Blucora, Inc.

Good morning and welcome to the Blue Cora second quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to D. Littrell. Please go ahead.

Thank you and welcome everyone to Blue Cora's second quarter 2022 earnings conference call. On Monday afternoon, following market close, 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 that speak only as of the current day. 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, 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 bluecore.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 second quarter of 2022 results with you today. Last quarter, we achieved strong operating metrics across the board in alignment with our commitments from Investor Day last year, and our results this quarter continued that trend. While the equity markets have remained volatile throughout Q2, and asset flows have been trending negative in the broader market, I'm happy to report that we've seen positive asset flows into our business. and our second quarter results have come in aligned with our plan for the year. This reinforces my confidence that we are effectively executing on our strategy and that we will continue to drive sustainable long-term growth across both segments. In particular, our performance and wealth in the second quarter was bolstered by continued positive net flows and high newly recruited assets as we attracted some of the best and brightest in the industry, as well as strong production retention rates as we continue to deliver for our existing financial professions. In tax software, we executed to our expectations to deliver our full year guidance. With our financial results on track for the year, despite a volatile macro picture, we are confident in our ability to deliver even stronger results next year driven by continued strong operating performance as well as favorable interest rate impacts. We expect our positive trajectory to deliver valuable free cash flow in the coming years as we continue to deliver differentiated value and services to our customers and clients. It's an exciting time for our business. I'd like to briefly highlight this quarter's performance for each business, and then I'll turn it over to Mark for a deeper dive into segment financials. Let's begin with tax software. With the 2021 tax season now behind us, I'd like to reflect on a few of the achievements this season that will set the foundation as we prepare for next year. Most notably, we increased our consumer market share by 20 basis points, from 4.75% to 4.94%, and delivered meaningful revenue growth across our consumer, SMB, and professional offerings. One of the things that we were most proud of this season, delivering expert help and exceptional customer service, answering over 90% of customer calls in a timely manner to support their tax filing needs. In the first full tax season of offering free expert help, almost 10% of our customers signed up for the service, generating considerably higher conversion rates than we've historically seen. We anticipate this metric to climb as we communicate more broadly about the service next season. Our mission to deliver a full featured value offering that serves as the best alternative to TurboTax, not just in price, but overall experience, is well underway. Looking ahead to next season, we expect to continue to expand the number of partners we work with, as well as the ways that we work with them. Our partnership efforts are focused on three critical areas. Increasing the number of data providers to make it easier for our customers to import their financial information. Driving new customer acquisition by having respected brands introduce Tax Act to their customers. And bringing incremental products and services to our customers. I want to also call out a recent sports partnership highlight. We renewed our Tax Act Texas Bowl title sponsorship as part of a multi-event, multi-year college football agreement with ESPN. We will be a featured sponsor throughout 2022 and 2023 ESPN Bowl games and across ESPN network programming. This is just one example of the approach we are taking to enhance our position as the third most well-known brand in the DDIY tax preparation space. Moving on to our wealth management business. First, I'd like to touch on our exceptional recruiting effort this year. Our 2021 fiscal year recruiting efforts achieved a record-breaking performance of just under 1 billion in recruited total client assets. I'm pleased to share that as of June 30th, we had already surpassed this level with over $1 billion in newly recruited assets for 2022. For the second quarter of 2022, we added 37 new financial professionals, driving approximately $514 million in recruited total client assets. This beat our internal forecast for the second consecutive quarter in a row, the details of which Mark will provide in a moment. Financial professionals are choosing Advantax for a number of reasons, including the strong, collaborative, tax-focused community, high-quality support, growth opportunities they don't get anywhere else, increasingly enhanced technology and digital products, and the direct access to senior leadership that we provide. Lastly, we continue to make progress on the RA acquisition fund. One recent example, we acquired our first wealth management practice in Florida, where the leader, a veteran of Avantax Wealth Management joins us as a financial planning consultant with Avantax Planning Partners. His wealth management practice had approximately $157 million in total client assets as of May 31, 2022. The seller saw the opportunity to spend more time focused on the well-being of his customers, and his presence on the APP team has already been felt. I mentioned community a few minutes ago, and I want to stress how important the Avantax community is for our current financial professionals and as a recruiting tool for bringing in new members. We've been pleased that 2022 has allowed us to re-engage with our financial professionals in person and at local and national events. We recently concluded our Elevate Conference and our Avantax Elite Summit for our Avantax