Blucora, Inc.

Thank you for standing by, and welcome to Blue Course first quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be aware that today's call may be recorded. Should you require any further assistance, please press star 0. I would now like to turn the call over to Dee Luttrell, Investor Relations.

Thank you and welcome everyone to Blue Cora's first quarter 2022 earnings conference call. Earlier this morning, we posted the earnings release and supplemental information on the investor relations section of our website at bluecora.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 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 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 blikora.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.

Good morning. I'm pleased to share our first quarter 2022 results with you today. During investor day in June of last year, we shared a number of goals. that when achieved would signal the positive execution of our strategy. I'm happy to report that we have effectively executed on the most critical of these metrics, and we feel better positioned than ever to deliver sustainable, profitable growth. In tax software, we continue to accelerate our top-line growth momentum with an expectation of delivering double-digit growth for TY21, which is ahead of our growth from the previous tax season. This growth is built on having delivered market share gains ahead of schedule, increasing ARPU associated with well-received customer bundles, and continued growth in conversion and retention rates. We also continue to maintain our value positioning and continue to enhance our marketing and partnership efforts that will serve as the primary drivers of new customer acquisition in the future. Relative to our expectations for Q1 in the year, external market dynamics have muted this quarter the long-term benefit of these important efforts. Our planning assumption for TY21 guidance was for the DIY market growth of 3.5 percent, a reversion to historical growth levels and well below the 10 percent and 6 percent we saw in TY19 and TY20, respectively. Based on figures reported by the IRS upon the close of the season, the DIY market year-to-date declined by 3.7 percent when compared to the corresponding date from the prior year, a 7.2 point difference versus our 3.5% expectations. You will see this impact in our financial results this year, creating a revenue gap versus our earlier outlook that all flows through the bottom line. On the wealth side of BlueCore, we succeeded in returning to net positive flows for Q1 and added more than $1 billion in net new advisory assets, a quarterly record in the history of our business. Our production retention rate approached 100% on a nearly flat financial professional account. In addition, our growth from existing financial professionals, we continued to recruit record numbers of assets from new financial professionals into Avantax. More than $500 million in new assets transitioned to Avantax in the first quarter, which represents 56% of what we did in our record year of 2021. Our team is consistently delivering more value to our financial professionals and clients, which is enabling this growth. Similar to our tax business, Avantax's financial results were also impacted by market forces in Q1. Volatile, declining equity markets during the period temporarily offset the benefits of strong execution, and as you would expect, negatively impacted our financial results versus prior expectations. These headwinds, however, pale in comparison to the long-term benefits of the strong organic progress we are making, which coupled with a favorable interest rate outlook has the potential to double the run rate profits of our wealth management business by the end of this year. In essence, exiting 2022 with a run rate of $150 million in segment income, depending on market levels. While we did not achieve the growth that we anticipated in our original Q1 outlook, I've adjusted our full year tax outlook because of the unexpected market headlines I just described. I would note that excluding the impact of these external factors, our Q1 results and updated 2022 guidance falls within our original outlooks we provided. In summary, our strategy is working and we are performing well against it, including meeting or exceeding most of our critical underlying operating metrics across the businesses. which gives us confidence that we are progressing more rapidly than planned in executing our sustainable growth strategy. Let's dive into our business performance, beginning with tax software. Central to our plan to drive TaxAct to profitable, sustainable long-term growth, we committed to improve new customer acquisition, retention, unit growth, market share, and ARPU. While the Q1 financial results and full-year guidance we are providing now reflect an unexpected and we believe temporary decline in the DIY tax market, we are pleased that we made meaningful improvements in all primary areas of focus. So first, customer acquisition. We increased for the season the number of new customers added year over year by 19%. This was particularly strong given the decrease in total filers and associated substantial decline in new customers in the market this year. Our customer acquisition approach really began even before the season started with our award-winning advertising and bowl game sponsorships. We used effective data and analytics to better target and personalize our customer outreach efforts, driving valuable customer engagement. We partnered with several leading brands, including Fidelity, American Express, Capital One, and NerdWallet to grow customer acquisition driven by partnerships. Second, customer retention. our paid federal retention for the season increased by 335 basis points, driven by significant jumps in our year two and year three filers, with both groups exceeding plan. This increases the long-term value of new customers acquired. We were particularly pleased with what we saw in our year two filers, where returning users surpassed our plan expectations considerably. This was driven by our continued improvements in our customer experience, highlighted by Business Insider, which chose TaxAct as the best overall tax software this year. We added important data partnerships, including W2 partners like TriNet and 1099 data partners like Charles Schwab that improved the experience for significant segments of our customers. We offered compelling bundles that were well received by customers. One example of this is our all-inclusive bundle that includes federal and state preparation, refund transfer, e-file concierge, and audit defense. We also delivered industry-leading customer care and tax expert guidance at no cost to the vast majority of customers throughout the year who were looking for the convenience and confidence of access to our agents and our tax experts. Both were important contributors