Avantax Inc (AVTA) 2021 Q4 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Blucora Fourth Quarter Year-end 2021 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

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

Thank you, and welcome, everyone, to Blucora's Fourth Quarter and Full Year 2021 Earnings Conference Call. Earlier this morning, we posted the earnings release and supplemental information on the Investor Relations section of our website at blucora.com. I'm 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 include risks and uncertainties, and actual results and events could differ materially from our current expectations. Please refer to our press release and our SEC filings, including our most recent Form 10-K and Form 10-Q for more information on some of these specific risks and uncertainties. We assume no obligation to update these 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 the Investor Relations section of our website at blucora.com and include full reconciliations 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. Today, I am pleased to share our fourth quarter and full year 2021 results. Overall, in 2021, we made significant progress executing our sustainable growth strategy for the company and are pleased to be ahead of our long-term growth goals. We generated strong financial results while investing for future growth, deepening our relationships with customers and financial professionals, strengthening our platforms and laying the groundwork to build on the significant opportunities we see ahead. Our financial results exceeded expectations, including delivering revenue growth of 17% and adjusted EBITDA growth of 46% for the full year 2021.

We believe that executing on our growth strategy is key to realizing the full value of Blucora's differentiated tax-focused businesses. As we have said, this strategy is not operating in isolation nor without a time frame. We have laid out clear goals and KPIs for our business over the next several years and consistently judge our progress against a wide range of value-creating alternatives through the company's business structure and capital allocation. Our approach across both businesses has been to continue to focus on 3 key drivers of sustainable growth. First, customer acquisition, which is finding unique ways to bring new customers and financial professionals to our business, including innovative marketing and partnerships. Second, customer retention, is building valuable long-term relationships with our financial professionals and customers by providing best-in-class experiences with great products and services. And finally, realizing crossover benefits between our 2 businesses, which is operating high-quality and efficient shared functions, extending our TaxAct technology and marketing capabilities to benefit Avantax as well as introducing wealth management opportunities to TaxAct Pro's customers. With support from our Board of Directors, our leadership and, most importantly, our teams, we made significant progress in each of these areas.

Now I'd like to provide an update on our businesses, beginning with our Tax Software business. TaxAct had a very solid year in 2021, reaching a critical inflection point on the path toward unit share gains and ARPU growth, which, as we have said, are key to unlocking the value of this business and driving profitable growth. In particular, for the first time since 2014, TaxAct was flat on consumer units at 3.2 million after having declining unit volume for a number of years. This is a critical step on our stated expectation of growing units and building share through embracing our value position. As a result, we had a strong finish to the year, exceeding our midpoint guidance of $226 million in revenue. Just as crucially, our customer satisfaction scores continued to improve with Net Promoter Scores up an additional 1.5 points on top of the prior season's historical high, thanks to our continued investments in product and user experience. We tested and iterated on product enhancements to deliver the most value to taxpayers this tax season with a focus on improving product flow and customer data entry.

These results give us solid confidence about our outlook for 2022. When we released our Q3 2021 results in November, we gave our preliminary outlook for 2022 segment revenue to be up between 14% and 18% from fiscal year 2021. And for our 2022 segment operating income of between $98 million and $106 million, representing 26% growth relative to the midpoint of our fiscal 2021 guidance for the business.

Today, we are reaffirming the strong 2022 guidance for our Tax Software business. The team and I are confident and excited about the year ahead. Heading into the 2021 tax season, we are bullish about the potential benefits to be realized from our product enhancements, marketing improvements and partnership investments.

Although it is early in the tax season, I would like to share some initial observations. Over the last several years, we have seen a shift of filers starting and completing their returns later in the season. This shift has accelerated in tax year 2021 as the number of reported e-files by the IRS roughly 2 weeks into the season is approaching 50% below what has been seen in past seasons. This relatively low number of filers makes it difficult to comment definitively on certain elements of the season. That said, we are already seeing a number of areas for which we previously forecasted improvements performing at or above expectations. This season, we are focused on several areas to support our customer acquisition and retention. To support customer acquisition, we focused on partnerships and marketing initiatives. Taking our learnings from prior seasons, we continue to invest in partnerships to build brand recognition and drive track. For the 2021 tax season, we have refined our approach with existing partners and added several new partners.

