and permanent capital. Yes, simply nobody else can credibly claim. And so we are operating in a very attractive niche. I said it on the last earnings call, our multiples were basically flat over the last 3 years. Technically, in fact, Craig, they were a little bit down last year versus the prior year and again the prior year. So, it’s all around the power of the value proposition, and quite frankly, simply the credibility of the consistently executed strategy by the market leader. You are correct there are some – we see some, let’s say unusual multiples occasionally. But quite frankly, we have seen these patterns many times in this industry, and yet in so many ways, they are always the same. So, some inexperienced newcomers kind of enter the space, usually with a poor value proposition. So, really all they can do is pay higher multiples. And then quite frankly, they realize that they have overpaid, and then the pattern repeats itself. First, they announce that all these firms that they acquired now operate under their brand, which quite frankly has very little value in this industry. Then they introduce mandatory platforms, and then they started encouraging them to sell their frequently underperforming, overpriced products. And finally, they encourage, they force their advisors to increase prices on their clients. Usually it’s just because of the way the industry works. These things are foolish strategies. And then what you see is that these businesses exit the market. And I said it a number of times, never has a bank succeeded in this industry, never has a foreign buyer succeeded, no insurance company, and certainly no asset manager, and this is not for a lack of trying. So, ultimately you need a business model that you consistently execute where you truly add value to partners, and where ultimately you are compatible with what made this business, this industry so successful. And since we started this thing on my kitchen table and my co-founder’s kitchen tables, we have been one straight line in the way we executed the strategy. Actually, sorry, you also asked international.

[Craig Siegenthaler:]

Yes, I am sorry. I asked you to contrast what’s going on in the U.S. versus your international markets in terms of multiples?

[Rudy Adolf:]

Yes, sorry, that’s a very important aspect of your question. So, this is where our scale and scope just gives us a unique advantage. We can constantly allocate capital to the highest opportunity, and guessing some of the international markets, the multiples are just more attractive than they are in some buckets in the U.S. And ultimately, we are investing in domestic and international fiduciary wealth managers. We are investing in your ultra high-end multifamily offices targeting athletes and entertainers. We recently did an OCIO transaction and have invested in PPAs. So, this diversity that we have in our model is very unique and allows us to really keep our returns on equity very, very consistent over time.

[Craig Siegenthaler:]

Thank you, Rudy.

[Operator:]

Your next question comes from the line of Owen Lau with Oppenheimer. Please proceed with your question.

[Owen Lau:]

Good morning and thank you for taking my question. Could you please talk about the value proposition of your new joint venture, Beryllus Capital? What is the competitive landscape in this multi-family space, and how Focus can add value to this joint venture? Thank you.

[Rudy Adolf:]

Yes, absolutely. So we are very excited about this opportunity, and quite frankly, the Hinduja is one of the most prominent ultra-high net worth families on the globe, and one of the wealthiest families in the UK. They obviously can choose to work with just about anybody. But ultimately they chose us as their partners because they really believe that our perspective, our value-added resources, can really help them develop together, of course, under the leadership of the management team, into one of the leading true ultra-high net worth multi-family offices in the world. We made a big statement from the start with launching it basically simultaneously in London, in Geneva, in Singapore. This is where a lot of this wealth of course is concentrated. And we really are very bullish about this market. We are very bullish about very differentiated value proposition that we can bring that ultimately, or one we actually believe will help – is everything we do at Focus, we have this diverse group of 75 partner firms. And basically, we always learn from each of them, we spread the news across the partnership when appropriate, and the – it’s really a learning network of partners. And I look at Beryllus as very much one of those very important firms that we have here in the group.

[Owen Lau:]

Got it. That’s very helpful. And then quickly on the leverage, so, what does it take for Focus to adjust the leverage guidance down? I mean it has been trending down in a pretty healthy M&A environment. So, with the adjusted EBITDA and the cash flow you are generating, what’s your thought process about changing, updating the leverage guidance? Thank you.