planning partners, affiliated accounting firms, and our top financial professionals, and we're looking forward to holding more of these events throughout the year. While the cost of these events will add to our cost base relative to the last couple of pandemic-affected years, the engagement and chance to learn from each other is our special sauce, and we're thrilled to bring them back. Overall, we've seen minimal, regrettable financial professional attrition year to date, resulting in our production retention rate remaining almost 100%. We have a good pipeline for continued recruiting success, despite market-driven headwinds. We've also started to see some of the benefits from rising interest rates in Q2, with Q3 and beyond appearing to deliver meaningful revenue and segment margins to the business, which should offset the negative impacts of equity market decreases this year and should deliver meaningful upside next year. I'm proud of our company's performance this quarter. We have a lot of reasons to be optimistic about our future performance across the company, not just due to the favorable interest rate environment, but also because of the purposeful investments we chose to make leading into this environment that we believe will allow us to take full advantage of the opportunities that come from operating from a position of strength. 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. As Chris mentioned, we continued to execute effectively and I'm pleased to report continued strong results for second quarter 2022 amidst what is a difficult backdrop for many across the economy. This morning, I'll be providing some additional detail on our second quarter results and our outlook for the balance of the year, which in short is in line with what we shared last quarter, despite the market being down 16% during the second quarter. Starting with second quarter results. total revenue of $256.9 million, an increase of 1% versus prior year, and gap net income of $39.4 million, or 81 cents per diluted share. Embedded within our gap net income figure is a $7 million gain associated with accruals for the HKFS earn out, which ultimately will be paid out at $23 million due to market conditions and the significant decline in advisory asset levels during the second quarter of 2022 relative to what we expected earlier this year. This concludes the payments associated with the HKFS transaction. Adjusted EBITDA, which excludes these and certain other items, was $62.1 million, which represents a 21% decline versus the prior year period due both to the timing of the tax season last year as well as the 16% decline in the equity market affecting wealth. Non-GAAP net income was $48 million, or 99 cents per diluted share, down 24% for the same reasons as adjusted EBITDA. Turning now to the tax software segment, which had results that were in line with our expectations for the quarter. Tax Act revenue was $94.2 million, and segment operating income was $53.9 million. Year-to-date, revenues for Tax Act were up 9.1% to $235.4 million versus prior year, reflecting our market share and ARPU gains, partially offset by a higher level of extensions in Q2, which we expect to come in later in the year. Our total e-files were up 2.4% year-to-date, despite a temporary, we believe, decline in the market for this past season. Consumer e-files were up 2.3%, and professional up 2.6%, with both increasing primarily due to growth in market share from favorable customer retention and acquisition, both of which benefited from our investments in strategic marketing spend and customer care support. Segment operating income for the quarter came in at $53.9 million relative to $63.4 million in the same period last year, as some marketing dollars shifted from Q1 to Q2 this year compared to last. Year-to-date segment income came in at $111.9 million versus $114.3 million for the first six months of last year. With the industry-wide expectation of a faster-growing market last tax year, we pulled some spending forward into the first half to ensure that our support services would meet the benchmark we set for ourselves. As a result of the unanticipated market decline, we took measures to control one-time operating expenses in the second half. As a result, our plan is for second half expenses to come in meaningfully below those of last year, which gives us confidence to reaffirm the guidance we provided last quarter for segment operating income between $89 million and $91 million for the year. Moving to wealth management. Second quarter reported wealth management revenue was $162.7 million, down 2% sequentially as a result of the decline in markets and lower transaction-based commission revenues of 13%, which tends to occur during times of heightened market volatility. On a year-over-year basis, total wealth management revenue was up $274,000 from $162.4 million a year ago. We feel good about this solid performance as the things that we do control, retention, recruiting, more than offset the impact of factors outside of our control including a 16% decline in the equity markets since the end of Q1, and so far, very modest benefits from the interest rate rebound. Wealth management segment operating income came in at $15.9 million, down 3% sequentially, driven by costs associated with one of our larger conferences for the year, and I'll address costs more broadly momentarily. We saw net inflows in advisory assets of $581 million with total client assets having net inflows of $185 million, the second straight quarter of driving positive net flows for both advisory and total assets. Newly recruited assets continued to be a bright spot for the business, as Chris previewed. In the second quarter, we added another $514 million of total client assets, bringing the year-to-date total to just over $1 billion, which surpasses last year's full total of $930 million, which had been a record for the business. Total client assets decreased 13% year over year to $76.5 billion, reflecting broader market declines, partially offset by successful recruiting efforts. Fee-based advisory assets were down 7% year over year