On the marketing side, this season, we are using improved data and analytics to provide enhanced insights into customer behavior as the season progresses. As we saw last year, we expect this will enable us to more efficiently deploy our marketing spend. Our investment in these enhanced capabilities facilitate our ability to rapidly test and optimize our marketing efforts during the season.

To support customer retention, we are focused on product enhancements and customer systems. We've invested in strategic product enhancements to simplify our user experience and increase start rates. I'll share a couple of great examples. During third peak testing, we learned that improvements in how we import prior year data could increase user completion rate. We also made improvements to W-2 and 1099 form import tools and have already seen significant increase in user leveraging.

We remain committed to making the user experience as smooth as possible for our customers. Beyond improving our product, we've also focused on incremental ways to assist our customers. We've made 2 notable enhancements on this front. We launched Xpert Assist, which provides filers of all types access to a team of CPAs and tax experts at no additional cost. Xpert Assist can guide customers through complex tax situations as a powerful component of our value positioning because easy access to expert help is typically an incremental charge for users of competitors' paid products. We also increased our customer care investments to be able to provide direct human assistance to a significantly greater percentage of customers than prior seasons.

Now on to the wealth management side, where we've continued to see the value in our hybrid independent broker-dealer in-house RIA approach to wealth management. The combination of Avantax Wealth Management and Avantax Planning Partners enables us to offer multiple affiliation models, which presents unique opportunities for us to better service our financial professionals and CPA firms. Heading into last year, we were focused on several initiatives. In customer acquisition, the focus was on recruiting new firms and scaling our employee-based RIA model. On the customer retention front, we were focused on continuing our progress with several initiatives, which also benefit customer acquisition. These include improving the overall experience for our financial professionals and their clients and enhancing our technology and service capabilities to provide additional customized resources to our financial professionals to help them grow their practices over time.

I'd like to highlight how we made progress on each of these areas last quarter. On the customer acquisition and recruiting front, it was a great quarter. We welcome 49 new financial professionals, adding $330 million in total client assets. To improve customer retention, I'm pleased to share that we are making meaningful progress in meeting the needs of our financial professional community. Our fall 2021 financial professional satisfaction survey results improved by 20 percentage points since spring 2021 and 33 percentage points since fall 2020. These results were driven by enhancements in our financial professional, customer service and technology.

On the tech front, we've made several improvements. We launched the first version of a new client portal to a pilot group of financial professionals, and we'll continue to expand this portal's availability to all firms throughout 2022. This exciting new feature will directly enhance the experience that end clients have when working with our financial professionals and will be the foundation of how end clients and financial professionals collaborate. We also launched new account opening and off-platform asset transition tools to help increase financial professional efficiencies by saving time and decreasing overall processing docs.

Finally, we expanded our consultation services to boost firm efficiency by using sophisticated data and analytics to provide proactive advice to financial professionals on how to become more operationally efficient as they grow, thus boosting their profitability potential.

We believe our increased investments across wealth management segment will continue to provide a more enhanced cohesive suite of services and opportunities to support our financial and tax professionals and help them grow their business. In addition, in 2021, we acquired 8 RIA firms to scale this portion of our business. This initiative is a compelling capital allocation opportunity, in addition to supporting our customer acquisition and retention efforts as well as enhancing cross-business synergies. Together, these acquisitions have added approximately $1.9 billion in assets under management to our employee-based model, which, as a reminder, is meaningfully more profitable than our independent broker-dealer model. The model for each of these deals has us approaching a margin profile double that of our wealth business today.

As this continues to present a compelling opportunity to the business, we will allocate capital in line with our communicated capital allocation priorities of maintaining a strong balance sheet, driving organic growth and returning capital to shareholders. We plan to increase the number of RIA acquisitions during 2022. In addition to our focus of executing to improve the fundamental value drivers of our business, we are set up to benefit greatly from the macro-environmental factors that we believe likely lie ahead.