[Rudy Adolf:]

Yes. And Jim may want to jump in as well, but we really like where we are with our guidance, 3.5 to 4.5. And yes, what we accomplished, again, in the first quarter is revenues, profitability margins, everything improved. We executed on 8 transactions, but still your leverage came down from 3.89 in Q4 to 3.79 in Q1 now. And of course, a big factor of this is we are just generating an enormous amount of free cash flow. Free cash flow available for capital allocation, which is I think a really important number to focus on, increased now by 52% versus prior trading 12 months basis. So, we just generated $219.9 million in free cash flow available for capital allocation and that helps us on the leverage side. Having said that, our pipeline is excellent, you will see one announcement after the other. I feel very, very good about the rest of the year and not just because of Texas, just structurally, we are in an excellent spot. And we simply want to have the flexibility to keep on deploying capital as we have in the past year, in highly accretive transactions. So if anything we had demonstrated in 2020, in the middle of the crisis. Particularly also in Q2 when kind of the full headwind hit our business, reality is we could really demonstrate the quality, the recurring nature yet the diversification of our cash flows to ultimately sustain this leveraged guidance very easily and really optimizing shareholder returns by using, of course, the very attractive capital that we have available to us.

[Jim Shanahan:]

I don’t have anything specific really to add there, Owen. We have a great opportunity set in front of us. The RIA industry is a large growing industry. It’s an industry with high fee base recurring revenue. We like what we see in the U.S. We like the opportunities to connect, that’s how we recently launched. We like the international opportunities. Obviously we proved last year has really just mentioned that we can operate during periods of high volatility and maintain our leverage guidance. So, it’s really about being a positive and look at the opportunity had, and using our cash flow and our low cost of debt capacity on attractive opportunities while still maintaining discipline in the transactions that we do.

[Rudy Adolf:]

Maybe just a last point, because I think it’s so interesting. We showed on the charts, basically, our EBITDA on an LTM basis would need to drop by $150.7 million, meaning 39% to ever reach our 6.25 net leverage covenant. So, we adjusted an excellent position and it’s ultimately optimizing the returns that we generate by staying within the 3.5 to 4.5 range.

[Owen Lau:]

Thank you.

[Operator:]

Your next question comes from the line of Mike Carrier with Bank of America. Please proceed with your question.

[Mike Carrier:]

Hi good morning. Thanks for taking the questions. Just the first question on some of the new products and services you guys are offering working on like the tax, credit, insurance, private investments, all seem to be important areas where we are focusing differentiation, but it also has to be done well, so if you can update. We just want to understand how you create new offerings, maybe how involved are the partner firms? And then any update numbers you have on some of those earlier initiatives or how it may help in winning when you are going after a certain M&A front?

[Rudy Adolf:]

Yes. Hi Mike. Focus from our start, we have always been about value added. And quite frankly, our scale, the scale that we have reached over the last number of years, will really ultimately enable us to create solutions that are unique in the industry. And quite frankly, are very, very helpful to our partners. And when we are working with prospects, the genesis is just about everything we do at Focus is always the same. It starts with one of our 70 plus partners saying, you know what, I have this need for some clients, how can you Focus help? And very often it’s just not one partner raising their hand, but it’s the number of partners. And that’s when we then help these partner firm solve initial problem, that’s the starting point. And then we look, is this something we can scale across the group because it’s really a pattern of service needs that these clients, or partners need and this thing built in a laboratory, but they are always real-life client cases, client opportunities that we are helping our part to serve. And through our scale, we are the largest client or the largest purchaser of just about any service that you could find in the RIA industry. This gives us insights. This gives us bargaining power. This gives us excess that quite frankly, nobody else in this space has. And this is what we didn’t deploy for our clients. The first area that we have worked on and announced publicly was cash and credit. We are very, very pleased with the cash and credit program. It was over $1 billion just last year. We see tremendous momentum and it’s very, high-tech kind of lending like very recently we help the financing of royalty rights in the segment. You had very, very attractive terms in a very complex, but very high value added transaction. We have done international lending, we have done aircraft and yachts and other things. So, there is a lot of kind of high-tech capabilities that we are bringing to the party, with a typical RIA in this industry maybe we will do 1 or 2 of them a year. We do way more than that. And that gives us the insights into the purchasing power. The areas where we – and I addressed them in my speech, the areas where we put a lot of energy right now is trust solutions. This is a major need in this industry. Quite frankly, many trust solutions are overpriced today. Again, our purchasing power comes in. We have partners with South Dakota, Delaware, Tennessee, and the national license. Alternative investments, very, very important because of the distribution of returns, you will need to have access to the best managers through the expertise of our partners like FCS, but also through just the scale of our organization, we have this access, you have better than probably anybody else, valuation services, very important for a state planning and other purposes and insurance. These are all areas we are investing in and we don’t look at these as profit centers, Mike, but we look at them ultimately as value added services to our partners, which therefore makes their proposition even more competitive in the market and therefore increase their growth through, getting more clients and retaining your clients. In fact, cash lending. If there is one thing I have learned over this year, last year and a half is you are so often in attractive lending solution, leads to a tremendous increase of assets. These clients hold with our partners. So, it’s really a win-win for the client, a win for our partners and then of course a win for Focus.

