Blucora Inc (BCOR) Q3 2021 Earnings Call Transcript

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Blucora Inc (AVTA)
Q3 2021 Earnings Call
Nov 4, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2021 Bluecora Earnings Call. [Operator Instructions]

I would now like to turn the call over to your host, Dee Littrell, you may begin.

Dee Littrell -- Investor Relations

Thank you, and welcome, everyone, to Bluecora's Third Quarter 2021 Earnings Conference Call. Earlier this morning, we posted the earnings release and supplemental information on the Investor Relations section of our website at blucora.com. I'm joined today by Chris Walters, Chief Executive Officer; and Marc Mehlman, Chief Financial Officer. Before we begin, let me remind everyone that today's discussion contains forward-looking statements based on the environment as we currently see it, that speak only as of the current date. As such, these include risks and uncertainties, and actual results and events could differ materially from our current expectations. Please refer to our press release and other SEC filings, including our Forms 10-K and 10-Q and 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, Dave, and good morning, everyone. I'm happy to report that Blucora's third quarter financial results have been strong across the board. The execution of our sustainable growth strategy is going well with TaxACT now running ahead of schedule. Our team's focus on continually improving the experiences for our financial professionals and customers is central to our progress. I'll now share the highlights of the third quarter as well as share our preliminary outlook for 2022. Starting with Tax software. With the majority of revenue for the year realized, we're raising our guidance for full year on revenue; two, $225.5 million to $226.5 million. Now that third peak of Tax year 2020 is complete, we are focused on preparing to deliver on our best season yet for TaxAct. I'm delighted to share that we're expecting to grow unit share for the first time in many years and generate revenue growth in 2022 of 14% to 18%, which exceeds the expected top line cumulative annual growth rate of 7% to 9% that we communicated at Investor Day for the period of 2021 to 2024. In addition, we expect 2022 segment operating income between $98 million and $106 million, which would be the highest in TaxAct's history. When we shared our long-term guidance during Investor Day, we were just completing the tax year 2020 season and not yet had the opportunity to fully analyze the data. from the season or the full range of opportunities to deliver performance improvements for the business. Each tax year, we run a number of tests to assess the potential of product enhancements and marketing tactics, commercial approaches and partnerships. We also conduct extensive consumer research during and after the season to better understand opportunities and challenges. The results of these tests and research increased our expectations for the performance of the business for 2022 and beyond.

We are focused on a few areas to drive positive momentum for the business. First, brand recognition. We expect our continued marketing optimization in terms of timing of deploying spend as well as media channels and partners utilized that continue to drive improvements in brand recognition. Second, we continue to work to address the highest priority areas of friction in the consumer experience. Fortunately, our recent test, research and resulting data provide us with confidence about the business impact of the enhancements, including improvements in start and conversion rates. Third, we have spoken about the importance of commercial partnerships. We benefit meaningfully from associating ourselves with respected brands that are current and potential customers trust. We grew our commercial partnerships 10 times this year, and therefore, we are in the first year of working with most of our commercial partners. With a full season of these partners under our belts, we now have a clear understanding of what worked and what didn't. We plan to focus our efforts with existing partners on scaling strategies that worked. One of the opportunities that we are most excited about is potentially expanding an existing partnership in a way that we believe could be significant enough to have a notable impact on our long-term growth trajectory. In addition, we're optimistic that we can bring on multiple new partners. The actions we are taking have long-term benefits that we expect to positively impact the retention and growth of our customer base. I'm pleased with the results of 2020 and the many learnings that our team has translated into action plans for tax year 2021.

I look forward to sharing our progress next quarter. Moving on to Wealth Management. I'm encouraged by our continued progress in our wealth management business. The actions we are taking align with the playbook we applied to the tax business. We're just earlier in the game. Our key product and technology initiatives focused on our financial professionals and end client experiences continue at pace. The enhanced service and support we are providing is also paying dividends. In addition, our efforts to drive growth and advisory relationships continue to have a positive impact. Our pipeline of independent financial professionals interested in joining our employee-based RIA, which we refer to as a Vantex planning partners continues to grow. In mid-October, we closed another great acquisition, Warner Finance, which further positions our employee-based model for success in the Northeast region. This brings acquired assets from our independent channel to our employee-based model to roughly $1.6 billion, which comprised nearly 30% of our employee-based model managed assets as of September 30, 2021. The ability to offer our financial professionals, a variety of affiliation models and a seamless transition to this alternative model is proving to be an attractive option for both our financial professionals and Avantax. We still have work to do on our technology experiences for our financial professionals and their clients. We are on track to launch our new compensation system in the first half of 2022 as well as delivering on the end client experience enhancements that we shared during Investor Day. The actions we have taken are delivering strong business results, and we remain confident in our ability to drive positive net flows by the end of 2022 with a continued shift toward advisory assets.