to our conversion and retention success this season, with users of ExpertAssist converting it over 10 points higher than those that didn't use the offering. As it relates to customer care, we answered over 90% of the calls, far above our historical average, which led to higher conversion and higher customer satisfaction. These efforts delivered significant gains, including unit growth. We increased units by 1% this season, when comparing to corresponding end-of-season data for TY20, driven by our acquisition and retention success. We have seen an increase in filing extensions, both in DIY and professional spaces, which we expect will provide a bit more revenue than usual for the business for the remainder of the year. Increased market share. I'm pleased to report that we successfully delivered on the commitment we made at Investor Day to increase our consumer market share. While navigating notable softness in the overall market, we increased our share by 19 basis points. We now have just under 5% of the tax software market as of the end of the season. Increased ARPU. We grew ARPU 11% to just above $50 as we drove strategic mixed shifts, including significant interest in high-value bundles that we tested last year and offered throughout the season this year. We continue to maintain our value federal pricing as we drive ARPU gains through driving greater adoption of ancillary offerings. On the tax professional side of our business, we continue our trajectory of growing share with an increase of 13 basis points to 3.18% of the pro market. As a result, our expectations are to grow the professional business by more than 15% this year relative to 4% last year. Our SMB offering which we believe will serve as a meaningful source of growth in the future, is expected to grow its revenue by more than 20% to over $11 million for the year, which is embedded in our reported consumer figures. Nevertheless, the dip in the DIY market was obviously a surprise for us, as it was for many of our peers and most of our partners. With the benefit of hindsight and initial data, we believe the key drivers were a reduction in the number of one-time filers, specifically those consumers receiving government funds, stimulus and unemployment, and a decrease in labor participation versus tax year 2019 and 2020. We view this as a temporary shift in what is likely to be a long-term continuation of DIY market growth. While, of course, the market decline caused us to update our outlook, I'm pleased that we still expect to deliver both 9% to 11% revenue and segment income growth for the business thanks to the fundamental improvements we are achieving. I'm extremely proud of what our team has achieved in yet another unique tax season. We have a compelling value proposition, made significant progress in all areas of our business, and are well positioned to continue the positive trajectory in future years with tailwinds from a rebound to more traditional market growth rates. Mark will share additional details in a few minutes. Now moving on to our wealth management business. In our wealth management segment, we committed to driving positive net asset flows and growing advisory assets by continuing to improve the overall financial professional experience and recruiting new financial professionals and firms. I'm happy to share that we successfully made progress in each of these areas in the first quarter, and in certain cases, significantly exceeded our plan. We continue to improve the financial professional experience by investing in improved account opening experience and client portal and an elevated service experience through our service consultant program. These efforts, along with others, have led to better FP retention and performance. We have started to meaningfully stem the attrition of our financial professionals, and we beat our net financial professional target for the quarter. There was zero attrition from financial professionals with over 500,000 in growth revenue for the trailing 12 months. And March was our lowest month of attrition in years. We had a production retention rate of 99.6%, which is incredibly strong relative to our historic figures. We also had exceptional recruiting efforts. We brought 85 new financial professionals into Avantax during the quarter. We set a company record. and recruited assets for the quarter exceeding $500 million. As a result of these actions, we saw great asset flows in Q1 with progress that was ahead of our forecast. We achieved positive net asset flows of more than $245 million, which is our best quarter since Q2 2019. Our flows into advisory were over $1 billion, illustrating the continued positive mix shift toward fee-based assets. Our employee-based RIA also continues to grow both organically and inorganically as we provide solutions for independent financial professionals to affiliate with us in our employee-based model and have a turnkey succession planning solution for themselves and their firms. During Q1, we completed two acquisitions totaling more than $100 million in assets coming from our independent channel. Currently, we have over $6 billion of assets in our acquisition pipeline. Our hybrid strategy allows not only for independent financial professionals to have multiple affiliation models and have certain and turnkey succession solution in-house, but also will provide the ability to expand our margins and ROA within the business considerably over time. I am thrilled with the continued progress from our team, despite the short-term impact to this quarter's financial results from a weaker and more volatile equity market, as Mark will get into in a moment. I am confident that the outlook for our wealth business is very bright, driven by the continued improvements in our operating performance and anticipated Fed rate hikes that would provide a meaningful boost to the business's profitability. If the Fed moves in line with the forward curve, we would generate an incremental 20 to 35 million in revenue this year relative to 2021, the majority of which would flow to the bottom line. On an annualized basis, Conservatively assuming a 225 to 250 basis point Fed funds rate, cash sweep revenue would be between 73 and 82 million, annually contributing to a segment operating income run rate of 150 million, as I just mentioned. Now for the company overall. I continue to be encouraged by the company's performance and progress, especially in the face of short-term market-driven headwinds. Our fundamental operating metrics and performance in each business are strong and continue to improve, regardless of the market headwinds. Looking ahead, I'm even more optimistic about the continued execution of our sustainable growth strategy, especially coupled with multiple tailwinds, which should translate to compelling financial outcomes and returns for investors the remainder of this year and in future years. With that, I'll turn it over to Mark.