to $36.7 billion, with advisory assets as a percentage of total client assets ending the quarter at 48%, an increase of 50 basis points versus last quarter, and up roughly 310 basis points versus Q2 of 2021. I'd like to spend a few minutes discussing operating margins, particularly with regard to the wealth business. I want to reiterate what we have said consistently over the last couple of years, which is that before 2020, the business had systematically underinvested across technology, product, and support, and been paying for it. More importantly, cost cuts associated with aligning HD Best and First Global have been too deep. Our investments in technology, product, and support have moved the needle on closing the gaps in our platform offerings. As we look at our business holistically, including the benefits of interest rates, we expect to see margins dramatically improve in the second half of this year to the mid to high teens for the wealth segment. As I mentioned last quarter, we continue to feel very positive about the investments we've made and are comfortable with our current staffing levels, and so we expect year-over-year expense growth to start to decline in the second half of this year. Further, as Chris mentioned earlier, we have brought back our full slate of in-person conferences this year, which has contributed to our elevated expense levels relative to last year. We expect the impact of conferences on expense growth to moderate as conferences continue in the future. Because of the investments we have been making, we believe Blue Corps' wealth business is in a stronger position today than at any time over the last several years, as demonstrated by improvements in advisor satisfaction, as measured by our annual Voice of the Advisor survey scores, record recruiting in the form of newly acquired assets, higher retention levels, as measured by 99% plus production retention levels, Net positive flows for two straight quarters for the first time since early 2019. Meaningful shifts to advisory, which is driving higher returns after financial professional payout, along with higher sweep assets ahead of the rising interest rate environment. And lastly, a steady pipeline of product releases addressing the most critical pain points of our financial professional base. These enhancements have led to consistently improving returns on assets after financial professional payout for the business. increasing from the mid-21 basis point level in Q1 of 2020 to the mid-23 basis point level this second quarter. The importance here is that we are generating more return for the business after accounting for financial professional payout at today's asset balances relative to what we generated when asset balances were at these similar levels during 2020. The key here is as asset levels continue to rise in the future, we believe we'll be in a position to create more value translating into higher profits and margins. Now, to return to second quarter financial results, at the corporate level, unallocated corporate expenses came in at $7.7 million, with most of the increase related to insurance costs associated with higher premiums for items like cyber. Turning to the balance sheet. We entered the quarter with cash and cash equivalents of $171 million, and net debt of $389.1 million. Our net leverage ratio at the end of the quarter was 3.1 times. For the second quarter, we generated 38.3 million in cash from operating activities and spent $4.5 million on share repurchases with the year-to-date amount of repurchases adding up to $35 million. Subsequent to the end of the quarter, we paid down our term loan balance by $35 million resulting in an updated principal amount of $525.4 million as of August 5th. 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, continuing to return excess cash to shareholders while maintaining a strong balance sheet. Our long-term approach, and especially in this environment of heightened uncertainty, we will balance the benefits associated with repurchasing shares and continued pay down of debt with an eye towards cementing our net leverage ratio closer to two times before turning our attention toward more aggressive share repurchases. With that, let's turn to our refined full year 2022 outlook taking into account current market conditions. For the full year, we continue to expect our tax software segment revenue of between $247.5 million $251 million and segment income of $89 million to $91 million. For our wealth management segment, we now expect full-year revenue of between $645 million to $665 million, down modestly from our prior outlook reflecting market declines, with segment income of $90.5 million to $94.5 million, which is in line with the midpoint of our prior guidance reflecting an uptick in more profitable sweep income. This translates to a consolidated full-year outlook of revenue of between $892.5 million and $916 million, adjusted EBITDA of $149 million to $156.5 million, gap net income of $28.5 million to $43.5 million, or 58 cents to 89 cents per diluted share, and non-GAAP net income of $84 million to $93.5 million, or $1.71 to $1.90 per diluted share. This outlook includes $30.5 million to $29 million in corporate unallocated expense. Included in this outlook is sweep income of nearly $40 million for the year, based on the current target range for the federal funds rate. Expectations for next year continue to be robust based on current Fed rate expectations. I had shared last quarter that based on rate expectations and, of course, market levels, we could see wealth management segment income approach $150 million. While market levels are down meaningfully from the end of Q1 and commissions revenues continue to show weakness, we estimate that an improved outlook for rates at 3.25% by year end would still have us delivering roughly $120 million of segment income at an S&P level of 3,000, which is another 20% decline from the S&P close as of June 30th, and upwards of $150 million at market levels above 42.50. This concludes our prepared remarks, and we'll now turn the call over to the operator for Q&A. Operator?

