Avantax Inc (AVTA) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the First Quarter 2021 Blucora Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your host, Dee Littrell, Investor Relations. Please go ahead.

Thank you, and welcome everyone to Blucora's First Quarter 2021 Earnings Conference Call. By now, you should have had the opportunity to review a copy of our earnings release and supplemental information. If you have not reviewed these documents, they are available on the Investor Relations section of our website at blucora.com. I am joined today by Chris Walters, Chief Executive Officer; and Marc Mehlman, Chief Financial Officer.

Before we begin, let me remind everyone that today's discussion contains forward looking statements based on the environment as we currently see it that speak only as of the current date. As such, they risks and uncertainties and actual results and events could differ materially from our current expectations. Please refer to risk factors in our most recent Forms 10-K and 10-Q for more information on some specific risks and uncertainties. We assume no obligation to update our forward-looking statements except as required by law.

We will discuss both GAAP and non-GAAP financial measures today. Our earnings release and supplemental financial information are available on blucora.com and include full reconciliation of each non-GAAP financial measure discussed to the nearest applicable GAAP measure.

With that, let me hand the call over to Chris.

Thank you, Dee, and good morning, everyone. It has been a busy but productive first quarter of 2021 as we continue to execute on the vision we have laid out for the business. We've made great strides in positioning the business for long-term sustainable growth all while focusing on expanding profitability.

Before I delve into the details of the quarter, I would like to address the annual meeting. First, on behalf of the Board, I want to thank shareholders for their support as we continue to execute on the strategy for the company.

That said, I want to acknowledge the valuable engagement and feedback we received during extensive conversations with investors and reiterate the Board's and management's commitment toward effecting positive change and maximizing value for all shareholders.

Transparency is essential to this commitment. During our Investor Day planned for June 15, we will dive into the long-term financial projections for our 2 business segments, including both the significant value that can be created by executing sustainable growth strategies for each segment, as well as the crossover benefits between them that can deliver incremental growth and value to our shareholders, financial professionals and consumers.

Now that we are nearing the end of the extended 2020 tax season, we are looking forward to engaging with our investors around the KPIs and financial expectations of the strategy on which we are executing.

I want to reiterate our commitment to driving shareholder value in whatever form that may take. Our Board takes diversity of thought and perspective seriously, within the boardroom, across the company and from our shareholders and has, and will continue to evaluate all avenues for driving maximum shareholder value. With that, let's turn our attention toward the highlights of the first quarter.

As you know, the IRS extended the 2020 tax filing deadline to May 17 for most states, and for Texas, Louisiana and Oklahoma to June 15. While this has some impact on our business, having learned from our experience last year, we are in a much better position to manage the effects of this change. As Marc will discuss shortly, during the current 2020 tax season, we haven't seen a material financial impact from this change relative to the 2019 tax season, other than as expected a change in the timing of revenue, which Marc will address.

As it relates to the season with a critical 12 days left, we are upping our guidance for segment income driven by ARPU and more efficiently executing on our revenue growth performance. We will provide more detail on the drivers of performance during Investor Day.

A few observations on the TaxAct business that we can share at this point. We have embraced our value position. We lowered federal pricing this year for the first time in at least 5 tax seasons. Depending on the point in the season, we had a 20% to 50% discount relative to the market leader. We believe this pricing advantage and messaging campaign will grow in awareness over the next several tax seasons.

We continue to have strong NPS scores, which should translate into attractive retention metrics for the business, which is what we've seen off of last year's NPS improvements through this point of the season relative to last year.

Further, as expected, the launch of our hybrid assisted offering has enabled us to drive ARPU this season. For the first full year, we are pleased with the results and the learnings and see this as a launching pad for even greater adoption and growth in the future.

As we have discussed in the past, there are meaningful governmental restrictions in place limiting our ability to use customer data for marketing purposes without customer consent. Our goal of driving consent across our user base has been largely successful with approximately 72% of customers providing consent as of April 30. This customer consent facilitates engagement throughout the year.

Lastly, our new marketing team has made great strides in their first full season. As a reminder, we revamped virtually the entire marketing organization and launched new technology tools this season. We've been able to execute on a number of tests throughout the season that have provided us with insights that helped us maximize the cost-effective growth potential of the business. There is more work to be done, but we are pleased with the way this team has executed this season. We look forward to providing more detail on our progress in these areas and others, including their impact on KPIs and financial results at the upcoming Investor Day.

Moving on to wealth management. As we have discussed, Blucora's independent financial professionals have experienced a significant amount of change over the last several years, as would be expected with clearing platform changes, integration of acquisitions and changes in the regulatory environment. This has resulted in some predictable turnover, including during the first quarter. But in most cases, attrition has been in line with our expectations as we continue to improve financial professional relationship management, accelerate service and operational improvements and roll out technology-related experience enhancements throughout the year.

