Q3 2021 Blucora Inc Earnings Call
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Ladies and gentlemen, please stand by your conference call will begin momentarily once again, ladies and gentlemen, please stay on the line.
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Ladies and gentlemen, thank you for standing by and walk into the queue 320, 21 Blue core earnings call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask the question during the session need to press star one on your telephone if you require any further assistance. Please press star zero.
Turn the call over to your hopes dealer troll you may begin.
[noise]. Thank you and what can make me want to do of course third quarter 2021 earnings conference call.
This morning, we posted the earnings release and supplemental information on the Investor Relations section of our website at <unk> Dot com.
And joined today by Chris Walters, Chief Executive Officer, and Mark Mellman, Chief Financial Officer.
Before we begin by doing that and get the win that today's discussion contains forward looking statements based on the environment as we currently see it.
Only as of the current date.
Such these include risks and uncertainties and actual results in event could get the material from our current expectation.
Please refer to our press release and other S evening finally, including our forms 10-K, and 10-Q and other reports for more information on some that'd be specific risk and uncertainty.
We assume no obligation to update our forward looking statements.
Required by law.
We will discuss both gap and non-GAAP financial measures today.
Our earnings release and supplemental financial information are available on <unk> Dot com.
<unk> pulled that conciliation, each non-GAAP financial major discuss to the nearest applicable gap measure.
With that let me end the call over to correct.
Thank you D and good morning, everyone.
I'm happy to report the Blue course third quarter financial results have been strong across the board.
The execution of our sustainable growth strategy is going well with tax Act now running ahead of schedule.
Our team is focused on continually improving the experiences for financial professionals and customers is central to our progress.
I'll know sure of 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 226.59.
Now that third peak of tax your 2020th complete.
We are focused on preparing to deliver on our best season, yet for tax Act.
I'm delighted to share that we're expecting to grow unit sure for the first time in many years and generate revenue growth in 2022, Ah 14% to 18%.
Which exceeds the expected topline cumulative annual growth rate of 7% to 9% that'd be communicated that investor day.
For the period of 2021 to 2024.
In addition, we expect 2022 segment operating income between 98, and $106 million, which would be the highest in tax Act history.
When we shared a longterm guidance during Investor day, we.
We were just complete the taxi of 2020, Steven and not yet had the opportunity to fully analyze the data from the season for the full range of opportunities to the lyrical for poor performance improvements for the business.
Each tax year, we run a number of tests to assess the potential of product enhancements marketing tactics commercial approaches and partnerships.
We also conduct extensive consumer research during and after the season to better understand.
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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 to continue to drive improvements and brand recognition.
Second we continue to work to address the highest priority areas of friction in the consumer experience.
Fortunately our recent tests <unk>.
Research and resulting data provide us with confidence about the business impact of the enhancements, including improvements and 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.
We grew our commercial partnerships tenex for 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 work and what to.
We plan to focus our efforts with existing partner on scaling strategies that worked.
One of the opportunities that we are most excited about is potentially expand 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 are optimistic 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 am pleased with the result of 2020 and the many learnings that our team has translated into action plans for tax year 2021.
I look forward to sharing your progress next quarter.
Moving onto wealth management.
I'm encouraged by our continued progress in our wealth management business.
Actions, we are taking align with the playbook, we applied to the tax business.
Earlier in the game.
Our key product and technology initiatives focused on our financial professional and and 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 advisor relationships continue to have a positive impact.
Our pipeline of independent financial professionals interested in joining our employee base R. Eight, which we refer to as a van tax planning partners continues to grow.
In mid October <unk>, another great acquisition.
Warner Finance.
Which further positions our employee base model for success in the northeast region.
This brings acquired assets from our independent channel to our employee base model to roughly 1.6 billion.
Which comprised nearly 30% of our employee base model managed assets as of September 30th 2021.
The ability to offer our financial professional 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 of anthrax.
We still have work to do on our technology experiences for our financial professional and their clients.
We are on track to launch a new compensation system in the first half of 2022 as well as delivering on the end client experienced enhancements that we shared during investor.
The actions, we have taken our delivering strong business results and we remain confident in our ability to drive positive Netflix by the end of 2022 with a continued shift towards advisory assets.
And now a few highlights for the quarter the.
The business set a record for Q3 for the greatest percentage of of total client assets at 45.9%.
Our financial professional quarterly Predock production retention in Q3 was at 97.9%.
The opportunity that we are providing for independent financial professionals to be acquired into the employee base are a model either for succession purposes or growth opportunities continues to accelerate with roughly 6 billion in assets in our pipeline.
Recruiting a transfer financial professionals from other firms is at record levels.
We're tracking financial professionals, who are seeking the combination of our tax focus scale and more personalised engagement model.
Our pipeline as strong and we expect to continue growing a recruiting assets in 2022 versus 2021.
Our Advisory Commission revenue per finished professional continues to improve up 38% versus Q3 2020.
