Blucora Inc (BCOR) Q2 2021 Earnings Call Transcript

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Blucora Inc (AVTA)
Q2 2021 Earnings Call
Aug 4, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the Blucora Second Quarter 2021 Earnings Conference Call. [Operator Instructions]

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

Dee Littrell -- Investor Relations

2021 Earnings Conference Call. By now, you should have had the opportunity to review a copy of our earnings release and supplemental information. If you have not reviewed these documents, they are available on the Investor Relations section of our website at blucora.com. I'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 other SEC filings, including our Form 10-K and 10-Q for other reports 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 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.

Christopher Walters -- President and Chief Executive Officer

Thank you, Dee, and good morning, everyone. I'm pleased to report that Blucora's second quarter financial results have exceeded our expectations across the board and that we continue to execute effectively against our strategic vision. Our market position across our respective businesses sets the company up for long-term sustainable growth potential and our team is clear on both our short-term and long-term execution plans for success. In short, the state of the business is strong.

Having just shared our long-term vision for the business and updating our full year guidance for 2021 during Investor Day in June, our remarks today will be relatively brief. Before I delve into the details of the second quarter, I will reiterate the elements of our sustainable growth strategy. TaxAct unit growth driven by providing a fully featured value off, AUA and advisory growth through technology, marketing and service enhancements, realizing the value of our differentiated model through a targeted synergy program, and lastly, implementing a unified, learning and customer-focused and performance-oriented culture. Our formula is paying off, and our excitement is building.

With that, let's turn our attention toward the highlights of the second quarter. During Investor Day, we shared the highlights of tax season. With our discussion that day having taken place on the same day as the extended deadline for the remaining three states that have been impacted by severe winter storms. With those three states now complete and having met our expectations, we are reiterating our full year 2021 financial guidance for TaxAct, which, as a reminder, is for 7.1% to 8.5% revenue growth over 2020 and between $80 million to $82 million in segment operating income, which represents greater than a $30 million year-over-year increase.

As a reminder, I will share a few of the key highlights. We meaningfully improved our value proposition by lowering federal pricing to offer a great experience at up to a 20% to 50% discount relative to the market leader. Drove a 10 times increase in our number of partnerships versus prior year. Refreshed the end-to-end customer experience while also launching a new hybrid offer. Improve start rate, conversion rate, paid customer retention and NPS scores versus the prior season. Continue to gain share in the tax professional market. With this strong momentum behind us, we now turn to preparation for the next tax season.

For the balance of this year, we plan to focus our attention on several key areas. Continue to drive improvements in our brand recognition, which has a direct effect on our marketing tactics in season. As it relates to marketing, prioritize our first-party data collection efforts to expand our one-to-one reach as well as improve our start rate in coming seasons through personalized customer experiences. Execute on our user experience upgrades, with a special focus on the areas with up greatest friction in the workflow. And lastly, focus on year two filers, where we have an opportunity to meaningfully improve retention and with that lifetime value. I'm pleased with the results for tax year '20 and the many learnings that relatively new team has absorbed.

I look forward to sharing the progress over the next two quarters as we prepare for next season. Moving on to wealth management. I'm encouraged by our continued positive trajectory in wealth management. We continue to drive growth in AUM, resulting in a greater percentage of overall fee-based assets, which results in a more favorable ROA for the business. At our Investor Day, we highlighted on platform RIA acquisitions as an opportunity to scale our advisory business by deploying capital at strong returns while delivering compelling solutions to financial professionals and their clients.

Our pipeline of independent financial professionals interested in joining our RIA continues to grow. And in case you missed it, we recently announced that Blucora has agreed to acquire Headquarters Advisory group. The Headquarters' team who have long affiliated with Avantax was looking for both a succession plan and continued growth opportunities. They concluded that, our Avantax planning partners RIA was the best solution to achieve both objectives. Once closed, this would bring the acquired assets from our independent channel to APP to $1.3 billion or approximately 20% of APPs total client assets.

The ability to offer our financial professionals choice and a seamless transition to this alternative model is proving to be an attractive option for both RFPs and Avantax. As we've mentioned on previous calls, we still have much work to do as it relates to the technology experience for FPs and as we discussed in our Investor Day, many of these improvements are inflate and will continue. While we are pleased with the quarter-over-quarter improvement in our net flows and the feedback we are receiving on our progress on both service support and technical improvements, we are not yet finished.