We remain optimistic about the potential of our differentiated tax-focused wealth management strategy. We're also very encouraged that top-quality financial professionals from other firms are taking notice of all of our efforts and choosing to affiliate with us.

And now a few highlights for the quarter. The business set a record in March for the greatest amount of gross inflows into advisory at $2.1 billion. We believe this is evidence that our efforts and focus towards comprehensive financial planning and advisory are starting to take hold. Of the 143 departing financial professionals in Q1, 117, or approximately 82%, were nonproducing financial professionals, which is defined as less than $50,000 in rolling gross production. This compares to 71% of departing financial professionals in Q4 2020.

Our production retention rate in Q1 was 98% compared to 96% in Q4 2020. Our business reached a significant milestone in Q1 with our first financial professional exceeding $10 million in gross dealer concession or advisor-driven revenue. While at the same time during the quarter, we brought on 67 new financial professionals, with 18 of them newly licensed affiliates entering the wealth management industry. We continue to be a destination for both large, experienced firms as well as those who seek a pathway towards greater diversification in their revenue streams.

Our RIA growth and in-house succession plan whereby we provide an opportunity for independent financial professionals to be acquired into the RIA continues to accelerate with more than $3 billion in assets in our pipeline as of April 30. Early acquisitions executed as part of this strategy have delivered above expectations through Q1. The opportunity is compelling for independent financial professionals who want to continue to serve their clients and grow their business with a different affiliation model or those who are interested in a turnkey succession plan.

We acquired 2 critical technology and service capabilities year-to-date. The first, GuideVine Technologies, announced in March, is designed to help our financial professionals with one of their most in-demand needs, increased client prospecting. The second is our recent acquisition of SigniFI, which accelerates our ability to offer value-added marketing services to our financial professionals, through customized agency-style marketing services. These 2 acquisitions provide more resources to our financial professionals to drive growth in their practices over time.

Stepping back, we remain committed to our strategy to improve the financial professional and end customer experience, to complete the integration work from 1st Global and HKFS, now Avantax Planning Partners, and lastly, to facilitate a natural evolution of our assets towards comprehensive financial planning and wherein the best interests of the client, an advisory relationship. Ultimately, we believe this will benefit end clients, our financial professionals and Avantax.

The environment within which we operate continues to pose challenges and I'm proud of the team for their unwavering focus on execution. Whether it be IRS-triggered challenges with stimulus payments, natural disasters affecting our employees based in Iowa and the Dallas-Fort Worth area, a proxy contest, or another extended tax season, our team continues to focus on executing the strategy. Our business is in a strong position, our strategic shift within wealth management is well underway, and our plans to drive growth and expanding margins within tax are on track.

With that, I'll turn it over to Marc to review our Q1 performance and full year outlook.

Thank you, Chris, and good morning, everyone. I'd like to provide additional detail on our first quarter results and our outlook for Q2 2021 and full year. As a reminder, on last quarter's call, we did not provide Q1 full business guidance in light of the potential delay in the tax season, but did provide guidance for revenue and segment income for wealth management along with expense for unallocated corporate activity. I will reference in my comments comparisons to our guidance ranges where applicable.

Now starting with first quarter consolidated results. Total revenue of $278.4 million, GAAP net income of $27.6 million or $0.56 per diluted share. Embedded within our GAAP net income figures are a $6.3 million true-up associated with the Avantax Planning Partners, formerly HKFS, earn-out, which as I've mentioned on previous calls, we expect to be at the full $30 million amount for the first of 2 payments, but accounting treatment doesn't reflect that number until we approach the earn-out date. An approximately $2.75 million impact associated with the proxy contest where we expect an additional approximately $750,000 in costs as the final fees are paid. Income tax provision expense of $1.7 million. Adjusted EBITDA, which excludes these and certain other factors, was $64.6 million. Non-GAAP net income was $51 million or $1.04 per diluted share.

Turning now to tax preparation. Similar to Q1 2020, the timing of revenue generation was impacted by the delay and filing deadlines and demand shifting out of Q1 2021. TaxAct revenue was $123.9 million and segment operating income was $50.9 million.

Moving on to wealth management. First quarter reported wealth management revenue was $154.5 million at the high end of our guidance range and up 3% sequentially, which included a 5% increase at Avantax Wealth Management. This revenue growth was primarily driven by market improvement and a 13% sequential increase in transaction commission revenue.

APP revenue declined modestly sequentially, related to a loss of assets stemming from post-acquisition attrition. On a year-over-year basis, total wealth management revenue was up 7%, which included revenue of $9.3 million from Avantax Planning Partners.