Before heading off the Mark I'll reiterate how pleased I am with a significant progress we've made.
Our team is focused on driving long term sustainable growth by delivering delightful experiences for financial professionals and customer.
The investments we have made an <unk> customer experiences and re imagining what our marketing in partnership teams could achieve have resulted in our meaningfully enhanced guidance for the tax software segment for calendar year 2022.
Compared to our performance for 2021, and the expected 2021 to 2024 CAGR that we share at investable.
This formula is also being applied to our wealth management business, where we're seeing similar early results as we saw with our tax software business.
Improve client feedback enhanced product and technology capabilities, and marketing and business development function delivering greater value to our financial professions.
We expect to see these efforts translate to improve kpis and financial performance in the coming quarters of 2022 and beyond.
With that I'll turn it over to Mark to review, our Q3 financial performance full year 2021 outlook.
And preliminary tax software segment outlook for calendar year 2022.
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 a 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 your 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 57 cents per diluted share, which are both better than the guidance range previously provided.
Embedded within our GAAP net income figure is at $1.7 million true of associated with the H K F. S 20, twenty-two earn out which we still believe will be paid out info at $30 million.
Adjusted EBITDA, which is better than the guidance range previously provided which excludes these in certain other factors.
Negative $800000 versus $27 million in the third quarter of 2020.
Non-GAAP net income with negative $12.8 million or negative 26 cents per diluted share and there's also better than the guidance range previously provided.
Turning now to the Tech software settlement.
Tech software segment revenue for the third quarter is $5 million at the low end of our guidance range driven by the backlog at the I R. S leading to a lover funded right for those leveraging a refund transfer offering.
We expect it to be a timing issue and related amounts to be realized in the fourth quarter.
When combined with our performance during the third quarter, which leads us to raise full year revenue guidance for 2021, which I will discuss momentarily.
Segment operating income was negative $13.9 million.
And then the guidance range provided as we continue to operate the business prudently from an expensive airplanes.
Moving onto a wealth management.
The third quarter reported wealth management segment revenue.
$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 a transactional revenue and the timing of revenue recognized in the third quarter that we <unk>.
Expect it to come in and Q4.
Over the last nine months, we have also seen an increase in our payout ratio of the financial professionals, which when combined with the investments we're making it to the business has resulted in the near term margin compression.
The increase in pay out to financial professionals has been driven by a number of factors, including improved market performance, which has shifted a number of financial professionals into higher pay a 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 grade between first global and H D that which created a lined incentives toward higher R O assets, where appropriate what resulted in higher payouts.
As mentioned, we've also invested in the business and 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 the anti explaining apartments.
Fee based advisory assets were up 23% year over year to $39.8 billion with advisory asset as a percentage of total client assets I need a quarter at a new high of 45.9%.
We saw net inflows an advisory assets of $621 million with total client assets, having net outflows of $433 million, which relates in part two.
Two or change in focus toward higher are away on platform assets at lower our away off platform D. T S.
Corporate level unallocated corporate expenses came in at $6.5 million below the guidance range as we continue to monitor our corporate cough in support of our businesses.
During the quarter, we had about $2.2 million, an acquisition and integration costs related to H K F. S. At first global with the majority related to the H K F S payment.
We ended the quarter with cash and cash equivalents of $184.9 million.
And that that a $376.9 million.
Ah reported net leverage ratio at the end of the quarter was 2.6 times compared to what 0.9 times and 3.5 times at the end of Q2, 2021, and Q1 2021, respectively.
Do the nine months ending September 30th it.
Generated $74.4 million in cash from operating activities, which is more than double what we tend to read it during the same time period in 2020.
A key priorities for cash include investing in our business to fuel growth and returning cash to shareholders.
A capital investments are aimed at solving critical customer of pain points and the workflows of our customers.
Ensuring continued positive momentum and net new assets and favorable financial professional sensitive it.
All all delivery on the most critical current needs of our financial professionals.
For providing capital R a acquisitions.
With that let's turn into a full year 2021, and preliminary taxi to that one.
For the full year, we expect our tech software setting up revenue to be between $225.5 million and $226.5 million in the segment income of 85 million to $81.5 million.
The increase in revenues driven by your performance in third quarter and the expectation that we will earn additional revenue in queue for once IRS delays debate.
We expect to invest this upside and investment leading into the first quarter of 2022.
Late to our improved outlook for next tax season.
Our wealth management segment.
Full year revenue of between $645 million and $650 million.
Segment income up between 81 million and $83 million.
This represents a full your improve improvement for wealth management segment income at the midpoint of the range of $700000 as compared to the guidance release that Investor day on which includes investments we are planning planning to make in queue for for the business.
On a consolidated basis for the full year, we expect total blue core revenue between $870.5 million and $876.5 million adjusted EBITDA of between $135.5 million from $139 million.
GAAP net loss of 4.5 million, two zero million or loss of nine cents to zero cents per diluted share.