[Mike Carrier:]

Alright. Great. That’s helpful. And then maybe just a quick follow-up, Jim, EBITDA margin is coming in better and has improved by a good amount, not just over the last 12 months with COVID, but over the past few years. So I am curious on the outlook and has anything changed or the next shift is that makes maybe the margin opportunity more attractive versus a few years ago?

[Jim Shanahan:]

Yes. Obviously, we are happy with the growth of the adjusted EBITDA margin just reported 25.6% this quarter. And on the Q1 last year was 23.1%. So 2.5 percentage points year-over-year. We are obviously very happy about that, that growth. We provided details in the earnings supplement in Q2. We have a few new partners that are going to contribute about $7 million in revenue, $2.6 million of estimated adjusted EBITDA. So, those firms we think will contribute around 37% adjusted EBITDA margin. So, that kind of goes into our math. We are guiding towards full year of at least 25% adjusted EBITDA margin. Expect later this year, travel business development activities will start to pick up. Structurally, our Connectus transactions have higher margins it’s still early days, so they are not contributing materially to any change, but over time that will impact the margins. And as we said on the last earnings call at the end of this year, when we have a little more visibility on all of these things, we will probably reevaluate the long-term adjusted EBITDA margin at that time. But overall we are pretty happy with the year-over-year growth of the 2.5 percentage points as I just mentioned.

[Mike Carrier:]

Got it. Thanks a lot.

[Jim Shanahan:]

Thanks.

[Operator:]

Your next question comes from the line of Kyle Voigt with KBW. Please proceed with your question.

[Kyle Voigt:]

Hi, good morning. If we go back to your IPO, which is almost 3 years ago now, I think you mentioned at that time, there were about 500 RIA firms with over $1 billion in AUM that could potentially be viewed as acquisition targets or potential for them to join the Focus partnership as partner firms. But since then, there has been a significant number of large deals announced by you and others in the sectors. Just wondering if you can give us an update on how that pool of potential RIAs or potential partner firms looks today versus that number that was around 500, I believe just a few years ago and Rudy anything else you could share on the number of kind of very large RIAs, maybe over $5 billion that you see as potential targets. I am just trying to get a sense for how that – your kind of addressable market for M&A has changed over time? Thank you.

[Rudy Adolf:]

Yes. Absolutely, Kyle. So, one of the fascinating things about this industry is basically, this is an ever increasing pool of opportunity. Reality is – actually the number is about 1,000 firms in the industry based on several research groups are over $1 billion. There is a total of about 17,000 RIAs. And so this number is staying constant. It’s actually really increasing. Why? Yes, there is some level of consolidation, but reality is these industries under consolidating depending on which research group you believe, maybe the 150 or so deals in this industry, Kyle, there should be probably 250 to 300 deals a year. So every year the backlog of deals is really building in this industry. My most favorite statistic, the 50,000 advisors out there, this is both brokers in RIAs that basically are managing over $3 trillion and are 65 years and older. So reality is there is a $3 trillion market and these are not focused numbers. These are industry research numbers that basically will transition, not in 10 years, in the next 5 years or 7 years, one way or the other. And we are – we have and we will continue to get more than just our fair share of this. So what’s driving the consistent high number and growing number of a $1 billion plus firms. One is just firms grow. Two is basically, more and more brokers, or even selectively bankers, are basically moving from the wirehouses into banks to the RIA space. So, there is a constant supply of large firms who are basically entering or growing into this target zone. Now because of our business model, yes, you’re correct, if a holding company deals direct most firms, $90 billion plus range. Prairie Capital, most recent, large deal announced was a $5 billion deal. Very, very large firm that joined us, but the real opportunity here is just getting this constant shelf of deals that we do at attractive multiples because of the very powerful value proposition that we have.

