Q2 2021 Blucora Inc Earnings Call
[music].
Good day, and thank you for standing by and welcome to the Blue Clara Q2, 2021earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session asked the question. During the session you will need the press star 1 on your telephone if you acquire any further.
Assistance. Please press Star Zero I would now like to hand, the conference over to your speaker of today do you have the trial Investor Relations. Please go ahead.
2021 earnings conference call by now you should have had the opportunity to review of a copy of the earnings release and supplemental information VP of <unk>.
Reviewed these documents they are available on the Investor Relations section of our website at record income.
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 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 other SEC filings, including our form 10-K, and 10-Q4 other reports for more information on some of the specifics 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 on.
Our earnings release and supplemental financial information are available on the core Dot Com and include the full reconciliation of each non-GAAP financial measure discussed to the nearest applicable GAAP measure.
With that let me handle the call over to Chris.
Thank you Lee and good morning, everyone.
I'm pleased to report the Blue core of 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.
The 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 from the business and updating our full year guidance for 2021 during the Investor day on June.
Our remarks today will be relatively brief.
Before I delve into the details on the second quarter I will reiterate the elements of our sustainable growth strategy.
<unk> unit growth driven by providing a fully featured value of.
In advisory growth through technology, marketing and service enhancements.
Realizing the value of our differentiated model sort of targeted synergy program.
And lastly, implementing a unified learning and customer focus and performance oriented culture.
Our formula is paying off and our excitement is building.
With that let's turn our attention towards the highlights from the second quarter.
During Investor day, we share the highlights of tax season, with our discussion that day, having taken place on the same day of the extended deadline for the remaining 3 stage.
Had been impacted by severe winter storms.
With those 3 states now complete.
And having met our expectations, we are reiterating our full year 2021 financial guidance for tax Act.
As a reminder.
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 offer a great experience at up 2 of 20% to 50% discount relative to the market leader.
Drove a 10 X increase in a number of partnerships versus prior year.
Refresh the end to end customer experience, while also launching of new hybrid off.
Improved start rate conversion rate paid customer attention and NPS scores versus the prior fee.
Continuing to gain share in the tax professional work.
With the 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 M C.
As it relates to marketing prioritize our first party data collection efforts to expand our 1 to 1 reach as well as improve our start rate income.
Coming seasons through personalized customer experiences.
Execute on our user experience upgrades with a special focus on the areas of greatest friction.
And the workflow.
And lastly focus on year to filers, where we have an opportunity to meaningfully improve retention.
And with that lifetime value.
I am pleased with the results for tax year 'twenty on the main learnings that are relatively new team is absorbed.
I look forward of sharing the progress over the next 2 quarters as we prepare for next year.
Moving on to wealth management.
I am 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 ROI for the business.
At our Investor day, we highlighted on platform 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 E continues to growth and in case you missed it we recently announced the Blue Cora has agreed to acquire headquarters Advisory group.
The headquarters team of long affiliated with the van tax we're looking for both of succession plan and continued growth opportunities.
They concluded that our event tax planning partners with the best solution to achieve both objectives.
Once closed this would bring the acquired assets from our independent channel the ACP.
1.3 billion or approximately 20% of <unk> total client assets.
The ability to offer our financial professionals choice on a seamless transition to this alternative model is proving to be an attractive option for both rfps kind of index.
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 in flight and welcomed Inc.
While we are pleased with the quarter over quarter improvement in our net flows and the feedback we're receiving on our progress on both the service support and technical improvements we are not yet finished.
We expect the trend of negative net flows to continue through year end with a shift.
For the positive flow is beginning next year.
And now a few highlights for the quarter of.
The business had a record 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 50000 of enrolling gross.
Production.
Our R&D rollout plan, whereby we provide an opportunity for independent financial professionals to be acquired into the raw continues to accelerate.
With more than 5 billion of assets in our pipeline.
Net new client assets of came in at negative $250 million.
Our best quarter since Q1 of 2020.
Yeah.
As I conclude I will reiterate my closing remarks from last quarter our.
Our business is in a strong position our cash balance of affords us the ability to be opportunistic on.
Our model shift within wealth management is well underway on our plans to drive growth and expanding margins and tax act are on track.
With that I'll turn it over to Mark to review, our Q2 financial performance and our Q3 and full year 2021 outlook.
Thank you, Chris and good morning, everyone.
Great day with you all again.
I'd like to provide some additional detail on our second quarter results and our outlook for the third quarter of 2021 of 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 <unk> 64 per diluted share.