We expect a trend on negative net flows to continue through year-end with a shift forward positive flows beginning next year. And now a few highlights for the quarter. Our business set a record through Q2 for the greatest percentage of AUM of total client assets at 44.9%. Our financial professional production retention in Q2 was at 98%. Of the 145 departing financial professionals in Q2, 111 or 77% were non-producing financial professionals, defined as less than 50,000 enrolling gross production.

Our RIA rollup plan, whereby we provide an opportunity for independent financial professionals to be acquired into the RAA, continues to accelerate with more than $5 billion in assets in our pipeline. Net new client assets came in at negative $250 million, our best quarter since Q1 of 2020. As I conclude, I will reiterate my closing remarks from last quarter. Our business is in a strong position. Our cash balance affords us the ability to be opportunistic. Our model shift within wealth management is well underway, and our plans to drive growth and expanding margins and TaxAct are on track.

With that, I'll turn it over to Marc to review our Q2 financial performance and our Q3 and full year 2021 outlook.

Marc Mehlman -- Chief Financial Officer

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 second quarter results and our outlook for the third quarter 2021 and full year. Starting with second quarter results. Total revenue of $254.3 million, an increase of 58% versus prior year and just shy of the high end of our guidance range. GAAP net income of $31.6 million or $0.64 per diluted share. Embedded within our GAAP net income figures are an $11.5 million true-up associated with the HKFS earnout.

The full $30 million payment for the first earnout period will be paid out in the third quarter, a roughly $2.5 million expense associated with the remaining costs relating to the proxy conflict. Adjusted EBITDA, which excludes these and certain other factors was $78.6 million, 524% growth versus the prior year period and $3 million above the high end of our guidance range. Non-GAAP net income was $63.1 million or $1.28 per diluted share. Prospective increases of 58.6 and $1.19 per share versus prior year and both above the high end of our second quarter guidance range.

Turning now to the Tax Software segment, which as we discussed during Investor Day, came in meaningfully above our expectations entering the season. Tax software revenue was $91.9 million and segment operating income was $63.4 million. Moving on to wealth management. Second quarter reported wealth management revenue was $162.4 million, slightly higher than the high end of our previously released guidance of $161.5 million and up 5% sequentially, which included a 5% increase at legacy Avantax and 7% increase at APP. Transaction-based commission revenues were down slightly quarter-over-quarter but still robust at north of $21 million.

On a year-over-year basis, total wealth management revenue was up 40%, which included revenue of $9.9 million from Avantax Planning Partners. Wealth Management segment operating income came in at $21.4 million, above the high end of our guidance of $19.5 million, driven by lower than expected operating costs and a strong top line revenue performance at the end of the quarter. Total client assets increased 28% year-over-year to $87.8 billion, which included approximately $5.7 billion from the addition of Avantax Planning Partners.

Fee-based advisory assets were up 49% year-over-year to $39.4 billion with advisory assets as a percentage of total client assets ending the quarter at 44.9%. We saw net inflows in advisory assets of $864 million, with total client assets having net outflows of $250 million, which relates in part to our focus toward higher ROA on platform assets and lower ROA of platform direct to fund assets. At the corporate level, unallocated corporate expenses came in at $6.3 million, exceeding expectations and below the guidance range, as we continue to monitor our corporate costs in support of our businesses.

During the quarter, we had about $1.2 million in integration costs related to HKFS and 1st Global. Based on our ongoing discussions with the SEC, we reevaluated our contingent liability reserve for the regulatory matter assumed in the 1st Global acquisition and increased the liability from $11.3 million to $16.8 million. The $5.5 million increase to the contingent liability reserve has been recognized in acquisition expense. We ended the quarter with cash and cash equivalents of $232.4 million and net debt of $329.8 million. Our reported net leverage ratio at the end of the quarter was 1.9 times compared to 3.5 times at the end of Q1 2021.

I would like to remind you that we will have an outflow of $30 million in the third quarter related to the first HKFS earnout payment. As discussed during Investor Day in June, our key priorities for cash include investing in our business to fuel growth. Our capital investments are aimed at solving critical customer pain points and the workflows of our customers. Ensuring continued positive momentum in net new assets, rising advisor sentiment, all while delivering on the most critical current needs for financial professionals.

Ensuring we are properly funding the crossover benefits between our two businesses, and lastly, providing capital for RIA acquisition opportunities. With that, let's turn to our third quarter and full year 2021 outlook. For the third quarter, we expect our Tax Software segment revenue to be between five and $5.5 million and a segment loss of $15.5 million to $15 million. Our Wealth Management segment, including APP, we expect third quarter revenue of between 158.5 and $162.5 million and segment income of between 16.5 and $18 million.