[Kyle Voigt:]

That’s very helpful. Thank you .Now I can just ask a clarification question regarding the insurance offering or some of the other value added services that you’re just rolling out. I just wanted to clarify is Focus sharing in those economics at all, or should we really think about that as just being part of the value proposition to advisors to make those advisors stickier and to enhance your offering to them? Thank you.

[Rudy Adolf:]

Yes. So just about everything veto, as I said before, is really ultimately how we can enhance the value proposition of our partners and how we can help them better serve their clients which then of course has a positive impact on our – their revenues and their profitability and we get plus minus 50%. It’s a very simple model. Occasionally, we will probably have revenue models where we can recover some of the expense on the holding company, but that’s really secondary. What is first and foremost, and quite frankly, Kyle, it’s really becoming a core of our value proposition, your partner. Prospects join us because they see just these awesome capabilities that only players of our scale have and really want to be part of offering these to their clients.

[Kyle Voigt:]

Understood. Thank you.

[Operator:]

Your next question comes from the line of Alex Blostein with Goldman Sachs. Please proceed with your question.

[Alex Blostein:]

Great. Hi, everybody. Good morning everybody. So just maybe a little more on the value-added services and when I take us back a couple of years and kind of think about the growth algorithm for the firm and really the growth algorithm for your partner firms, same-store sales has not been the biggest driver, right? The majority of the growth, I believe, has been market, but also obviously deals that you guys help them, both fund and access. So I guess my question is, do you see enough evidence that these value added services could accelerate the actual same-store sales of your partner firms? Any evidence of that you could share with us and kind of what’s the kind of organic same-store sale has been over the last couple of years and where you guys think it could ultimately go based on everything you’ve done in the last couple of years, cause it’s been quite a lot?

[Rudy Adolf:]

Yes. And obviously Alex, we wouldn’t be doing these things if we didn’t fully believe in the power of these services. And as I said before, they never just get created in some laboratory outside of the real world, but they always ultimately meet demands that our partner firms have. And yes, we very much can see the impact of these value added programs. And there are two type of programs, Alex, that we have. There is focused business solutions, that’s basically all the things where we help with new marketing and new operations and new technology and talent management and compliance. And this, of course, also includes when we help with mergers and acquisitions. And there is no question that there is just tremendous impact here that these have. And when you look at the organic growth rates of our partner firms that we disclosed every quarter, these are quite frankly, very, very powerful numbers. Focused line solutions, we see the impact of cash and credit because we have done it long enough. And as I said before, it’s well over $1 billion so far. And again, it’s not the margin we make on this because most of this is simply pass-through, meaning really, it’s the bank’s balance sheet and we use our scale to get excellent solutions for the clients. But what we do here is, yes, we just did – actually, yesterday, I learned about a $40 million – sorry, a $20 million credit that we arranged for a very important client in the South, small, medium-sized business. And once we arranged it, we increased $10 million of this liquidity, ultimately came to us for investments. So we are tracking these things very carefully. We see them as really a core part of our value proposition, and we think it’s a major differentiator in the market. Trust portfolio optimization, valuation services, insurance, multifamily office services, they are – the jury is still out. It’s too early. We are just announcing a number of things. We are just launching these. But yes, Alex, for sure, we wouldn’t invest these resources and – that we have in this space if we weren’t convinced that it has a major impact on our clients but also from a prospecting perspective.

[Alex Blostein:]

Got it. Okay, makes sense. I guess we will stay tuned for more details there.

[Rudy Adolf:]

Yes.

[Alex Blostein:]

My second question, just around the earn-outs, so Jim, I was wondering if you could help with the amount of the earn-outs that are vesting kind of over the next 12 months. I think the total fair value liability is around $190 million. I think you gave us the $55 million in the second quarter. Just curious kind of what that looks like over the next 12 months as we think about kind of the cash flow capacity for deals sort of net of the earn-out payout?