Market volatility can increase fees as the value of the assets under management impacts our revenue. In a market in which asset values are under pressure, our fees will be lower. Conversely, as asset values increase, so too will our fees. That said, the profit-sharing model in place with our financial professionals mutes the impact of market volatility. But the effects of increasing rate environment flowing through to the bottom line is much more significant.

As everyone on this call no doubt appreciate, the near 0 interest rate environment over the past few years has been unprecedented. This has severely impacted cash sweep revenue, which is a critical input for our wealth management business. As we have repeatedly said, a return to historically normalized interest rate environment represented a significant opportunity for additional revenue, which will positively impact Blucora's earnings. As the interest rate environment normalizes back to conventional pre-COVID rates, sweep revenue will once again be a source of high-margin income for the business. As an example, upon reaching a Fed funds rate of 125 to 150 basis points, Avantax will generate incremental annual segment operating income of between $40 million and $50 million assuming today's level of assets, among other factors. This is a key component of our earnings power. Due to the timing of rate increases and the nonlinear nature of upside associated with the first 4 rate hikes, we won't see all the positivity hit our P&L in 2022. But based on what the forward interest rate curve implies, we will return to normalized levels in 2023.

Now let's talk about Blucora overall. As I complete my second year as Blucora's CEO, I want to reiterate how encouraged I am by the company's progress and how optimistic I am about our growth outlook. We are making solid headway returning TaxAct and Avantax to sustainable, profitable growth, which is essential to unlocking Blucora's value. We have focused on empowering our teams, supporting our financial professionals and exceeding the expectations of our customers. I'm pleased to see the satisfaction improvement we have made with each group, and this bolsters our confidence in the future. As the macro environment begins to revert to pre-pandemic norms, headwinds of the past few years are becoming tailwinds and expected to boost our earnings and shareholder value substantially. I believe the steps we have taken to reposition our business, coupled with the continued execution of our differentiated strategy, have the potential to create tremendous value for our team, our financial professionals, our customers, and ultimately, our shareholders. I look forward to continuing our progress throughout this year.

With that, I'll turn it over to Marc to outline our Q4 and full year 2021 financial performance.

Thank you, Chris, and good morning, everyone. It's great to be with you all again. I'd like to provide some additional detail on our fourth quarter and full year results as well as our outlook for the quarter ahead.

Starting with fourth quarter results. As Chris mentioned, we are thrilled to have executed well across the board, exceeding the midpoint or high end of our guidance across most metrics. 2021 was a strong year for the business, one which saw our TaxAct business return to meaningful revenue and profit growth and considerably higher margins versus the prior year. Further, our wealth management business saw a shift of over 400 basis points toward higher ROA advisory assets as a percentage of total assets and an expansion of almost $2 billion of assets to our RIA model. Our plan to create sustainable growth frameworks, while shifting our business towards higher valuation models, is on track and expected to accelerate.

Now on to fourth quarter financial results. Total revenue was $178.3 million, an increase of 15% versus the fourth quarter of the prior year and above the high end of our guidance. Total revenue was driven primarily by the wealth management business. GAAP net loss was $23.7 million or (inaudible) loss per diluted share, both of which outperformed the high end of our guidance. As a reminder, the fourth quarter is a seasonally small quarter for our tax business and we typically generate a consolidated net loss for the period. Embedded within our GAAP net income figure is a $2.9 million increase in the fair value of the HKFS contingent consideration earn-out, which we still believe will be paid out in full at $30 million as well as a $12.1 million tax benefit primarily associated with the reduction in our valuation allowance. Adjusted EBITDA, which outperformed the midpoint of our guidance, was negative $3.8 million versus a positive $2.2 million in the fourth quarter of 2020. Non-GAAP net loss was $14.1 million or a loss of $0.29 per diluted share, which outperformed the high end of our guidance.

