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spk02: Thank you for standing by. Welcome to the Advantax first quarter 2023 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Dee Luttrell. Please go ahead.
spk03: Thank you and welcome everyone to the Avantax first quarter 2023 earnings conference call. On Monday afternoon, following the market close, we posted our earnings release and supplemental information on the investor relations section of our website at avantax.com. I am joined today by Chris Walters, Chief Executive Officer, and Mark Melman, Chief Financial Officer. Before we begin, let me remind everyone that today's discussion contains forward-looking statements 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 included in our most recent 10-K informed 10-Q. For more information on some of these 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 the investor relations section of our website at avantax.com and include full reconciliations of each non-GAAP financial measure discussed to the nearest applicable gap measure. With that, let me hand the call over to Chris.
spk01: Thank you, Dee. Good morning. I'm pleased to share our first quarter 2023 earnings results. After announcing our corporate name change to Avantax earlier this year, we're off to a great start in our first quarter, reporting as a pure play wealth management business with a continuation of our strong operational performance that we reported last night. We delivered record-setting net asset flows with strong inflows of assets and minimal attrition and continued positive momentum in newly recruited assets. Our production retention rates continued to exceed 99% based on the effective support that we provide to our financial professionals, including growth consulting, marketing, and service. Lastly, average production per advisor continues to see steady increase and is now 15% higher than it was just two years ago. Last quarter, we focused our remarks on the significant progress we made on focusing and streamlining operations and capital structure. Since then, we have made additional progress in both areas, beginning with operations for the first quarter. With regards to sales, We drove positive net new asset flows for the fifth straight quarter, largely due to the strong same-store sales flows and limited attrition. Net new assets were at the highest level in years for the organization. Same-store sales across both advisory and brokerage assets outperformed, building on a strong quarter-over-quarter result. From a new store sales perspective, we recruited 54 new financial professionals, including nine new affiliates to Avantax planning partners across five new CPA firms. We've also added 13 financial professionals to our strategic partner program that helps pair up tax and wealth professionals to drive incremental value. Overall, this quarter was a strong indicator of the strength of our tax-focused wealth management model. Coming off a year when both equity and bond markets were down considerably, more existing and prospective clients turned to Avantax Financial Professionals, looking for a more comprehensive and tax-inclusive approach to their financial plans. In addition, our initiatives focused on growth strategies and practice management from our financial professionals and accounting firms, such as our Connect for Growth Conference and our Rise to Elite coaching program. have proven successful as financial professionals participating in these programs are outperforming both their Avantax peers as well as industry benchmarks. Financial professional retention. In Q1, we contained our trend of exceeding 99% production retention, which we believe continues to be best in class. This performance on retention was driven by multiple parts of the business. Our client services and operations team, which continues to achieve superior service and processing metrics. Our elite business strategy team that partners closely with our top performing financial professionals to help them maximize their performance. Our growth consulting team, which provides data-driven critical insights and solutions to our financial professionals to support their growth. Our product and technology teams that continue to prioritize the financial professional's experience and build out digital experiences that are easier to use, more intuitive, and can provide unique value for our financial professionals and their end clients. As we move past tax season, our revamped chapter program, Growth Through Community, is launching to drive more connectivity, education, and accountability. Now onto our mix shift. Our assets under management now are more than 50% of total client assets. This shift was partially enabled by both strong same-store sales, new advisory assets, as well as attrition being concentrated towards commission-based assets. Additionally, we have continued to look to acquire firms that are a good fit for Vantax Planning Partners, our employee-based RIA business. In the past, we have focused our efforts on acquiring independent financial professionals affiliated with Avantax Wealth Management, but we are excited to note that we are now expanding our acquisitions to other wealth management firms not currently affiliated with Avantax Wealth Management and expect to close at least two external deals this year. On capital structure. During Q1, we closed a modified Dutch auction pursuant to which we purchased approximately 8.3 million shares or approximately 17.4% of our outstanding shares for a total amount of approximately $250 million. The tender was funded by cash on hand and $170 million draw from our term loan facility. Additionally, in March, We recommenced our stock buyback program, which Mark will detail in a few minutes. On the Tax Act separation. Finally, I would like to share an update on the Tax Act separation. As part of the sale, we agreed to execute transition services agreements, or TSAs, in several key operational areas to ensure a smooth transition. We expect to complete the services provided by the end of Q3. At that time, we expect to be positioned to deliver stable run rate financial performance for the business beginning in Q4. Now, I'll turn it over to Mark. We'll be happy to answer questions after the prepared remarks. Thank you, Christian.