On a consolidated basis for the third quarter, again, including APP, we expect total Blucora revenue of between 163.5 and $168 million, adjusted EBITDA of between negative $6.5 million and negative $4 million, GAAP net loss of $34 million to $30.5 million or a loss of $0.69 to $0.62 per diluted share and non-GAAP net loss attributable to Blucora of $19 million to $16 million or a loss of $0.39 to $0.33 per diluted share.

This outlook includes third quarter unallocated corporate expenses of $7.50 to $7 million. For the full year, we expect our Tax Software segment revenue of between 223.5 and $226.5 million and segment income of $80 million to $82 million. For our Wealth Management segment, we expect full year revenue, which includes APP of between 631.5 and $649.5 million and segment income of $79 million to $83.5 million. This translates to consolidated full year outlook, again, including APP of revenue of between 855 and $876 million, adjusted EBITDA of $131.5 million to $139 million, GAAP net loss attributable to Blucora of $8.5 million to net income of $1 million or a net loss of $0.17 to net income of $0.02 per diluted share and non-GAAP net income of $76 million to $84.5 million or $1.52 to $1.70 per diluted share. This outlook includes $27.5 million to $26.5 million in unallocated corporate expenses.

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

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Jackson Ader with J.P. Morgan. Your line is open.

Jackson Ader -- J.P. Morgan -- Analyst

Great. Thanks. Good morning, guys. First question is on the tax business. The last time I heard from you in June, you kind of reiterated the second quarter tax guidance came in a little bit below the midpoint. So I'm just curious how the square -- the positive commentary with the idea that tax revenue came in below your expectations?

Marc Mehlman -- Chief Financial Officer

Jackson, it's Marc here. It's good to hear from you again. So, as you recall from the prepared remarks, we held to the full year expectation for TaxAct and so really what it just comes down to is the amount of extended filings and things of that nature that we would recognize in the third quarter relative to where it comes out in the second quarter. There were still three states left to finish up that were impacted by the severe weather event that happened earlier in the tax season. But ultimately, we're going to finish up this season, we believe, where we had forecasted during Investor Day, and we feel good about the progress we've made this year.

Jackson Ader -- J.P. Morgan -- Analyst

Okay. And then on the wealth side, the acquisition that was announced just earlier this week, little over $1 billion in assets. Just curious, can we get a little bit more color on that, maybe any kind of revenue expectations for the Headquarters acquisition?

Marc Mehlman -- Chief Financial Officer

So ultimately, this was an opportunity for the Headquarters team to monetize the enterprise value that they've created over time by affiliating with Avantax with the employee owned RIA versus the contractor model. From a revenue standpoint, it doesn't change the amount of assets that we have, but what it does change is the economic model going forward. I think it's a bit early for us to share specific revenue projections associated with that transaction, but ultimately, it's something that's favorable for them as well as for us.

The one thing that I will call out is once that acquisition does close, it would bring the acquired client assets move from our independent contractor model to the employee-based RIA model to about $1.3 billion. It's exciting, right? That represents approximately 20% of the total client assets for our employee-based RIA model. The one thing I do want to clarify is our employee-based RIA model includes both APPs total client assets and the acquired client assets that removed from the independent contractor model.

So, another way of saying this is -- it's relatively early days. We're excited for the Headquarters' team to join us in a new way, and we'll be able to share more details as time goes on.

Jackson Ader -- J.P. Morgan -- Analyst

Okay. And then if I could sneak in one last one. Chris, you mentioned as part of kind of your tax strategy because I totally understand you're already planning for next year and you talked about year two filers and how you can increase retention. Can we just get like a couple of examples, some of the low-hanging fruit that you feel like you can implement in order to retain more of those year two filers?

Christopher Walters -- President and Chief Executive Officer

Yes. I think we've talked about this before. So retention rates tend to be quite good for the business generally, but year two filers are at the lowest level of all kind of returning filers. And so this is a really important place for us to move the needle and there's a variety of things that we'll do to do that.

One is optimizing the communication with them, both during the off-season and then in the season, right, where there's a lot of testing that we do on the messages, offers, right, and the things that different groups of your two filers respond to.

The second thing is ultimately optimizing the experience when they arrive at the site, right? So we want to make it as frictionless as possible for them to enter the site, right, achieve what they're ultimately trying to achieve, which is get their max refund with the lowest level of effort. And so the second step is around optimizing the homepage experience which could be tailored in some ways to meet their needs.

And then the third thing is actually something that we're doing for all customers, but we'll have a benefit to these year two customers, which is ultimately addressing in the off season, some of the remaining friction points within the product.