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 first quarter results as well as our outlook for the year ahead. Starting with first quarter results, as Chris mentioned, this is an exciting time for the business. As you have hopefully observed, the team of Lucora is singularly focused and committed to driving long-term value for our shareholders. Not surprisingly, over time, markets will create headwinds that are outside of our control. However, that does not take away from our strategic focus on the long term and on delivering sustainable growth. We intend to continue to invest in those areas that have proven to generate strong returns, including product, customer support, brand awareness, and enhanced partnership capabilities. As I laid out last quarter, our plan to create sustainable growth platforms while shifting our business toward higher valuation models is on track and, in our view, accelerating. beginning with first quarter financial results. Total revenue was $307.6 million, an increase of 10% versus the first quarter of the prior year. Gap net income was $34.6 million or 70 cents per diluted share versus $27.6 million or 56 cents per diluted share a year ago. Adjusted EBITDA was $67.2 million versus a $64.6 million in the first quarter of 2021 Non-GAAP net income was $52.6 million, or $1.06 per diluted share. Turning now to the tax software segment. Tax software segment revenue for the first quarter was $141.2 million, which represents 14% growth year over year. Segment operating income was $58 million, relative to $50.9 million in the first quarter of 2021. Marketing spend was greater than expected as we saw performance marketing opportunities to acquire customers at attractive cost per new start relative to in-season revenue expectations. In a declining market with fewer new customers than in seasons past, the competitiveness for these customers was higher, and yet we found opportunities to acquire customers at rates that would yield near break-even profitability in year one. Further, we saw an opportunity to continue expanding our brand awareness, which we believe will deliver positive benefits in seasons to come. Further, the first decline in the DIY market, which we believe to be a temporary adjustment from unnatural growth over the previous two seasons, had a significant impact on our results relative to our earlier outlook. As a 7.2-point swing in the plan assumption, 3.7% down versus 3.5% up, impacts top and bottom line by $12 to $15 million for the year, depending upon the impact of extension filings. Adjusting for this market-driven impact, our growth would have been on track with the full-year revenue growth guidance we previously provided. Moving to the wealth management segment, we continued our strong momentum during the first quarter. Wealth management segment revenue was $166.4 million, up 8% year over year. Transaction-based commission revenues were $20.6 million, a decrease of 15% sequentially, which is not uncommon during times of market volatility. Year-over-year transaction-based commission revenues decreased 8% for the quarter. Wealth management segment operating income for the first quarter was $16.4 million, driven by unfavorable revenue performance, as well as the impact of headcount investments made in the second half of 2021, in technology, growth consultants, and support to enhance the experience of our financial professionals and their customers. We believe these long-term investments were critical to our delivery of net positive flows this quarter, strong advisory asset expansion, and the new store sales we continue to generate. The incremental headcount investments in the first quarter of this year were meaningfully lower than what we saw in 2021 as we are comfortable with the current positioning of the business, But we will have full year impacts in 2022 of the 2021 hires that are not offset by top line performance as a result of adverse market conditions. However, we expect these costs to be more than offset by the benefit of an expanding interest rate environment, as I will address momentarily. Our payout rate increased slightly versus Q4, coming in at 75.4% versus 75% in the fourth quarter of 2021. This is driven by three factors. One, greater retention and recruitment of higher-producing financial professionals. Two, the timing of setting payout rates for independent financial professionals, which occurred this period when equity markets were higher than the March quarter end. And three, intra-quarter volatility of the market that affects our employee-based RIA payout rate. I'll address full your outlook momentarily but these impacts to payout rate will not impact our ability