Turning now to the Tax Software segment. Tax Software segment revenue for the fourth quarter was $6.1 million, which outperformed the high end of our guidance as the backlog of the IRS was significantly reduced, helping to drive overperformance. For the year, the Tax Software segment delivered $227 million of revenue, representing 8.7% growth versus the prior year. Consumer e-files were $3.2 million for tax year '20, which, as Chris mentioned, is flat to tax year 2019, the first time we have maintained or grown our e-file volume in at least 6 years. This is a testament to our team and the strategy they are executing. This is a big moment for the business and is another signal of our turnaround towards healthy unit-driven growth. Segment operating income was negative $18.6 million, which outperformed the high end of our guidance. We continue to operate the business prudently from an expense standpoint, maintaining the financial flexibility to invest in a number of marketing opportunities ahead of tax year 2022 such as the ESPN Bowl series, which exceeded our expectations for brand awareness.

Moving to the wealth management segment. We continued our strong momentum during the fourth quarter. Wealth management segment revenue was $172.2 million, above the high end of our guidance and up 2% sequentially. Transaction-based commission revenues were $24.2 million, an increase of 8% sequentially. Year-over-year transaction-based commission revenues increased 22% for the quarter and 20% for full year 2021. On a year-over-year basis, total wealth management revenue was up 15% for the quarter and 21% for the full year. Wealth management segment operating income was $21.9 million for the fourth quarter, above the midpoint of our guidance driven by favorable revenue performance, offset by incremental headcount and investments in technology to enhance the experience of our financial professionals and their customers. Our payout rate decreased slightly versus Q3, coming in at 75.6% versus 76.1% in the third quarter of 2021. We will see fluctuations in payout rate depending on the concentration of transaction-based revenues and makeup of net flows; and lastly, the type of assets for which we have quarter-to-quarter movement.

We ended the year with total client assets of $89.1 billion. Fee-based advisory assets were up 18.5% year-over-year to $42.2 billion with advisory assets as a percentage of total client assets ending the quarter at a new high of 47.3%, 440 basis points higher than the end of 2020. We saw net inflows in advisory assets during the fourth quarter of $780 million, with total client assets having net outflows of $562 million, which relates in part to our change in focus towards higher ROA on platform assets and lower ROA off-platform DTF assets where it makes sense for our customers.

I would now like to turn your attention to Slide 6 in the earnings presentation. Over the last 24 months, a key strategic imperative has been to shift our business development focus to attract more established financial professionals with higher expected long-term retention. This has been a success. We have driven our newly recruited assets for full year 2021 to $929 million versus $363 million in 2020 at an average of $407 million for the years 2017 through 2019. Our expectation for 2022 is for meaningful growth over 2021. This focus on fewer but more productive financial professionals has greatly increased recruitment of assets. And so while we continue to share financial professional accounts and discuss the drivers of movement, our strategic focus will continue to primarily be on assets and our drive towards positive net new assets in 2022.

At the corporate level, unallocated corporate expenses during the quarter came in at $7.1 million as we continue to manage our corporate costs prudently. During the quarter, we had about $3.9 million in acquisition and integration costs related to HKFS and First Global, with the vast majority of it related to the increase in fair value of HKFS contingent consideration that I previously mentioned.

Turning to the balance sheet. We ended the quarter with cash and cash equivalents of $134.8 million and net debt of $426.5 million. Our net leverage ratio at the end of the quarter was 3.1x. For the full year 2021, we generated $36.8 million in cash from operating activities, which includes a $16.9 million onetime settlement with the SEC that dates back to the First Global acquisition. Our key priorities for cash remain investing in our business to fuel growth and returning cash to shareholders. As it relates to returning cash to shareholders, we commenced share repurchases in the first quarter of 2022 under our expanded $100 million share repurchase authorization announced in December. Through February 15, we have purchased roughly 500,000 shares or about 1% of outstanding shares for a total cash outlay of about $8.5 million.

With that, let's turn to our first quarter 2022 outlook. As is customary, we will provide second quarter guidance and full year guidance during Q1 earnings in early May. For first quarter in our Tax Software business, we expect revenue between $150 million and $175 million and segment operating income of $57 million to $77 million. As Chris mentioned earlier, the tax season is off to a significantly slower than usual start, which makes it a bit difficult to pinpoint which e-files will come through at the end of March versus the first 2 weeks of April. We, therefore, have a wide guidance range to take this phasing uncertainty into account. This has no impact on our view for the full season.