That, as we address those friction points, a higher share of those people will convert, right? So our complete rates have been trending up for the last couple of years, and this benefit accrues broadly across all users, but we'll see a lift in year two filers with that flow.

Jackson Ader -- J.P. Morgan -- Analyst

Awesome. All right. Thank you.

Operator

Thank you. Our next question comes from Dan Kurnos with Benchmark Company. Your line is open.

Dan Kurnos -- Benchmark Company -- Analyst

Good morning. Not too much to go over here after the pretty exhausted Analyst Day that you guys did. But maybe, Marc, just one quick one for you. No change to the full year guide, but maybe just a little bit more lumpiness than we would have thought in terms of the quarterly cadence for wealth management? Just anything to call out there? Does that have to do with just the general market trends? Or does that in core trailers or some of the asset inflows and outflows that you've been calling out?

And then just in general, I know you guys are super excited about the RIA opportunity, congrats, Headquarters. I think you gave some metrics in your prepared remarks around kind of accelerated uptake. I just maybe -- I know you kind of laid out the game plan at Analyst Day, but just wondering how we should think about sort of cadence of more RIA adoption announcements, etc., in the next, let's call it, 12 months, now that you're kind of have the underlying basis sort of squared away here and looking to build?

Marc Mehlman -- Chief Financial Officer

Sure. It's good to hear from you again. What I'd say is, as it relates to lumpiness for wealth management, look, there are certain revenue streams related to transaction revenues, which go up and down each month and quarter, but generally have been trending in a positive way for us as a business. From an investment standpoint, there are certain investments we're making in the client experience, both for the financial professionals and their end clients, to the extent that those investments happen in one quarter versus another.

Could create some variability in the segment operating income. But generally, the trend has been in a positive direction, both from a total revenue standpoint, from a total asset standpoint, and most importantly, from the higher ROA advisory standpoint. So we're feeling good about the actions that we've taken and the response we've gotten from our financial professionals. As it relates to the acquisition of independents into the employee owned RIA, we're not really publicly discussing any sort of detailed growth plans there right now.

What I can tell you is that we work intentionally, really to provide multiple flexible affiliation models as well as succession plan options to our affiliated firms and financial professionals. Ultimately, just giving them choice. And that's really what it comes down to. So to the extent that an independent seeks an opportunity to take advantage of what we're offering here,, you'll see transactions, and it's going to come as it goes. So that's, in essence, the plan going forward.

Dan Kurnos -- Benchmark Company -- Analyst

And then maybe just one for Chris, on tax. Obviously, partnerships were highlighted pretty extensively on the Analyst Day. We're now, finally, I guess, although it never seems to end anymore past tax season. So, now that you've got all your learnings behind you as you look to kind of build for next season, are there any kind of opportunities there to explore initial traffic gains, brand building? Just how do we think about sort of getting the positioning right after this extensive tax season as we head into next year?

Christopher Walters -- President and Chief Executive Officer

Yes. So on partnerships, there's really three types of partnerships that we focus our efforts on. One is supporting customer acquisition. And so this is leveraging other brands that have solid user bases or more member bases and strong relationships with those member bases who are open to introducing TaxAct to their customer base. And as we talked about, we increased the number of partners pretty meaningfully this year.

And so there's a lot of work that goes on in the off-season to help me figure out what worked with each partner, figure out how we can actually collectively realize more value as we move forward.

And then in the categories that work best, we'll ultimately seek additional partners. So that's kind of one group. The second group is around data integrations and our data partners. This is something that can really help remove friction from the TaxAct experience, right? If we can pull in 1099s or W-2s for more partners, ultimately, consumers can go through their taxes more seamlessly. The final category of partnerships that we're looking at, this is a little bit more emerging for us, is opportunities to bring incremental products and services to our customers that they really will value highly and that we would have unique insight to, based on the tax process that they've gone through with us.

And so, we're looking at some partners in that category and that could drive some incremental revenue as well as it could have positive retention benefits when you bring things that are really value to your customers. So, those are the areas that we're focused on.

Dan Kurnos -- Benchmark Company -- Analyst

Great. Thanks, guys.

Operator

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Chris Walters for closing remarks.

Christopher Walters -- President and Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 29 minutes

Call participants:

Dee Littrell -- Investor Relations

Christopher Walters -- President and Chief Executive Officer

Marc Mehlman -- Chief Financial Officer

Jackson Ader -- J.P. Morgan -- Analyst

Dan Kurnos -- Benchmark Company -- Analyst

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