to deliver significant growth year-over-year profitability despite difficult market conditions. We ended the quarter with total client assets of $86.1 billion. Fee-based advisory assets were up 11% year-over-year to $40.9 billion, with advisory assets as a percentage of total client assets ending the quarter at a new high of 47.5%, 410 basis points higher than the end of Q1 2021. We saw net inflows and advisory assets during the first quarter of $1.2 billion, a new record. Total client assets had net inflows of $245 million. At the corporate level, unallocated corporate expenses during the quarter came in at $7.3 million. Turning to the balance sheet. We ended the quarter with cash and cash equivalents of $144.2 million and net debt of $416.7 million. Our net leverage ratio at the end of the quarter was three times. For the first quarter, we generated $47.3 million in cash from operating activities and spent $30.5 million on share repurchases. Through March 31st, as part of our share repurchase authorization, We purchased back 1.6 million shares and an additional approximately 200,000 shares subsequent to the end of the quarter for a total outlay of $35 million. Our key priorities for cash remain investing in our business to fuel growth, both organically and via acquisitions of our independent financial professionals, and lastly, returning cash to shareholders. With that, let's turn to our 2022 outlook. As most of the regulars on these calls know, La Cora has historically introduced full-year guidance on the first quarter call in addition to short-term quarterly guidance each quarter. Given increasing volatility in equity markets and ongoing changes over the past few years and how the tax season unfolds, both of which contribute volatility to our short-term results, we have decided this year to begin the transition to providing only annual guidance with quarterly updates on our progress toward these figures. We believe this approach is more consistent with our strategic focus on building sustainable growth and continued profitability gains. As appropriate and where we have near-term visibility, we'll also provide color on quarterly seasonality. As detailed in this morning's earnings release, in our tax software business, we expect revenue between $247.5 million and $251 million and segment operating income of $89 million to $91 million for full year 2022. With the surprising tax year 21 season and the marketing costs associated with targeting a smaller set of new potential customers, along with investments we have and plan to make that will enable us to continue accelerating revenue growth, our profit growth is likely to be in line with our revenue growth this year versus a typical year where we see more attractive flow-throughs. These are purposeful decisions to drive top-line performance over a longer period of time, which we believe will drive more profitability than short-term decisions weighted towards single-season dynamics. For our wealth management business, we expect full-year revenue of $690 million to $720 million and segment operating income of $85 million to $100 million. Embedded within this guidance are assumptions on both market performance as well as Fed funds rate expectations. The low end of the range assumes the S&P 500 maintains its current value as of Friday, April 29th at 4,132 and that the Fed hikes rates 25 basis points at each meeting for the balance of the year. The higher end of our guidance assumes 1% positive movement in the S&P 500 per quarter from the end of Q1 levels as well as the current forward curve of achieving 225 basis point interest rates by the end of the year, which would equate to about $20 million to $35 million of revenue this year from cash sweep, depending upon when 50 basis point rate hikes occur. Assuming that rates end the year at 225 basis points to 250 basis points with no additional hikes in 2023, Our cash sweep revenue would result in between $73 million and $82 million for 2023 alone, likely resulting, as Chris mentioned, in $150 million or more in segment income for the wealth business, depending upon where market levels reside. On a consolidated basis, we expect full-year revenue between $937.5 million and $971 million, adjusted EBITDA between $143.5 million and $162 million, GAAP net income of $22.5 million to $43.5 million, or $0.46 to $0.89 per diluted share, and non-GAAP income attributable to Glucora of $81 million to $100 million, or $1.65 to $2.04 per diluted share. This outlook includes unallocated corporate operating expense of $30.5 million to $29 million. This concludes our prepared remarks. We will now turn the call over to the operator for Q&A. Operator?