For our wealth management business, we expect first quarter revenue of $164.5 million to $171.5 million and segment operating income of $19.5 million to $22 million. On a consolidated basis, we expect first quarter revenue between $314.5 million and $346.5 million; adjusted EBITDA between $69 million and $92 million; GAAP net income of $38 million to $62 million or $0.75 to $1.23 per diluted share; and non-GAAP income attributable to Blucora of $52.5 million to $76.5 million or $1.04 to $1.52 per diluted share. This includes unallocated corporate operating expense of $7 million to $7.5 million.

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 Jackson Ader with JPMorgan.

The first one is on the slower start to the tax season. I guess 2 parts. Number one, what are kind of the main drivers as to why tax seasons seem to be getting later and later as we move in recent years? And then secondly, what type of -- I don't know. Are you shifting some of your marketing or partnerships or any kind of spend in order to capture some of these later returns that might come in, as you said, into March, early April?

Sure. There's no way to know precisely exactly what's driving the shift, but we think there are a number of factors that are leading to the consistently kind of pushed-out demand. And I would say this season, a few of the primary contributors are. There's a variety of things that taxpayers are a bit -- confuse us about. One is child tax credits. A second being the stimulus dollars will be treated. And some of that confusion leads to a delay in terms of when they actually start and complete. There's also just more dollars in the market within consumers' hands based on the stimulus funds that have been provided and many early season filers are often securing some dollars, and that's particularly with some of the storefront operators that cater to kind of the lower end of the market. They secure dollars in advance of getting their returns. And so I think all of those things are contributing to some of the delays in demand.

In terms of our actions, we've talked about how we've built a more flexible approach to marketing. Obviously, the first year of the pandemic, we were caught by surprise because the seasons were so predictable in the past and had locked in a fair amount of our marketing spend. And ultimately, in future seasons, we've built a more flexible approach. We are constantly monitoring demand and market and then we shift our dollars and also work closely with our partners to shift our actions to make sure that we're actually capitalizing at the points where there's greatest demand.

Okay. All right. Great. And then so on Xpert Assist, any -- and I know it's early, but are there any kind of data points you can share on the uptake of Xpert Assist? And then also what kind of impact will Xpert Assist have on gross margin given, I assume, there's a big cost associated with hiring the experts and not necessarily the same type of price per return uplift?

Yes. So we are excited about Xpert Assist because it really allows us to continue to embrace our value positioning and helping taxpayers through a filing experience that, honestly, for some of them have complexity. Over the course of the season, as you progress through the season, there's more and more complex filers. And so the utilization rate will grow as each month progresses in the season. I don't believe we've shared any utilization rates and so I can't share any now.

And Marc, do you want to comment on the margin impact?

Sure. Jackson, thanks for the questions. So as it relates to the Xpert Assist and impact on margins, there is an offsetting benefit to the cost in terms of attracting new users to the tool as well as just retention rates and what have you from existing users. And so our expectation, based on what we believe the uptake will be and the benefit associated with new customers, is that it should be a wash and should actually drive additional top line but allow us to maintain our margins going forward.

And we have a question from Dan Kurnos with Benchmark Company.

Sorry about that guys. I had to double mute my earphone and my phone, sorry. Hopefully, you can hear me now. Chris, just kind of given the commentary that we've heard from you guys into it now just on sort of timing of the tax season and sort of lack of visibility, obviously, you guys are seeing something or at least have kind of your double tested your models to confirm just this tax guide. Is there any thoughts on perhaps mix shift in terms of units, so whether it's coming from partnership, which you mentioned but didn't really talk about extensively in the prepared remarks versus kind of what were considered D2C or assisted? Is there any mix shift that you're anticipating given the complexity? And how much are you -- we've seen a lot of commentary about inflation weighing in on people moving up. Obviously, wage brackets and some complexity in filings, which while that would push assist, it also suggests that you might see some healthier ARPU gains if there are incremental forms or other things that people would need to pay for. So how much is that weighing in on or influencing kind of your thought process in this relatively early tax season?

As we said, it's early. But what we see, we are optimistic about some of the ancillary services that we have as well as some of the packaging or bundling things that we tested at the end of last year and third peak. And the early signs are some of the optimism that we had about those opportunities. They link to my remarks where I said we're seeing some positive signs on them. And so we haven't shared any specific guidance on any mix shift. But as I said, we've seen some really positive signs on some of the packaging and bundling and ancillary products that we tested in third peak last year.