[Jim Shanahan:]

Yes. So Alex, the guidance that we provide is quarterly. We – this quarter Q1, we paid $10 million. That was in line with the guidance that we had provided. Our guidance this point for Q2 is the $55 million. And you’re right, the estimated earn-out under GAAP at March 31 is $192 million. It’s harder for me to estimate 12 months or longer term periods based on the change. So the guidance that we provide is the next quarter, which is the $55 million. And then obviously, the cash flow has gone up quite a bit. The LTM cash flow available for capital allocation was $219 million, up 51%, and that’s becoming more and more a piece of the proceeds, if you will, that we’re using for our M&A activities in conjunction with the credit capacity that we have as well that are driving the business towards 20% top line revenue growth this year.

[Alex Blostein:]

Yes. And – go ahead.

[Rudy Adolf:]

Actually, Alex, maybe just one more thought. The – whenever I sign the checks or I approve the wires for some of these large earn-out payments, I always do it with a big smile because it really ultimately proves here that we have done great transactions. And it’s just a reflection of the quality of our partner firm portfolio.

[Alex Blostein:]

Yes, for sure. High class problem. Just a clarification of the $190 million, is it all cash or is there stock as well? I believe that there is sometimes equity I just wasn’t sure whether the fair value of the liability is inclusive of the stock or is it cash?

[Jim Shanahan:]

Yes. We predominantly pay cash, but there can be equity elements as well.

[Alex Blostein:]

Okay, thank you very much.

[Rudy Adolf:]

Thank you.

[Operator:]

Your next question comes from the line of Michael Young with Truist Securities. Please proceed with your question.

[Michael Young:]

Hi, good morning. Thank you for taking the question.

[Rudy Adolf:]

Hi, Michael.

[Michael Young:]

I wanted to follow-up just on the sort of COVID-impacted revenue from the entertainment businesses, etcetera, any kind of thought as we reopen here on how those should trend? And should they move back to higher levels than where they have been before or should we expect them to be a little bit stunted for a period?

[Rudy Adolf:]

Yes. And Jim, you may want to – to, Tim, you want to jump in?

[Jim Shanahan:]

Sure, sure. So obviously, if you look at our non-correlated revenues over the last year or 2, it sort of peaked around $100 million. We just reported $87.8 million. Obviously, we anticipate activities in the entertainment sector to recover later this year and obviously, into 2022 as the vaccinations are deployed countrywide. We don’t provide specific guidance on this. It’s sort of embedded into our overall guidance, of which, at this point is for Q2, $415 million of revenue and obviously driving the business full year towards 20% plus revenue growth year-over-year. But obviously, we remain positive. A lot of pent-up demand on live event activities and while some of it was a headwind in the past year, we’re hoping for some tailwinds in the future.

[Rudy Adolf:]

Yes. It’s interesting when I talk to our partners in this segment, the – so clearly, this pendulum is going the other way now. And it has just started. But in call most recently, a partner mentioned that it seems to be now a shortage of venues that is – by the later in the year, where basically people are just booking and booking. And this, of course, can have a very positive impact, but one step at a time. But clearly, the world is looking much better now than only two quarters ago.

[Michael Young:]

Great, thanks. And I guess maybe zooming out to kind of the longer term targets, you provided that you guys are going to update in the EBITDA outlook later this year, but more just curious kind of big picture, where you’re maybe ahead of plan there or behind? You guys have done a lot of things over the last year through COVID and the pandemic that seems like you might be a little bit ahead or on the front foot, but I just wanted to get kind of a high level view now that we are kind of reopening and back to normal, etcetera?

[Rudy Adolf:]

Yes. Michael, the – we have been very clear throughout last year that there was, of course, some impact, but ultimately, de minimis impact to our business momentum through COVID that we didn’t see a need to change the targets I think $3.5 billion in revenues, $840 million in EBITDA. This margin guidance is still to be determined or updated. We quite frankly feel these are very powerful and very good targets. And I don’t think we are ahead. I don’t think we are below. We are just chugging along to really fundamentally doubling the size of this business and more by 2025, which I think is a very good aspiration.

[Michael Young:]

Okay, great. Thanks.

[Operator:]

Your next question comes from the line of Gerry O'Hara with Jefferies. Please proceed with your question.