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the queue, you may press star then two. At this time, we will pause momentarily to assemble our roster. And the first question is from Josh Sigler from Cantor Fitzgerald. Please go ahead.

Yes. Hi. Good morning. Thank you for taking my question. You made significant share gains in the DIY tax market this year. I'd love to dive a little deeper into this. Can you walk us through some of the drivers behind that market share growth and perhaps some of the tailwinds as we progress into the next tax year?

Yeah, there are a number of things that we've focused on to drive the business forward. So one has been really clarifying and delivering on our value proposition. And so as described in my earlier remarks, we have a full feature value offering. And what that means is really four key components. First, we want a simple and easy to use product. And we've made huge strides over the last couple of years in delivering that simple and easy to use product, which is translated a great NPS score increases. The second thing is one of the best guarantees in the market. So $100,000 guarantee that customers are going to get their max refunds. The third thing is exceptional customer care. And that is both answering the calls when people reach out to us for basic questions, but also providing access to experts at no incremental cost. And the final is a really compelling price. And the price is on our core federal SKUs typically is 20 to 50% less than TurboTax. And the combination of all of those things has enabled us to drive both retention increases, customer satisfaction increases, and supported our ability to grow new customers. You know, the other thing that's been critical is how do we actually engage new customers? And we've done that through building an incredibly sophisticated in-house marketing team and scaling some of our marketing spend. And then we've also talked about the fastest growing area of customer acquisition for us is the many partnerships that we've built where folks are interested and willing to introduce our great product to their customers. And so it's a combination of all those things that have translated to the strong performance. In terms of tailwinds going forward, I would say the most notable tailwind is just a return to the normal growth that we would expect and have seen for decades in the DIY market. As we've shared in the past, the market was down due to some unique circumstances over the last couple of years related to the pandemic and filers that had come into the market and then exited the market, but we expect a return to the more normal levels of market growth. So all of those things have contributed to the progress and the outlook.

Great. Thank you very much. And then with the Fed funds rate expanding faster than previously anticipated in your March investor presentation, to what extent do you expect this cash sweep tailwind to help offset the decline in equity markets in the back half of this year? And do you believe that it can actually act as a net positive tailwind as we progress into 2023? Thank you.

Hey, Josh. Mark here. I'll take that one. As we mentioned during the prepared remarks, even though the market was down in the second quarter, the fact that the Fed accelerated their interest rate hikes puts us in a great position to continue to deliver our segment income for the year, even though revenue is going to be down. As an example, in June alone, before the 75 basis point hike, we generated close to $5 million of sweep income. And again, that was before the most recent 75 basis point hike and continued hikes. And so we're going to see meaningful increase in sweep income next year, which should allow us to deliver significant segment income growth for wealth in 2023. Thank you very much.

And once again, if you have a question, please press star then one. The next question is from Dan Kernos from the Benchmark Company. Please go ahead.