And now a few highlights for the quarter. The business set a record for Q3 for the greatest percentage of AUM of total client assets at 45.9%. Our financial professional quarterly production retention in Q3 was at 97.9%. The opportunity that we are providing for our independent financial professionals to be acquired into the employee-based RIA model, either for succession purposes or growth opportunities continues to accelerate, with roughly $6 billion in assets in our pipeline. Recruiting of transfer financial professionals from other firms is at record levels. We're attracting financial professionals who are seeking the combination of our tax focus, scale and more personalized engagement model. Our pipeline is strong, and we expect to continue growing our recruiting assets in 2022 versus 2021. Our advisory and commission revenue per financial professional continues to improve, up 38% versus Q3 2020. Before handing off the Marc, I'll reiterate how pleased I am with the significant progress we've made. Our team is focused on driving long-term sustainable growth by delivering delightful experiences for our financial professionals and customers. The investments we have made in Tax Act, customer experiences and reimagining what our marketing and partnership teams could achieve have resulted in our meaningfully enhanced guidance for the tax software segment for calendar year 2022 as compared to our performance for 2021 and the expected 2021 to 2024 CAGR that we shared at Investor Day. This formula is also being applied to our Wealth Management business, where we are seeing similar early results as we saw with our tax software business, improved client feedback, enhanced product and technology capabilities and marketing and business development functions, delivering greater value to our financial professionals. We expect to see these efforts translate to improved KPIs and financial performance in the coming quarters of 2022 and beyond.

With that, I'll turn it over to Marc to review our Q3 financial performance, full year 2021 outlook. and preliminary tax software segment outlook for calendar year 2022.

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 third quarter results and our outlook for full year as well as a preliminary view of our tax year 2021 season. Starting with third quarter results, which due to tax year 2019 extending into the third quarter of 2020 resulted in disjointed year-over-year comparisons. Total revenue of $174.2 million, a decrease of 1% versus the third quarter of the prior year, but above the high end of our guidance range. Total revenue was driven primarily by the Wealth Management business. GAAP net income of negative $27.8 million or negative $0.57 per diluted share, which are both better than the guidance range previously provided. Embedded within our GAAP net income figure, is a $1.7 million true-up associated with the HKFS 2022 earnout, which we still believe will be paid out in full at $30 million. Adjusted EBITDA, which was better than the guidance range previously provided, which excludes these and certain other factors, was negative $800,000 versus $27 million in the third quarter of 2020. Non-GAAP net income was negative $12.8 million or negative $0.26 per diluted share was also better than the guidance range previously provided. Turning now to the tax software segment. Tax Software segment revenue for the third quarter was $5 million, at the low end of our guidance range, driven by the backlog at the IRS, leading to a lower funded rate for those leveraging our refund transfer offering. We expect this to be a timing issue and related amounts to be realized in the fourth quarter. When combined with our performance during the third quarter, this leads us to raise full year revenue guidance for 2021, which I will discuss momentarily. Segment operating income was negative $13.9 million better than the guidance range provided as we continue to operate the business prudently from an expense standpoint.