And non-GAAP income attributable attributable to Cora.
82 million to $86 million or gain of $1.65 to one dollar and 73 cents 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.
Chris mentioned earlier, you're excited to share that our efforts to drive improve sustainable growth of tax Act is ahead of schedule.
This was a valuable off season for the business, where we were able to further tests and iterate on a product and marketing approaches, which do deep analysis and testing has resulted in a more favorable view for the season. Then we could've then we could share in June when the season was just coming towards delayed clothes.
Our view for the season is predicated on driving the following key metrics.
Start late we've.
We believe that the focus on a consistent messaging from last season, the learnings from our media partner testing during the off season, and keep product enhancements will drive and meaningful improvement in our strawberry for new users.
Conversion.
The continued improvement in M. P S scores from last season.
Along with targeted enhancements to the consumer workflow I've been factored in and are supported by your 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 were excited about.
The results as a preliminary review of revenue growth of between 14% and 18% to the midpoint of 2021 full year guidance and for segment operating income of between 98 and $106 million.
Delivering results within this guidance range would have us either approaching are falling within the guidance range is 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.
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Ladies and gentlemen, if you have a question or a communist. This time. Please press the star than the one key on your Touchtone telephone. If your question has been answered he wished remove yourself from the queue. Please press the pound key.
My first question comes from Jackson added with J P. Morgan.
Okay, great. Thank you guys give me.
I think the first question is probably on the task outlook.
Curious on a on a few things so.
What date came in that you guys saw between now and the end of the tax season that like really gives you the confidence to guide.
For such a rebound.
And then if you were if you were thinking about those those kind of areas brand recognition areas of friction partnerships.
What would be kind of the main drag her in in the in the acceleration.
Yeah, and so it's actually Fortunately, it's actually all three areas.
So we felt really good about the date of the review you the off season, one of the benefits that we had as 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 attacks industry that you do very in depth analysis of the prior season as well as as additional consumer research.
And with the benefit of that additional time Uhm, we have identified a number of opportunities, but 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 I just wanted partnerships.
One of the things that provides so much opportunity as as we grew our partnerships tenfold most of our partners were in their first year.
You never 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 that'll be 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.
And all elements of optimization, we see continued improvement that will come.
From this team, having a bit more experience under their belt and having all of the data.
From last season and.
And the product experienced as we're going through the the season, we're 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 your.
Benefits associated with the things that work best so it's across the board.
Okay.
A quick follow up on that too.
What were some examples of like key areas breakthrough either and start just conversion like you know getting into the that day.
And then also.
Does any [noise] excuse me.
Any of the any of the growth depend on on kind of.
Either deepening discounts relative to tears and maybe raising type thing for next season.
So let me take the first so one example of the refinement of the product experiences at the point of entry. So I think we've talked a lot in the past about uhm. It's important that we drive start right as we move forward and so we were testing a variety of both landing pages messaging on those when learning <unk>.
Pages, and even the flow and how that flow might look different for current customers for new customers.
And in each of those areas, we saw opportunities for improvement in so that'd be simplified float for new verses returning customers that that we saw will ultimately drive a higher start right uhm and so.
We saw a variety of things at the beginning of the experienced that that we could refine.
I'm.
Price I would just say we feel good about re focusing on our valued positioning uhm in our price versus kind of the the market leader Uhm and ultimately we're gonna continue to embrace that valued position.
Okay, Uhm and if I can squeeze just one last one I'm sorry on the on the outside.
Uhm.
Yeah, how do we square kind of you know the the fact that maybe people that left the platform, where lower producing or not producing with the idea of the date that you still had kind of net outflow asset that were.
Outside of the advisory when when I think it would be good.
For the most part market performance would've been probably a little bit of a tailwind.
Yeah. So we've talked about a variety of the changes that we've making it our business and also that we believe that that will get to a point next year, where net flows will be positive and and as we get later on in the year Uhm and so some of those outflows or are driven by a variety of things that we've talked about before we.
Have invested a fair bit and improving the advisor experienced a netbook from a product and technology perspective, but also support we're seeing real traction with those efforts, but but ultimately we still have work to do and then we also made some uhm further efforts to harmonize the businesses that have been acquired Uhm one of the examples.
That was our advisory pricing grid and in that particular case, certainly the right thing for the business longterm and and consistent with.
The approach that we want to take which is to have more advisor relationships, where it makes sense for the end client, but ultimately that shift let some advisers who were more focused on DTF business to be less inclined.
Or less happy with us in the 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 <unk> of.
Of course for the next year.
Alright wonderful thank you.
Okay, ladies and gentlemen, if you have a question or a communist. This time. Please press the stars on the <unk> on your Touchtone telephone.
And I'm not showing any further questions. This time to watch from the call back over to Chris Walters.
Great. Thank you all for joining us today and for your interest in Blue Court will speak your next quarter.
Ladies and gentlemen conclude today's presentation, you may not disconnected have a wonderful day.
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