Wealth management segment operating income came in at $19.4 million, close to the high end of the target range, driven by revenue performance and in-line expense expectations.

Total client assets increased 39% year-over-year to $84.8 billion, which included approximately $5 billion from the addition of Avantax Planning Partners. Fee-based advisory assets were up 56% year-over-year to $36.8 billion with advisory assets as a percentage of total client assets ending the quarter at 43.4%.

We saw a net inflows into advisory assets of $369 million with total client assets having net outflows of $869 million, which relates to a shift to on-platform assets, which has increased the ROA for the business.

At the corporate level, unallocated corporate G&A expenses came in at $5.7 million, considerably better than the guidance range. During the quarter, we had about $8.1 million in acquisition and integration related costs primarily associated with HKFS and 1G, with $6.3 million attributed to the mark to market of the HKFS earn-out provision.

We ended the quarter with cash and cash equivalents of $191.8 million and net debt of $370.9 million. Our reported net leverage ratio at the end of the quarter was 3.5x compared to 4.3x at the end of 2020.

As we assess our priorities for capital allocation, we will focus on ROI accelerators, such as investments in RIA acquisition opportunities and we'll assess these versus alternatives such as debt paydown or other opportunities. We remain committed to having a long-term net leverage ratio below 3x.

With that, let's turn to our second quarter and full year 2021 outlook. For the second quarter, we expect tax software segment revenue of between $82.5 million to $87.5 million and segment income of $53 million to $58 million. For our wealth management segment, including APP, we expect second quarter revenue of $155.5 million to $161.5 million and segment income of $17.5 million to $19.5 million.

On a consolidated basis for the second quarter, again, including APP, we expect total Blucora revenue of between $238 million to $249 million. Adjusted EBITDA of between $63 million and $70.5 million. Non-GAAP net income of $47 million to $55.5 million or $0.94 to $1.11 per share and GAAP net income attributable to Blucora of $22.5 million to $31.5 million or $0.45 to $0.63 per share. This outlook includes expected second quarter unallocated corporate-level operating expenses of $7.5 million to $7 million.

For the full year, we expect tax software segment revenue of between $212.5 million and $218 million and segment income of $72 million to $76.5 million. For our wealth management segment, we expect full year revenue, which includes APP, of between $631.5 million to $649.5 million and segment income of $79 million to $83.5 million. This translates to consolidated full year outlook, again including APP, of revenue of between $844 million and $867.5 million, adjusted EBITDA of $122.5 million to $132.5 million, non-GAAP net income of $67.5 million to $80 million or $1.34 to $1.60 per diluted share and a GAAP net loss attributable to Blucora of $12.5 million to net income of $2 million or a net loss of $0.25 to net income of $0.04 per diluted share with $28.5 million to $27.5 million in corporate unallocated expense.

This concludes our prepared remarks. We will now turn the call over to the operator for Q&A. Operator?

(Operator Instructions) Our first question comes from the line of Jackson Ader with JPMorgan.

Great. First one from a high level on the tax side, if we think about all the influx of stimulus filers from a year ago, from the 2019 taxes for the 2020 season, are they sticking around this year in 2021?

Well, so last year, the dynamic you just described ultimately did contribute to really, really healthy market growth. It's hard to predict how much of that will stick around until we get through -- obviously, when we get to the end of the season. And right now, what we saw early in the season was slowness in demand for the entire industry due to the confusion about some of stimulus payments and unemployment payments. But ultimately, we expect some of those units to stick this year, but we won't really know until the end of the season.

Okay. And there was a comment, I think that you made, Chris, on revenue per return. Just to clarify, are you saying that you expect revenue per return to actually be up year-over-year? Or is it better than you guys had expected entering the tax season?

It's better than we expected coming into the tax season.

Okay. All right. Yes. That makes sense. Last one on tax, just, okay, you've mentioned Marc 12 days left. How do you sit relative to where, I think, you would have expected to sit with 12 days left regardless of when the deadline is? 12 days versus 12 days expectations, how do you feel?

(inaudible), Chris?

Yes, that was directed to you.

Sure. What I'd say is we've reaffirmed our guidance on the revenue side and obviously upped our guidance a bit from a profitability perspective. And so relative to our expectations, we feel good heading into the final 12 days. The curves this year and how consumers have been filing has certainly been different than what we've seen over the last 20 years of our experience. Nonetheless, based on our assessment of the market, we feel good with the amount of demand that's left and our expectations of what our share will be.

Our next question comes from the line of Dan Kurnos with The Benchmark Company.

Just maybe, Chris, I know, you're obviously trying to save some dry powder for the Investor Day, but just initial thoughts on hybrid-assist tax rates and to the extent that you are pushing it or looking to expand the product feedback, just anything that kind of gives us some help on how the initial rollout or expansion's gone.