Moving on to Wealth Management. The third quarter reported Wealth Management segment revenue was $169.1 million, higher than the high end of our previously released guidance of $162.5 million and up 4% sequentially. Transaction-based commission revenues were up quarter-over-quarter by 6%, coming in at $22.4 million. On a year-over-year basis, total Wealth Management revenue was up 24%. Wealth Management segment operating income came in at $19.6 million for the third quarter, above the high end of our guidance of $18 million, driven by lower-than-expected operating costs and a strong top line revenue performance driven by transactional revenue and the timing of revenue recognized in the third quarter that we expected to come in, in Q4. Over the last nine months, we have also seen an increase in our payout ratio in the financial professionals, which when combined with the investments we're making into the business, has resulted in a near-term margin compression. The increase in payout of financial professionals has been driven by a number of factors, including improved market performance, which has shifted a number of financial professionals into higher payout levels, the exit of lower-producing financial professionals over the last 12 to 18 months, which were concentrated at lower payout levels and an alignment of our payout grid between First Global and HD Vest, which created aligned incentives toward higher ROA assets where appropriate, but resulted in higher payouts. As mentioned, we've also invested in the business in the areas of product management, software engineering, support and sales and marketing and believe we have a more appropriate level of staffing to support our growth initiatives going forward, which we expect to result in margin expansion in the future. Total client assets came in at $86.6 billion, which included approximately $5.4 billion from the addition of Avantax planning partners. Fee-based advisory assets were up 23% year-over-year to $39.8 billion with advisory assets as a percentage of total client assets ending the quarter at a new high of 45.9%.

We saw net inflows and advisory assets of $621 million, with total client assets having net outflows of $433 million, which relates in part to our change in focus toward higher ROA on platform assets at lower ROA off-platform DTF assets. At the corporate level, unallocated corporate expenses came in at $6.5 million, below the guidance range as we continue to monitor our corporate costs in support of our businesses. During the quarter, we had about $2.2 million in acquisition and integration costs related to HKFS and First Global, with the majority related to the HKFS payment true-up. We ended the quarter with cash and cash equivalents of $184.9 million and net debt of $376.9 million. Our reported net leverage ratio at the end of the quarter was 2.6 times compared to 1.9 times and 3.5 times at the end of Q2 2021 and Q1 2021, respectively. Through the nine months ending September 30, we have generated $74.4 million in cash from operating activities, which is more than double what we generated during the same time period in 2020. Our key priorities for cash include investing in our business to fuel growth and returning cash to shareholders. 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 and favorable financial professional sentiment, all while delivering on the most critical current needs of our finance professionals and for providing capital for RIA acquisitions. With that, let's turn to our full year 2021 and preliminary tax season outlook. For the full year, we expect our tax software segment revenue to be between $225.5 million and $226.5 million and the segment income of $80.5 million to $81.5 million. The increase in revenue was driven by our performance in third quarter and the expectation that we will earn additional revenue in Q4 once IRS delays abate.

We expect to invest this upside in investment leading into the first quarter of 2022 that relate to our improved outlook for next tax season. For our Wealth Management segment, we expect full year revenue of between $645 million and $650 million and segment income of between $81 million and $83 million. This represents a full year improvement for Wealth Management segment income at the midpoint of the range of $700,000 as compared to the guidance released at Investor Day and which includes investments we are in planning to make in Q4 for the business. On a consolidated basis for the full year, we expect total Blucora revenue of between $870.5 million and $876.5 million, adjusted EBITDA of between $135.5 million and $139 million, GAAP net loss of $4.5 million to $0 million or a loss of $0.09 to $0.00 per diluted share and non-GAAP income attributable to Blucora of $82 million to $86 million or a gain of $1.65 to $1.73 per diluted share. This outlook includes full year unallocated corporate expenses of $26 million to $25.5 million. Finally, at this time of year, it has been customary to provide a preliminary outlook for the upcoming tax season. As Chris mentioned earlier, we are excited to share that our efforts to drive improved sustainable growth in Tax Act is ahead of schedule. This was a valuable off-season for the business, where we were able to further test and iterate on our product and marketing approaches, which through deep analysis and testing has resulted in a more favorable view for the season than we could have -- that we could share in June when the season was just coming to its delayed close.

Our view for the season is predicated on driving the following key metrics, start rate. We believe that the focus on our consistent messaging from last season, the learnings from our media partner testing during the off-season and key product enhancements will drive meaningful improvement in our start rate for new users. Conversion. The continued improvement in NPS scores from last season as along with targeted enhancements to the consumer workflow have been factored in and are supported by our off-season testing. Unique visits. We expect unique visits to be positively impacted by three things: continued marketing optimization, enhancing partnerships that brought us success last season and new partnerships all of which we're excited about. The result is a preliminary view of revenue growth of between 14% and 18% to the midpoint of 2021 full year guidance and for segment operating income of between $98 million and $106 million. Delivering results within this guidance range would have us either approaching or falling within the guidance ranges offered for 2024 during Investor Day last June.

This concludes our prepared remarks. I 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 JPMorgan.