[Gerry O'Hara:]

Okay, thanks. Rudy, I think last year, either maybe third quarter, so you kind of cited some industry stats around market dislocations driving a pickup of assets in motion, I suppose, broker recruitment, that type of activity. Can you perhaps help us frame where we are in that process? Are we largely through it post the pandemic or is there still a fairly significant runway of advisers looking to partner with platforms such as yourself?

[Rudy Adolf:]

Yes. You know what, Gerry I think it’s just starting. Of course, there are no industry statistics out for 2020 yet. Actually, there is some now. But what we are seeing clearly is an acceleration of the market share gain by the RIA industry. As you know, if you look over a long cycle, basically RIAs, RIA part of the industry growth is about 10%, while the traditional wirehouses grow about 3.2%, which – so we’re going triple the incumbent players. And you’re exactly right. It was in Q2 earnings, where we showed the empirics where in the year of the crisis, the RIA industry simply does better than all the other industries. But of course, it gets impacted by the crisis. But then in year 1 after the crisis, the RIA industry grows by 17% here versus the typical 10%, while the wirehouses only grow at 6%. And then in year 2, our industry still grows at 16% while the wirehouses here, then you get to 12% and then it basically stabilizes again to the 10% versus 3% ratio. So, we think it’s just beginning. And we think that, yes, we never this crisis is truly over, and yes, it’s almost over, but I think there is more to go and more surprises to come. But reality is the next couple of years are going to be just terrific from – for our industry and for Focus. And you have seen the guidance in Q2. Our Q2 guidance speaks to an organic growth rate of 23% to 26%, which, quite frankly, these are numbers that speak for themselves.

[Gerry O'Hara:]

That’s helpful. And apologies if I missed it, I had to join the call a little late this morning, but can we get a little bit of an update on kind of the traction that the Connectus platform has been seeing? I know it’s still relatively early, but is that focused on any specific regions beyond Australia? Or how has that sort of been evolving if you can?

[Rudy Adolf:]

Yes, absolutely. So we are very bullish on Connectus, and we are very bullish in international, but also in the U.S. So we just announced it. And at this point, we – Connectus a total of six deals already. Four of these deals are in Australia. Quite frankly, it’s much of the thought process around Connectus. Really came, my Co-Founder, Rajini and my colleague Molly, just from experiences that we have in the Australian market where this model really resonates just tremendously. So four deals already in Australia, one in the UK and then, of course, one in the U.S. at this point. So we expect that this is absolutely going to continue to expand. We expect that this will – Connectus will be in, not too long a time, one of Focus’ largest partner firms, no question. And it was this kind of hybrid model that we developed that stands between on the one hand, the direct holding company deals, which is, of course, the hallmark of what Focus does and the mergers where we deploy our resources to help our partner firms grow through smaller transactions typically. Connectus is square in the middle between these two. And we think it’s just a tremendous opportunity in just about all the markets that we are operating in.

[Gerry O'Hara:]

Great. Thanks for taking my questions today.

[Rudy Adolf:]

Thanks, Gerry.

[Operator:]

Ladies and gentlemen, we have reached the end of the question-and-answer session. I’ll now turn the call back over to Rudy for closing remarks. Rudy?

[Rudy Adolf:]

Yes. Thank you. And in closing, I would very much like to thank our partner firms for their outstanding financial performance and continued excellence in serving their clients in another quarter marked by volatile macro backdrop. I’d also like to thank our holding company employees for their hard work in serving our partners and continuing to build the business during challenging times. I want to reiterate the value of our scale and the diversity of our partner portfolio and business models and the enduring competitive advantages these attributes create for us. We delivered another strong quarter of growth, achieved a significant milestone in delivering more $100 million in adjusted EBITDA, generated approximately $220 million in LTM cash flow available for capital allocation, and we sustained our M&A momentum. We made solid progress on expanding our international footprint, further diversifying our partnership and increasing our presence in the ultra-high net worth market. We continue to enhance our partners’ ability to deliver integrated, highly personalized services to their clients through the additional value-added services we are now able to provide. Our scale and profitability support a level of innovation and execution on behalf of our partnership that wouldn’t have been achievable just 3 years ago. We are extremely well positioned as the world moves beyond the pandemic and the strong fundamentals of our business will enable us to continue driving superior growth and performance. Thank you all for your interest.