And is there any way to quantify -- I mean I assume the answer is no, but is there any way to quantify if there's a change between the ARPU and unit growth expectations given to the start of the tax season?

No. Dan, it's Marc. I'd say it's too early to be able to comment on that. I mean there are a number of factors that go into what we ultimately report for tax season. And so like Chris mentioned, a lot of the areas that we tested last year are playing out favorably. But it's a bit too early to comment on those particulars.

Okay. Fair enough. On wealth management, just out of curiosity, historically, it's been about a $2 million impact to segment income for, I think, every 100 basis point move in the S&P relative to your own forecast. And obviously, there's been some market volatility which you called out. You guys are shifting to RIA. Is that -- and Chris, you mentioned that kind of the profit-sharing model that's starting to get a bit muted, and you had very strong net inflows, frankly, at the end of the year. So I'm just trying to get a sense. I'll get into interest rates in a second because I'm curious but -- on the assumptions there. But is that the right way -- are we still thinking about that level of sensitivity or this shift towards RIA starting to further dampen kind of the general market impact, understanding you'll always have some just due to the nature of the business?

I'd say the $1.5 million to $2 million is still an appropriate range to use for every roughly 100 basis points. While we are seeing really exciting growth within the RIA, a majority of our assets still reside within the independent broker-dealer. And so that's a good number, Dan.

Okay. And then just on the sort of the interest rate hike, I mean, I think Goldman put up 7 now this year. I think it's a race to see who can guess how many more they're going to be. But -- and you guys kind of resized or restated the impact. I'm curious, Chris, I know you guys haven't given full year guidance yet, but how should we be thinking about -- obviously, at the Investor Day, you made very limited assumptions around that. I would expect that you'll continue to conservatively -- make conservative forecast around the benefit from that. But just can you remind us of the cadence of how quickly that flows through?

And really higher-level question for me is, if you have that incremental operating income that gives you a little bit more flexibility to either delever buyback, which you said you started doing or be more aggressive on the RIA side. And so maybe it's a combination of all 3, but I'm just curious how you would look to utilize sort of the incremental cash flow that, that could generate.

Let me let -- I'll let Marc take the capital allocation question. But first, in terms of what we shared at Investor Day, we had not made any assumptions. There's nothing embedded in our outlook that included interest rate increases, right? At that point, we did share a perspective on what the value might be associated with it. And today, we've shared kind of an annualized view. Obviously, these kind of flown over time based on when the changes are made. And so the full year impacts are dramatically larger than what might be realized within the year.

Why don't I turn it to Marc to share a little bit more about capital allocation?

Sure. And just to piggyback on what Chris was saying. As it relates to Fed rate increases this year, the first 4 rate increases don't impact the P&L in a linear fashion, right? So -- but by the time we get to 100 basis points, there is about a $28 million to $30 million impact. And as we mentioned in the prepared remarks, $125 million to $150 million will give us an annualized value of $40 million to $50 million. And so it's all going to come down then to the timing and the magnitude of each one of those rate hikes. And while we will likely see some positivity this year, it's all going to depend on the timing. As it relates to the full year, obviously, we're not providing full year guidance until Q1 earnings. But during our Investor Day, we offered long-term guidance of somewhere between 9% to 12% annually operating segment income growth for the wealth management business and all else being equal, right? So if we remove any sort of volatility in the market through this first quarter and any sort of interest rates, you would expect us to be somewhere in that 9% to 10% range growth on operating segment income.

Now as it relates to capital allocation, we're very much looking forward to getting that additional capital and cash into the business. And our priorities remain the same, right? So it's to fuel organic growth. It's to return capital to shareholders. And it's to maintain a strong balance sheet. And so depending upon which of those turns out to be the best use of capital is where we will point it .

And that's all the questions we have. I'd like to turn the call back to Chris Walters for closing remarks.

Great. Thanks so much for joining us. We look forward to talking again next quarter.

This concludes today's conference call. Thank you for participating. You may now disconnect.