Q3 2022 Blucora Inc Earnings Call
Good morning, and welcome to the third quarter towards each will teach you blew Cora earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your.
Telephone keypad.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please.
Please note this event is being recorded.
I would now like to turn the conference over to <unk> Littrell director of Investor Relations <unk>. Please go ahead.
Thank you and welcome everyone to <unk> third quarter 2022 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.
I am 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 will contain forward looking statements.
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 SEC filings, including our most recent 10-K and Form 10-Q for more information on the specific risks and uncertainties.
We assume no obligation to update our forward looking statements, except as required by law.
We will discuss both GAAP and non-GAAP financial measures today.
Our earnings release and supplemental financial information are available on the Investor Relations section of our website at <unk> Dot Com and include full reconciliations of each non-GAAP financial measure discussed to the nearest applicable GAAP measure with that let me hand, the call over to Chris.
Good morning.
Before we share our third quarter results, Mark and I will discuss the announcement we made earlier this morning.
Yesterday, we signed an agreement to sell our software business tax Act to an affiliate of <unk> for $720 million in cash we expect to close the transaction by the end of the year.
While the decision to sell tax that may come as a bit of a surprise for some of you or the board has been consistent niche positions remain open to opportunities to create or unlock value for shareholders.
We commenced the process to explore such a transaction and citizens offer validates the extraordinary work our tax team has done to grow the business by enhancing our products and customer care approach as well as the significant strides made acquiring customers by increasing the sophistication of our marketing efforts and scaling partnerships.
A few of the teams numerous accomplishments over the last few years include increasing NPS scores, providing exemplary customer care with free access to tax experts and having tax ex products rated as the best in market by multiple third party reviewers including business insider.
We believe the sale of <unk>, a highly respected private equity firm with deep experience in the tax space is the right next step for <unk> to continue to scale.
Through our discussions we recognize that we are completely aligned with <unk> on the importance of meeting customers needs, including delivering exceptional software combined with best in class customer care for the upcoming tax year and in the future.
<unk> has indicated that it intends to operate tax act independently during the transition period expected to be six to nine months post closing.
On a business as usual basis and prepare for the upcoming tax season to ensure our customers are not impacted by the transaction.
Following the closing we will rebrand <unk>, two <unk> and focus solely on executing our long term sustainable growth strategy for a tax focused wealth business, which has delivered impressive results over the last couple of years.
This means aligning the company's operations and enabling strategic investment in high return initiatives to best support the needs of our financial professionals and CPA firms and their clients.
Additionally, the transaction should allow us to return significant capital to shareholders.
Looking ahead, we see many opportunities for our wealth business as a pure play wealth management company, we will be laser focused on further differentiating ourselves as the partner of choice for tax focused financial professionals tax professionals and ppas.
Now I'll turn it over to Mark to discuss some of the other details regarding both capital return and a long term growth algorithm for <unk>.
Thank you Chris as Chris shared the sale of the tax Act business is compelling for a number of reasons.
First we will create a differentiated pure play tax focused wealth management company.
Monetizing tax act at a meaningful valuation following a successful turnaround by the management team.
Second the proceeds of the transaction totaling expected after tax net cash proceeds of roughly $620 million will be used to pay down existing debt.
With the go forward net debt to EBITDA target of two to three turns we will be in position to return significant capital to shareholders, which is expected to be in the range of $400 million to $450 million post close.
Moving forward <unk> will have the focus and cost structure to invest for growth and deliver strong adjusted EBITDA margins, which following the transition services period, we would expect to be in the 16% to 18% range, assuming a more streamlined corporate structure.
This transaction will position each of our businesses to operate from a position of strength. After both turned in peak performance is this year across the most critical kpis.
To focus on <unk>, given it will be the Gulf forward company through the first nine months of this year. It has delivered record breaking results across the following metrics.
One 3 billion and newly recruited assets on a year to date basis.
This roughly $329 million more than our record performance in all of 2021.
$380 million in Q3 positive net flows our highest result since Q1 2018.
Roughly $810 million and year to date positive net flows the highest since at least 2015, when we acquired HD vest.
99% plus average quarterly production retention rate year to date considered best in class in the industry.
And lastly advisory assets, representing 48, 8% of overall assets with 10 straight quarters of upward movement.
With this strong foundation in place we project <unk> to grow revenue annually in the eight 5% to 11% range of the medium term with an assumption of the market growing at 4% and additional growth drivers of newly recruited assets.
Net growth on existing assets, and lastly high value mix shifts towards advisory and Ara Nia business rounding out our growth algorithm.
As stated earlier, our profitability expectations of 16% to 18% adjusted EBITDA margins for the go forward company are grounded in a streamlined corporate structure.
The current interest rate environment, and our ability to focus our attention on growing <unk> tax and an efficient and scalable manner.