Embedded within our GAAP net income figures are at 11.5 million true up associated with the H campus right now.
The full $30 million payment for the first right out of area will be paid out in the third quarter.
The roughly 2.5 million expense associated with the remaining costs.
Relating to the property conflicts.
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.
Respective increases of $58.6 million of $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.
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 of $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 of Phanteks, 7% increase at a P. P.
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 a VAT tax 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 topline 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 a VAT tax 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 released in parts of our focus towards the higher ROA on on farm assets and lower ROI of off 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 and integration costs related to <unk> from first global.
On our ongoing discussions with the SEC, we reevaluated our contingent liability reserve for the regulatory matter of assumed in the first 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 non 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 on the third quarter related to the first E. Scaff S right out of 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.
Showing continued positive momentum in net new assets rising advisor sentiment all while delivering on the most critical current needs of our financial professionals.
Ensuring we are properly funding the crossover benefits between our 2 businesses and lastly, providing capital for acquisition opportunities.
With that.
Let's turn to our third quarter on a full year of 2021 outlook for the.
The third quarter, we expect our tax software segment revenue to be between $5 million at $5.5 million and the segment loss of $15.5 million to $15 million.
Our wealth management segment, including ATP, we expect third quarter revenue of between $158.5 million of $162.5 million and segment income of between $16.5 million.
Yes.
On a consolidated basis from the third quarter again, including <unk>. We expect total of core revenue of between $163.5 million at $168 million adjusted.
Adjusted EBITDA of between negative $6.5 million of negative $4 million.
GAAP net loss of $34 million, the $35 million or a loss of 69.
The 62 cents per diluted share and non-GAAP net loss attributable to Bukhara of $19 million to $16 million or a loss of 39 to 33 per diluted share.
This outlook includes the third quarter unallocated corporate expenses of 7.5 million to $7 million.
For the full year, we expect our tax software segment revenue of between $223.5 million at $226.5 million and segment income of $80 million to $82 million per.
Our wealth management segment, we expect full year revenue, which includes a P. P of between $631.5 million $649.5 million and segment income of 79 million to $83.5 million.
This translates to consolidated full year outlook again, including AVP of revenue of between $855 million on $876 million.
<unk> EBITDA of $131.5 million per $139 million.
GAAP net loss attributable to the <unk> of $8.5 million and net income of $1 million or on net loss of 17 cents to net income of 2 cents per diluted share and non-GAAP net income of $76 million to $84.5 billion of $1.52.
The $1.70 per diluted share.
This outlook includes 27.5 billion 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.
Thank you as a reminder to ask a question you're on mute the press star 1 on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
The first question comes from Jackson Ader with Jpmorgan. Your line is open.
Great. Thanks. Good morning, guys first question is on the tax business.
Okay.
The last time, we heard from you in June kind of reiterate in 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 of the tax revenue came in below.
Your expectations.
Is that kind of it's mark here, it's good to hear from you again.
So as you'll recall from the prepared remarks, we held to the full year expectations for tax Act and so really what it comes down to is the.
The amount of extended filings.
Things of that nature of that we would recognize in the third quarter relative to.
Where it comes out on the second quarter. There was still 3 states left to finish up that were impacted by the severe weather event that happened earlier.
Earlier on the tax season ultimately.
We're going to finish off the season, and we believe where we had forecast it during investor day, and we feel good about the progress we've made this year.
Okay.
And then on the West said the the acquisition that was announced earlier this week.
A little over 1 billion of assets just curious can we get a little bit more color on that maybe any kind of revenue expectations for the for the headquarters acquisition.
Yeah.
So ultimately the.
This was an opportunity for the headquarters team to monetize the enterprise value of the accretive over time by affiliating with a band tax.
On the employee on.
Vs.
The contract the 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.
Sections of associated with that.
That transaction, but ultimately it's something that's.
Favorable for them as well as for US the the 1 thing that I would call out is once that acquisition does close.
Would bring the acquired client assets move from our independent contractor model to the employee base R&D model to about $1.3 billion.
It's exciting that represents approximately 20% of the total client assets or employee based on model.
On the 1 thing I do want to clarify on employee base are a model includes both hep's total client assets and the acquired client assets are removed from the independent contractor model. So another way of saying that says it's relatively early days. We're excited for the headquarters team to join us on anyway that will be able to share more details.
Time goes on.
Okay.
And then if I can sneak in 1 last 1 Chris you mentioned.
It was kind of kind of your tax strategy, because I totally understand you're already planning for next year and you talked about year, 2 filers and how you can increase retention can we just get tougher.