Great. Thanks. Good morning. Mark, just to be clear on the wealth outlook, if we take the equity decline from quarter end to quarter end, it's probably called a $40 million impact, I think. although for the year S&P is only down 8. I'm assuming that your guide does not include a potential 100 basis point hike in September from the Fed. And I just want to, if there's any noise in there just around, well, I guess it would be noise, but just around productivity gains, could you guys continue to shift very positively to advisory? Do you continue to make productivity gains And, you know, historically, it's been interesting seeing the interplay as markets get more volatile between transaction revenue and sort of, you know, kind of underlying numbers here. So with all of the net inflows you've had, I'm just trying to make sure I understand sort of all of the puts and takes in the wealth guide and then sort of on the revenue side, understanding op income should be just fine and understanding that the rate hike is probably not shaked into that number?

Yeah, thanks for the question, Dan. When we think about, so when we provide guidance for the wealth business, we try and remain consistent from quarter to quarter. And so what we had said last quarter is we were going to hold market levels constant in terms of guidance. And so wherever market levels were at the end of the second quarter is what we figured into for the balance of the year. As it relates to the interest rate environment, we're using the forward curve, the CME forward curve. And so that did not expect or forecast 100 basis point hike in September. And so the expectation would be to finish the year somewhere around three to three and a quarter. And that's how we got to what I mentioned, the $40 million this year in sweep income. As it relates to the recruiting efforts and what have you, know the expectation built into our forecast is for the second half to look similar to the first half but as you know at this point we have already billed for three quarters uh in advance so there's only one billing period left and so it becomes a bit easier for us to forecast wealth uh with that you know as a backdrop okay that's that's helpful thanks um just chris just on the sort of the the shift to

the RIA, you know, obviously the market being what it is right now, you know, I wonder if in some ways getting guys to maybe cash out or, you know, incentivize them to be part of the team, as it were, is maybe an easier conversation. Although, you know, understanding that you have this sort of potential, you know, you don't want to take anything for granted yet, rate hike, uptick in your cash flow in sort of your back pocket. You've already got a lot of these assets identified. How are you thinking about how aggressive you want to be in this environment, you know, balancing, you know, managing debt levels, which you've done pretty well here versus, you know, maybe getting a little bit more aggressive on RIA M&A?

Yeah, so we've deployed a modest amount of capital in terms of acquiring some of our independence and converting them to our employee-based RIA. And we've been building that pipeline quite materially over time. That said, in volatile markets like this and with declining kind of asset levels, and obviously that's bounced back since the end of the quarter, right, that creates a little bit of a headwind in terms of our ability to move forward at the pace that we had initially thought. That said, the pipeline continues to build We're enthusiastic about providing this option for our independents and expect to continue to make progress on this type of investment as we move forward. I just expect it to be a little bit slower than we anticipated for the second half of the year, primarily due to the volatility. Our financial professionals need to spend plenty of time with their clients during periods like this. And so they spend a little bit more time thinking through their options than they would in a more stable time.

Got it. And then interesting on the call out on ESPN, you guys aren't the only digital forward company to be entering into this. How much of that is sort of offline versus online? Are you guys doing live reads on radio, which has been very popular and probably has good ROAS? I know you guys are pretty savvy with your marketing spends. and clearly some incremental branding is going to be helpful for you guys to get out into the marketplace, given all the positive press you got around the product during the past season.

So maybe just some more color on how you're thinking about that. Yeah, so the ESPN partnership, I would say, is primarily brand-focused, where, as you know, a healthy portion of all of our spend has a heavy performance orientation. What we saw this past year was some incredibly positive effects associated with our spending early in the season, both around the Tax Act bowl, but also all of the ad spots and some of the presentation or visual kind of representation of Tax Act in some of the shoulder programming. And so what we've done is we will continue with that approach this year and actually the following year, and we'll actually extend it even further. And so the reason why I described it a little bit more broadly around ESPN college sports programming is it will extend through the taxi, which we think is a really favorable thing. We picked up a really healthy lift at the start of the year from a brand perspective, and we're going to continue to do that. But I would say most of it is top of funnel versus performance-oriented spend.

Got it. Yeah, that's helpful. And this market, too, performance is super expensive. So it makes a bunch of sense. Appreciate the color, guys. Thank you.

Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Chris Walters for any closing remarks.

Great. Thanks so much for joining us. We look forward to updating you on our progress next quarter.

Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.