The TSA period is likely to last between six to nine months after which we would expect the new margin profile to begin to take hold.
With that let me turn it back to Chris to discuss our third quarter results.
Thanks, Mark now I'll highlight our third quarter results, beginning with our tax software segment.
As we've mentioned before our plan to drive <unk> to profitable sustainable long term growth has been built on a base of unit growth fueled by new customer acquisition and customer retention, enabling market share gains combined with higher <unk> through delivering more value to customers.
Now that we're past the October tax extension window and with the overall positive third peak performance, we have better visibility across the entirety of the taxes.
The DIY market has performed in line with expectations for the second half of the year, we have maintained our market share gains and our forecast for the balance of the year has us coming in slightly higher on revenue and stable at the midpoint of our segment income guidance.
With tax year 'twenty, one now largely behind US the tax act will shift their efforts to fully prepare for the upcoming tax season.
This season, the team will focus on a few key areas.
Investing in tools and technologies to further improve the efficiency of our industry, leading customer care and tax expertise.
Enhancing our products, including an improved mobile offering for consumers and enhanced data important capabilities and forms covered for tax pros.
And then continuing to scale, our partnership efforts and refine our marketing approach to acquire new customers.
Overall, we had a strong season, despite the headwind of market declines.
We met or exceeded most operating metrics, we accelerated topline growth gain market share ahead of schedule increased <unk> by utilizing bundling of various products and enhanced our value proposition by providing free access to experts.
I am confident that <unk> will carry this momentum into next season and continue to deliver the best full featured value software and exceptional customer care in the market.
Now turning to our wealth management business.
As has been the case over the past several quarters underperformance in the equity markets negatively impacted either driven revenue as assets associated with equities have declined with the market.
However, this was partially offset by an increase in cash sweep revenue driven by the portion of assets held in cash and increased interest rates.
In addition, we saw lower payouts for financial professionals due to decreased market levels.
These financial metrics, we have continued to reach new heights across a range of our most important key indicators.
First our net positive flows for the third straight quarter, we have seen net positive asset flows in Q3, we had $380 million and net new assets the highest since Q1 2018.
Our year to date net flows have now topped $810 million.
Second recruiting.
We also continued to successfully recruit financial professionals away from larger firms with over $200 million of newly recruited assets this quarter and have a great pipeline for the remainder of the year.
Third.
<unk> acquisitions and succession plans this quarter, we closed four acquisitions and our RA business totaling 20 acquisitions since we began the program.
Fourth on financial professionals attrition, we had fewer departures than anticipated and this combined with recruited financial professionals allowed us to virtually stay flat quarter over quarter.
Of the financial professionals, who departed during the quarter about 81% were non producing financial professionals with less 50000 enrolling gross production.
Finally, our production retention rate, we maintained our consistently high production retention rate coming in at 98, 6% for the quarter.
Now I'll turn it over to Mark and.
And we'll be happy to answer any questions. After the prepared remarks.
Thank you Chris I'll provide some additional detail on our third quarter results and our outlook for the remainder of the year, starting with third quarter results.
Total revenue of $171 7 million, a decrease of 1% versus the third quarter of the prior year total revenue was driven primarily by the wealth management business gap.
GAAP net loss of $21 8 million or a loss of <unk> 46 per diluted share.
Our 21% and 20% better than prior year, respectively.
Adjusted EBITDA, which excludes certain other factors was $7 $7 million meaningfully better than the prior year third quarter figure loss.
Of $800000.
non-GAAP net loss of $9 8 million or a loss of <unk> 20 per diluted share.
Both 23% better than prior year.
Turning now to the tax software stack.
<unk> software segment revenue for the third quarter was $6 $7 million.
A $1 $6 million improvement versus prior year, driven by greater extensions volume versus prior year.
We expect this trend to continue into the fourth quarter, resulting in a slight improvement at the midpoint for tax act full year revenue.
Segment operating loss was $12 $5 million better than the prior year by $1 $3 million driven primarily by the improved revenue performance.
Moving on to wealth management.
Third quarter reported wealth management segment revenue was $165 million up 1% sequentially. Despite a meaningfully lower asset base on which we build for advisory assets offset by.
By the impact of the rising interest rate environment.
Transaction based commission revenues were flat quarter over quarter coming in at $17 9 million.
On a year over year basis, total third quarter wealth management revenue was down 2%.
Wealth management segment operating income came in at $27 6 million for the third quarter up 74% sequentially driven by the rising interest rate environment and up 41% versus the third quarter of the prior year.
Segment operating expenses were down nine points.
$4 million sequentially, and $12 $2 million year over year.
Changes in operating expenses included declines in cost of revenue, which is highly variable and dependent on changes in advisory and commission revenue.
Of $8 $2 million at $15 1 million respectively.