Couple of examples some of the low hanging fruit. The you feel like you can implement in order to retain more of the tier 2 followers.
Yes, I think we've talked about this before so retention rates tend to be quite good for the.
The business generally but year 2 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 the variety of things that they're moving due to do that.
1 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 on.
Offers right some of the things the different groups of of your 2 fathers respond to the.
The second thing is.
The optimizing the experience when they arrive at the site.
Want to make it as frictionless as possible for them to enter the site achieved what they're ultimately kind of IC, which is get the Max refund with the lowest level of effort and so the second step is around optimizing the homepage experience who can be tailored in some ways to meet their needs.
And then the third thing is actually going on that we're doing for all customers, but will have a benefit to these year to customers, which is ultimately addressing in the off season, some of the remaining friction points within the product.
As we address those friction points of higher share of those people will confirm the tomorrow complete rates I.
Have been trending up for the last couple of years and this kind of bit of cruise broadly across all users.
But we will see a lift in year 2 fathers with basketball.
Awesome alright, thank you.
Thank you. Our next question comes from Dan <unk> with Benchmark Company. Your line is open.
Hey, good morning, not too much to go over here after the exhaust at analyst day on that you guys did but.
Maybe mark just 1 quick 1 for you.
No change to the full year guide, but maybe just a little bit more lumpiness than we would of thought in terms of the quarterly cadence for wealth management.
Anything to call out there does that have to do with just the general market trends or do you guys did on trailers or some of the asset inflows and outflows, which you've been calling out.
And then.
Just in general I know you guys are super excited about the RIAA opportunity.
Congrats on headquarters.
You gave some metrics on your prepared remarks around kind of accelerated uptake I, just maybe I E.
I know you've kind of laid out the game plan at analyst day, but just wondering how we should think about sort of cadence of.
Of more IRI adoption announcements et cetera in the next let's call. It 12 months now that you are.
Kind of half the the underlying basis sort of squared away here and looking bill.
Good morning.
The good to hear from you again.
I'd say as it relates to Lumpiness for wealth management.
There are certain.
Revenue streams related to the transaction revenues, which go on.
Up and down each month on quarter generally have been trending in a positive way for us as the business.
I'm from an investment standpoint, there are certain investments, we're making in the client experience both from the financial professionals and their clients to the.
The extent of those investments happen in 1 quarter versus another could create some variability in the segment operating income.
But generally the trend has been in the positive direction.
On the total revenue standpoint from an average total asset standpoint, the most importantly from the high higher ROA advisory standpoint on the.
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.
The acquisition of independence to the employee on.
We're not really publicly discussing any sort of.
Detailed growth plans there right now, but I can tell you is that we werent intentionally.
Really to provide multiple flexible affiliation models as well as succession planning options to our affiliated farms of financing professionals.
Ultimately just giving them choice.
And that's really when it comes down to sort of the extent that an independent seeks an opportunity to take advantage of.
Offering here.
Youll see transactions.
And it's going to come and take out of a cell.
That's in essence, the plan going forward.
And then maybe just 1 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 of past tax season.
So.
Now that you've got all of your learnings behind you as you look the kind of build for next season.
Are there any kind of opportunity there to explore initial traffic gains brand building just how do we think about sort of getting the positioning right. After.
The extensive tax season, as we head into next year.
Yes, so on partnerships, there's really 3 types of partnerships that we focus our efforts on.
1 is supporting customer acquisition and so this is leveraging.
Other brands that have.
Solid user bases or of our member basis and.
Our strong relationships with the member basis, who are open to introducing tax ex of 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, we figure out what worked with each partner figure out how we can actually collectively realize more value as we move forward and then on the.
Categories. The work best will ultimately seek additional partners.
So that's kind of 1 group the second group of around data integrations and our data partners. This is something that could really help remove friction from the tax on experience right. If we can pull in the 10.90 nines W. Twos from more partners ultimately consumers can go through their taxes of more seamlessly the.
Final category of the partnerships that we're looking at this as a little bit more emerging for us is opt.
Opportunities to bring incremental products and services.
2 of our customers.
Really the value highly and that.
We would have unique insight to based on on the tax process of they've gone through with us and so.
We're looking at from partners in that category and that could drive.
From incremental revenue as well as it could have a positive retention benefits. When you break things that are really value to your customers. So those of the areas that we're focused on.
Great. Thanks, guys.
Yeah.
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 the closing remarks.
Great. Thank you all for joining us today and for your interest in <unk> will speak the next quarter.
Okay.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
[music].
[music].
[music].
[music].