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Again, that's star 1 on your touchtone telephone to ask a question. Our first question comes from the line of Dan Kernos, a benchmark. Your line is open.

Great. Thanks. Good morning, guys. A couple just on tax and sort of the tax environment. One, just how did you evolve your marketing spend when it became apparent that the DIY channel of filers was not going to meet? And tangential to that, you guys talked, a lot about driving units through partner channels, and I'm curious how that conversation evolved and, you know, given the backdrop, you know, what kind of seeds you're planting for next year and sort of what your assumptions are from, you know, in a more normalized season, you know, what growth from that channel could look like.

Yeah. So let me take the marketing spin first. So I As we've talked about, we've split our spend into top of funnel spend and kind of performance-oriented spend. And our top of funnel strategy was required to build brand awareness and drive performance and the other elements of our spend. And that stayed pretty consistent throughout the season. Our performance spend... varies based on the cost that we can acquire customers. And as we referenced, we saw opportunities to acquire customers at reasonable expenses, and we really use in-year revenue as a guide. We want to be below that target. And so we were continuing to invest in performance spend as we saw opportunities to do so efficiently. That actually led to a bit more spend in a competitive environment with a smaller number of new customers available. In terms of partnerships, we continue to expand our partnerships efforts, and even in a market that was weaker than anticipated, we saw stronger than expected performance from our partners. And so there were more new customers that came from partners than ever. And we remain optimistic that we'll continue to grow both our partnerships and the performance of partners in future seasons. So we're laying the seeds over the last couple of years to continued strength from partnership channels as it relates to new customer acquisition.

And so with that said, Sorry, Chris. Just with that backdrop, just help us think, you know, as we get into, obviously, the destination tax season, so we don't want to talk about next year, but just as we look forward, you've laid out kind of your investor day highlights. You guys talked about being ahead of schedule on year two, year three kind of cohorts. Clearly, you guys have seen sort of the initial ARPU uptick. that you were anticipating, how do we think going forward about, you know, the balance between unit growth and ARPU here? And given what you've seen from this tax season, is there anything you can give us just around a little more granularity around conversion and retention that would help us sort of backstop your own forecasts?

Yeah, so I'll let Mark provide any specific metrics that make sense to do so. The reason why we're so excited about year two and year three retention rate, the vast majority of revenue in any year typically comes from returning customers. And when you can improve retention rates, you drive increases in the lifetime value of those customers. That allows you to invest more in acquiring new customers. And so we were really excited by the progress. Year two is often the most challenging for the entire industry, right, to drive retention levels higher. And we saw strength both there and with 3+. And so that gives us real confidence that going forward we're going to continue to see high lifetime values and be able to invest in acquiring more new customers. In terms of ARPU, one of the factors that drove a change in ARPU was our purposeful approaches to selling ancillary services, and that includes some bundling approaches. And we continue to see opportunity with that in the future. It was also a change in the mix of filers that were available in market. When you have a smaller number of filers at the low end of the market, ARPU will go up. Mark, I don't know if you want to add anything to that.

Hi, Dan. It's good to hear from you again. It's a bit early to comment on future seasons at this point, considering we're just a couple of weeks out from the season having been completed. What I will say is a lot of the underlying metrics and KPIs that you mentioned, retention, conversion, those are all critical to our ability to have confidence to invest, to invest in acquiring new customers, recognizing that their lifetime value is that much more attractive than before we were able to see positive movements in those metrics. So over the course of the next several weeks and months, we'll continue to assess the data, see how the market evolves, and we'll be able to provide more guidance on how we expect next year and the year to follow to play out.

If I could speak just one last one, and just around wealth management, obviously the markets have been incredibly volatile lately. I don't know if this changes your strategy at all, but does this have any impact on either what you're doing? You've got a long-term plan, but your ability to go after RIA to make some people maybe panic a little bit more, do you offer them sort of a comport and a storm? Is there anything that the volatility in the market – is creating either opportunistically or as more of a headwind internally as you guys kind of pursue your long-term targets?

Yeah, so it doesn't change our strategy or execution in any meaningful way. Obviously, it has some impact, as we noted in this quarter, on financial results. However, the strategy that we have, which is about delivering more value to our financial professionals and their end customers, and we've made some refinements in our recruiting strategy, all of those things are delivering the operating metrics that we were expecting. schedule. And so we believe we continue to do that. Despite volatility in the markets, we're going to continue to see real strength in the business and the outlook for the business.

Great.

Thanks a lot, guys. Appreciate it.

Thank you. Once again, to ask a question, please press star 1 on your touchtone telephone. Again, that's star 1 on your touchtone telephone to ask a question. And as there appear to be no further questions in queue, I'd like to turn the call back over to Chris Walters for closing remarks. Sir?

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

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