Sure. So we will share more detailed metrics after we get through the end of the season at our Investor Day. I would say generally, we're really excited having officially launched hybrid assisted in January of this year. Our team put a ton of work into it over the last couple of seasons to be ready. That said, it's the first year and there are a number of potential outcomes in terms of how it could play out and we're happy with what we've seen so far and we'll share more specifics when we get to Investor Day.

And then again, not trying to push the envelope, but just in terms of getting users sort of following up on the first question, getting users to move up funnel, you talked a lot about NPS. I think that's helpful on the retention rates, how much education are you guys doing? You raised your profitability a little bit on the tax side, which I think is comforting given sort of the [math that's been] tax season and who knows what pricing will do to the last kind of rush here, but to the extent that you guys are out there pushing brands, talking about the pricing, talking about the delta in pricing, but then even at hybrid-assist, just trying to get people to sort of move up funnel, just the education efforts there. And any kind of granularity you can give us around sort of what you guys are doing, without the specific KPIs to incentivize work, to educate people to make that decision, to drive ARPU higher?

Sure. Well, so first, we talk about ARPU coming in a bit more favorably than we anticipated, but that's driven by higher tax rates across a variety of the elements of our offering.

In terms of what we're doing to educate people about our value pricing and offering elements like hybrid assisted, it's both direct outreach, right, to our customers and former customers via e-mail communication. We also have very clear communication at the beginning or the start of our product and then throughout the product about the different elements of our offering.

And then finally, we are using a multichannel marketing strategy and both value and the feature set or elements of our service offering are highlighted extensively through both traditional media, television and radio as well as all elements of performance digital channels and based on where people sit as they move through the process of completing their taxes, right, we communicate different things to appropriately how it's relevant for them based on what they've done so far.

Got it. That's helpful. And then maybe just last one for Marc, I think there was some noise, especially kind of from an expectation perspective originally around the 1Q wealth management segment income guide, which you then posted a little bit margin attrition sequentially, but nothing to write home about, came in a lot better. The 2Q guide does seem to sort of have the same setup. So I'm just wondering if you could give us maybe some of the puts and takes as we just think about wealth management segment income.

Sure. As we shared, we came in just shy of the high point of our guidance in Q1. We've been making certain investments to ensure the experience for financial professionals is what they deserve. And so some of that hiring took place a little bit later in the first quarter than we would have initially anticipated. There are also certain onetime expenses associated with in-person events, things of that nature. And so from quarter to quarter, you'll have nonrecurring expense items as well as the timing associated with headcount plays into when we may deliver a certain profit number versus another in one quarter versus another.

So the drivers really just have to do with when the hiring takes place and when some of those one-time expenses come into play. But when you think about the full year guidance that we provided, we feel good about where we'll come in relative to that range.

Do those in-person events, I guess, tick up as vaccinations increase, is how we should think about that?

That's correct. Yes, it's one of the things that we're really excited about. We tend to see greater engagement with our financial professionals, as you can imagine, during those in-person events, and there's also a really great positive knock-on effect in terms of their ability to engage with our customers once they come together as a community and share ideas and what's working across the landscape.

(Operator Instructions) We do have a follow-up question from the line of Jackson Ader with JPMorgan.

Just a couple of follow-ups, I know that the proxy vote is over, but I just would like to ask any additional kind of commentary you have on whether there will or won't be some kind of engagement with -- like the continued active investors and any kind of formal process. We saw that there was actually an announcement for the wealth management business upgrade for the wealth management business before the vote. Curious if you've heard any other interest other than the one that was made public.

Yes. So we don't comment on speculation. What I would say is what we've shared publicly before, which is our Board and management team are focused on all different approaches to create value or maximize value for shareholders. And so we'll continue to evaluate all options. In terms of engagement with shareholders, right, we will engage with all shareholders who have interest in our -- deeply value their perspectives. And so we'll continue our past practice of doing so.

Okay. And then just speaking of the Board, saw the announcement this morning of the appointment of Tina Perry. Curious, just what expertise she will be able to bring to either the tax or the wealth business or both?

Yes. So Tina joined the Board months ago and we're thrilled to have Tina join. She has extensive experience in transforming organizations from a performance perspective and culturally. And so as we have put together multiple businesses over the years, it's important that we drive cultural alignment within the company.

She also has extensive experience in media and as you know, one of our largest line items in terms of cost is actually spending on media to support the TaxAct business. And so we're thrilled to have her both general management experience, but also her leadership experience in cultural transformation and performance transformation, and deep understanding of the media landscape.

Thank you. There are no further questions. I will now turn the call back to Chris Walters for closing remarks.

Great. Thank you all for joining us today and for your interest in Blucora. We'll speak to you next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.