spk06: Good morning, everyone. The team has continued to execute our business plan extremely well, and we are performing in line with our internal expectations. The investments that we made over the past couple of years continue to drive record-breaking results. We are extremely proud of the efforts of our team over this time period and of our financial professionals who continue to guide their end clients through volatile times. We believe that the business is well-positioned to deliver sustained long-term annual growth. We have delivered another well-executed record-breaking quarter. Avantax broke records for revenues, total net new assets, and assets and advisory accounts as a percentage of total client assets. Now, to discuss our first quarter financial results. Total revenue of $178 million was up approximately 7% from the first quarter of the previous year and up 3% from the fourth quarter of 2022. Achieving this revenue figure continues to be a reflection of the favorable interest rate environment, as well as asset mix shifts we've seen in our portfolio. Transaction-based commission revenues were down slightly from the fourth quarter to $18.8 million, which is a reflection of the higher interest rate environment, which has impacted alternative investments like 1031 exchanges. Year-over-year transaction-based commission revenues decreased 9% during the first quarter. adjusted EBITDA from continuing operations for the first quarter of 2023 with $28.1 million versus $5.7 million for the same period last year. GAAP net income was $1.7 million, or 4 cents per diluted share. Included in our GAAP net income was a finalization of the working capital estimate for the Tax Act sale, resulting in income from discontinued operations of $1.9 million. A couple items of note that I would like to point out are $5.2 million in executive transition costs and $7.8 million in stock-based compensation costs. The stock-based compensation costs include an additional approximately $2 million in costs associated with actions we took earlier in the year to right-size our team. A few other details regarding our performance this quarter. Our payout rate increased in the first quarter to 75.2%. up from 74.2% during the first fourth quarter of 2022. This was driven in part by a larger share of performance coming from our highest tier of financial professionals and the continued mix of assets into advisory-based accounts. We will continue to see fluctuations in our payout rate depending on the concentration of transaction-based revenues, the makeup of net flows, and the mix of assets in the quarter. We ended the first quarter with total client assets of $80.6 billion. That is up approximately 5% sequentially from the fourth quarter of 2022 due to market improvements and net positive asset inflows. Fee-based advisory assets were also up sequentially by approximately 6% from the fourth quarter to $40.6 billion, with advisory assets as a percentage of total client assets and in the quarter at a new record high of 50.3%. Net asset flows into advisory for the quarter were $906 million, with total client assets having net inflows of $932 million for the quarter. This compares to net asset inflows into advisory of $638 million, and total client asset inflows of $495 million for the fourth quarter of 2022. Newly recruited assets were approximately $228 million for the first quarter of 2023 versus $401 million for the fourth quarter of 2022. This decline is a timing issue as our recruitment pipeline remains strong, and we would expect some lumpiness quarter to quarter based on the size of recruits. I would like to turn your attention to cash balances and our sweep-driven revenues. I'll point you to slide number 10 in our earnings presentation deck. This provides a 3 year look back at our test. We balances as a percentage of total client assets. Which tends to fluctuate between 3 and 4% of assets. Similar to our peers, we have noticed that our clients have been repositioning cash assets. To higher yielding products, such as treasuries and money market funds. However, we don't see the assets leaving our platform just reposition. Because of this movement. client cash suite balances have declined year over year to $3.1 billion at the end of March 2023. This is now 14% from the end of 2022, although we had a number of large deposits towards the end of the year that were subsequently invested in the first part of January. Balances started to stabilize in mid-March and have stayed relatively stable since then, with cash balances currently at $2.9 billion as a result of advisory billings that took place in April. Assuming a stable cash balance for the remainder of the year, the most recent interest rate hike in May, and our current sharing amounts, we anticipate a small negative impact to the sweep revenue we expected earlier this year in the low to mid single-digit millions offset in part by stronger equity markets. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $145 million and total debt of $170 million outstanding on our term loan. In early March, we announced the results of the completion of our modified desk auction tender offer. We were able to repurchase and retire approximately 8.3 million shares at $30 per share. The cost of the tender offer of approximately $250 million was satisfied with cash on hand and proceeds from our delayed draw term loan facility. For reference, by the end of the second quarter, we expect to have borrowed the entire amount of the $270 million term loan aid. As mentioned from the fourth quarter, our board of directors authorized the company to repurchase $200 million of our company's common stock. In addition to the purchase of approximately $250 million of shares of the tender offer, so far in the first three months of 2023, We have also purchased approximately 1 million shares of our common stock at a total purchase price of approximately $24.8 million. Also, between April 1, 2023 and May 5, 2023, we purchased approximately 700,000 shares at a total purchase price of approximately $17 million. This brings our total share repurchases through May 5 to approximately 1.7 million shares for approximately $41.8 million. Our capital allocation priorities continue to be returning capital to shareholders, investing in our business to fuel long-term growth, and executing on our acquisition program of independent financial professionals. For the medium term, we expect our net leverage ratio to be between 1.5 times and 2.5 times. With that, let's turn to our full year 2023 outlook. We are reconfirming our previously issued guidance from February. We expect full year revenue between $750 million and $758 million, and adjusted EBITDA of between $124.5 million to $135.5 million. These figures assume 1% market growth per quarter from the end of Q1 2023. As it relates to Fed funds rates, we are assuming no additional rate hikes or cuts subsequent to the May meeting decision. Factors that can drive revenue and profit outcomes include the performance of transaction-based commission's revenues, timing of asset flows throughout the year, changes in cash balances, and the timing of the conclusion of the provision of services under the TSA. Our guidance assumes that we will drive meaningful cost efficiencies in the business that will be realized throughout the year with a larger amount following the conclusion of the provision of transition services in connection with the Tax Act sale, which we believe will be substantially completed by the end of the third quarter of 2023. With respect to GAAP net income, we expect between $25.5 million and $40.1 million, and GAAP earnings per share up between 63 cents to 96 cents per share. We are also anticipating coming in at the higher end, if not a bit higher, of the previously shared range for adjusted expense items relating to the cost of delivering cost savings and transition items related to the sale of tax acts. As a reminder, that range was between $7.8 million and $14.5 million. Lastly, we have received several questions as it relates to our cash suite program and whether we plan to hedge the variable rate tied to the Fed funds rate. We have explored a number of options and intend to hedge a significant portion of our notional balance for between three and five years. We will provide additional details once we enter into a hedging agreement, and thereafter, we'll report quarterly on cash balances, hedged amounts, tenors, and rates hedged. This concludes our prepared remarks. We will now turn the call over to the operator for Q&A.
spk02: Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. Our first question comes from Jeff Schmidt of William Blair. Jeff, your line is open.
spk05: Hi. Good morning, everyone. looking at net flows in the quarter, they look to be about 5%. And that's actually kind of in line with your target. I think if you back out the market growth, it was sort of 4.5% to 7%. So I was just curious how sustainable that is and if you could see that sort of moving up.
spk01: We feel good about the net flows as they're generally in line with expectations. We've had some very positive trajectory on that incredibly important metric over the last couple of years, and we expect to be able to continue to perform well.
spk06: The only thing I would add to that, Jeff, and first of all, welcome aboard. We're glad to have William Blair and you covering the company. It starts with making sure that we don't have a leaky bucket, right? And so our production retention rate and the assets that we've been able to retain really sets us up for really strong long-term growth and asset flows as the folks who are with us today stick with us. And that's a very exciting element of it.
spk05: Great. And just on your shift to acquire wealth management firms that aren't affiliated with the Vantex, I think it's the first time that you've started doing that. Have you done anything to sort of change your strategy in terms of the size or character of the firms that you're targeting? And, you know, even though it's kind of early in that next step, is that are you seeing competitors being pretty aggressive on the recruiting front in this market?