Jackson Ader -- JPMorgan -- Analyst

Thanks guys. I think the first question is probably on the tax outlook. So I'm just curious on a few things. So firstly, what data came in that you guys saw between now and the intact season that really gives you the confidence to guide for such a rebound? And then if you're thinking about those kind of areas, brand recognition, areas of friction, partnerships, what would be kind of the main driver in the acceleration?

Christopher Walters -- President and Chief Executive Officer

Yes. And so it's actually -- fortunately, it's actually all three areas. So we felt really good about the data that we're reviewing the off season. One of the benefits that we had is, as you know, this leadership team has come together over the last 18 to 24 months. And this is the longest off season that we've had in that period of time. It is quite typical in the tax industry that you do very in-depth analysis of the prior season as well as additional consumer research. And with the benefit of that additional time, we have identified a number of opportunities that based on the testing that was done last season and some of our research give us great confidence in the updated guidance. And it's in each of the areas that you described. So on partnerships, one of the things that provides so much opportunity is as we grew our partnerships tenfold, most of our partners were in their first year. You never are fully optimized in the first year of working with a partner. And so we found a variety of things that worked really well, and we can scale those things. In terms of marketing, we've talked about bringing in and really upskilling the team. And again, we've had the benefit of them now being through one full season and a longer off-season. And so whether it is the timing of our spend, the channels that we spend in, the messaging and all elements of optimization. We see continued improvements that will come from this team having a bit more experience under their belt and having all of the data from last season. And on the product experience, as we're going through the season, we are constantly testing a variety of different approaches. And so much of what gives us confidence is things that we were testing at different points in the season, some of them late in the season and seeing that the effect of those were notable and we're really looking at full year benefits associated with the things that work best. So it's across the board.

Marc Mehlman -- Chief Financial Officer

Okay. And a quick follow-up on that. So what were some examples of like key areas of friction either in starts or conversion like getting into the specific? And then also, does any -- any of the growth depend on kind of either deepening discounts relative to peers or maybe raising pricing for next season?

Christopher Walters -- President and Chief Executive Officer

Let me take the first. So one example of the refinement of the product experience is at the point of entry. So I think we've talked a lot in the past about it's important that we drive start rate as we move forward. And so we were testing a variety of both landing pages, messaging on those landing pages and even the flow and how that flow might look different for current customers or new customers. And in each of those areas, we saw opportunities for improvement. And so there will be a simplified flow for new versus returning customers that we saw will ultimately drive a higher start rate. And so we saw a variety of things at the beginning of the experience that we could refine. On price, I would just say we feel good about refocusing on our value positioning And our price versus kind of the market leader. And ultimately, we're going to continue to embrace that value position.

Jackson Ader -- JPMorgan -- Analyst

Okay. And if I can squeeze just one last one, sorry. On the wealth side, how do we square kind of the fact that maybe people left the platform were lower producing or not producing with the idea that you still had kind of net outflow of assets that were outside of advisory? When I think for the most part, market performance would have been probably a little bit of a tailwind.

Christopher Walters -- President and Chief Executive Officer

Yes. So we've talked about a variety of the changes that we're making in our business and also that we believe that we'll get to a point next year where net flows will be positive and as we get later on in the year. And so some of those outflows are driven by a variety of things that we've talked about before, right? We have invested a fair bit in improving the advisor experience and that's both from a product and technology perspective, but also support. We're seeing real traction with those efforts. But ultimately, we still have work to do. And then we also made some further efforts to harmonize the businesses that have been acquired. One of the examples of that was our advisory pricing group. And in that particular case, it was certainly the right thing for the business long term and consistent with the approach that we want to take, which is to have more advisory relationships where it makes sense for the end client. But ultimately, that shift led some advisors who were more focused on DTF business to be less inclined or less happy with us in the near term. And so there's a variety of things that have happened, but we think that the actions that we're taking will ultimately turn that tide over the course of the next year.

Jackson Ader -- JPMorgan -- Analyst

All right. Wonderful. Thank you.

Operator

[Operator Instructions] And I'm not showing any further questions at this time. I'd like to turn the call back over to Chris Walters.

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: 18 minutes

Call participants:

Dee Littrell -- Investor Relations

Christopher Walters -- President and Chief Executive Officer

Marc Mehlman -- Chief Financial Officer

Jackson Ader -- JPMorgan -- Analyst

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