spk01: Well, so in terms of we think of recruiting and an M&A in somewhat separate categories, but on the M&A front and moving off platform, the characteristics of the firm that we are targeting is very similar. We want wealth managers who are aligned with our culture, aligned with our strategy, have a deep appreciation of our tax-focused approach, and largely have a book of business that is aligned to advisory relationships. And so as we move off-platform, we're sticking to the common profile and we see opportunity, which is why we announced that we expect to have a couple of deals this year that are off-platform. Okay, very helpful. Yeah, sorry, I think you also asked a question about recruiting, right, and recruiting in the market. We think of this as independent financial professionals and recruiting them to transition, right, from one broker-dealer to another versus acquiring them. And on that front, we aren't seeing a notable change in the competitive dynamics. It's been a competitive market for multiple years, and it continues to be so. But there's nothing notable in this quarter that's changed.
spk00: Okay. Very helpful. Thank you.
spk02: Thank you very much. Stand by for our next question. Our next question comes from Dan Kernos of the Benchmark Company. Dan, your line is open. Great. Thanks. Good morning.
spk04: Super helpful color, Mark, by the way, and all the cash sweep stuff. So appreciate that. Chris, maybe just on some of the You called out kind of the third-party partner opportunity that you guys have been pursuing. I know you've done that in the past. You've been very successful on both fronts, even when you own Tax Act, doing that. Can you just talk a little bit about sort of contribution runway there and how that's sort of contributing to results that we're seeing and if that's also helping drive sort of better mix, I guess, if it's helping with recruitment.
spk01: Yeah, and I don't believe that I commented on third-party partnerships. However, we have talked about it in the past, and we look to partners. We have multiple software partners that, TAC software partners, that work with us and give us access to their client base to introduce the wealth management opportunity. We've never provided specific data on how significant those contributions are. It's one of many tactics that we employ to reach the right target accounting firms that can be great partners for our business. We continue to see success through those forms of partnerships, but haven't provided any specific data on the size or magnitude of them.
spk04: And on the off-platform stuff, you know, so I'm assuming when you say similar characteristics, I assume you also mean size-wise for M&A. And, you know, you and or Mark can kind of take this. You know, as we kind of go through the year, given the success you're seeing in both, recruitment inflows and kind of the growth trajectory. Is there any thought to kind of shifting the bucket between cap allocation, between more towards M&A? And I know you can kind of walk and chew gum at the same time, but how do we think about kind of that balance?
spk06: Yeah, it's a constant review of the various options in front of us. You know, what we've said historically is that we look at the share buyback as a benchmark by which we make all capital allocation decisions. To the extent that M&A is presenting an opportunity to add meaningful value, then we're going to take that seriously, right? We're very fortunate to have been successful over the last couple of years in our M&A program, and so expanding out to not just internal or those who are currently affiliated with the van tax wealth management, but also to those who are external, just creates that much more opportunity to make those capital allocation decisions. So, we look at it on a regular basis.
spk04: And just, Mark, just to be clear, one housekeeping question, and I'll step aside. You know, given the last rate hike here, you know, I know you tend to take more of a stable outlook approach, but has your own view internally changed with regards to how long rates may stay at current levels? So I know that you have a differing belief between sort of what long-term rates are and what current rates are. So has that influenced your outlook at all?
spk06: I would say that is above my pay grade. The Fed is going to do what the Fed is going to do based on the data that's being presented to them. What we're doing is trying to support our financial professionals to make the right decisions for their end clients. We will take the rate environment into account as it relates to the hedging program that I discussed at the end of my prepared remarks. Our goal is not to take a position on where things are going, but rather to create stability. The more stable our earnings potential is, then the smarter our decision making as it relates to capital allocation in the long term. So that's really how we think about it.
spk04: Okay. Fair enough. Thanks for the color, guys. Appreciate it.
spk02: Thank you. At this time, I would now like to turn our call back to Chris Wolters for closing remarks.
spk01: Great. Thank you all for joining us today and for your interest in Avantax. We'll speak to you next quarter.
spk02: Thank you for your participation in today's call. Goodbye.
spk01: You may now disconnect.
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