On a year over year basis, our other operating expenses increased at a lower rate than compared to the first and second quarters of the year as the investment has the investments made in the second half of 2021 began to normalize.
We saw net inflows in advisory assets of $514 million with total client assets, having net inflows of $380 million the third straight quarter of driving positive net flows for both advisory and total assets.
Our year to date net flows of $810 million is the highest value since at least 2015.
Newly recruited assets continued to be another bright spot for the business in the third quarter. We added another $214 million of total client assets, bringing the year to date total to $1 3 billion.
Total client assets decreased 16% year over year to $72 $6 billion, reflecting broader market declines partially offset by successful recruiting efforts.
Fee based advisory assets were down 11% year over year to $35 $4 billion with advisory assets as a percentage of total client assets ending the quarter at 48, 8% an increase of 80 basis points versus last quarter and up 290 basis points versus Q3 of 2021.
We ended the quarter with cash and cash equivalents of $91 $1 million and net debt of $434 3 million or.
Our reported net leverage ratio at the end of the quarter was three three times.
In the quarter, we paid down $35 million on our term loan balance as well as paid the final installment of the earn out related to the <unk> acquisition and the amount of $23 million.
With that let's turn to our full year 2022 outlook.
For the full year, we expect our tax software segment revenue of between $249 million to $250 million.
And segment income up 89 million to $91 million.
For our wealth management segment, we now expect full year revenue of between $660 million to $665 million.
With segment income of $93 million to $95 million, reflecting an uptick in more profitable sweep income.
This translates to a consolidated full year outlook of revenue of between $909 million and $915 million adjust.
Adjusted EBITDA of 152 million to $156 5 million.
GAAP net income attributable to <unk> of 36 million to $41 million or <unk> 73 to 83 per diluted share and non-GAAP net income of $86 million to $95 million or $1 75 to $1 84 per diluted share.
This outlook includes $30 million to $29 5 million in corporate unallocated expense.
Expectations for next year continue to be robust based on current fed rate expectations.
I had shared last quarter that based on rate expectations and of course market levels. We could see wealth management segment income approached $120 million to $150 million in 2023.
While market levels are down somewhat from the end of Q2 and commission revenues continue to show weakness, we estimate that an improved outlook for rates at 4% by year end, we now have us delivering roughly $135 million of segment income at an S&P level of 3000, which is another 16% decline from the S&P closed.
As of September 30th and upwards of $170 million at market levels above $42 50.
This concludes our prepared remarks, we will now turn the call over to the operator for Q&A operator.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If you're using a speaker phone please pick up your handset before pressing the keys.
Any time your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Dan.
Dan.
Excuse me Dan Kronos.
With the benchmark company.
<unk> go ahead.
Great. Thanks, good morning.
Jeff and I thought I'd seen everything from you guys Chris.
So the scale up.
Tac.
Can you just give us.
Some thoughts on timing, obviously the market basket right now.
I think you guys had really good momentum.
Clearly taking share.
I know that you guys have the debt.
Back coming up so obviously this takes care of all of that end market.
Mark you gave some good color on capital returning her prepared remarks, but just kind of why why now.
Can you talk a little bit about the bidding process how competitive was it.
Just maybe some initial thoughts around that would be helpful. Thanks.
Sure we've been monitoring the business and market conditions for selling <unk> for a number of years right. We've shared publicly that we have.
Constantly been reviewing our strategic options until now there were a number of obstacles to achieving an attractive value for the business, including the pandemic.
Unusual revenue and expected expense variations associated with 2020 in 2021 seasons with the shifts in timing.
So we decided earlier this year that it was the right time to add.
It's a more deliberate process to explore such a transaction.
Simmons offer validates the extraordinary work of the team over the last couple of years that you were highlighting we do feel good about the progress in the business.
And that progress in the business allowed us to get a evaluation that we thought was a good.
A good number for the business.
Going forward.
And just how do we think about and maybe this is for Mark how do we think about.
Where leverage should be now that you'll be in a net cash position I mean, we can kind of do the math you've laid out for us, but I just wanted to get a sense from you how.
How much cash you want to keep on the balance sheet here, obviously, you talked last quarter, Chris into those do about the environment being.
Maybe a little bit harder to make to do M&A.
But.
With sort of the streamlined business you have and a net cash position you have an interesting opportunity that makes you more attractive potentially to others to go out there.
Really aggressively add especially I mean, how.
How do we think about kind of those puts and takes.
Sure.
Thanks for the questions. This morning, Dan.
So im not going to get into exact cash balances that we expect to hold we have a lot of work to do.
Getting from sign to close and working through transition. So what have you, but what I did share is that we're targeting a two to three times net leverage ratio for this business going forward.
Based on where we expect to end this year.
Wed expect that that leverage ratio would be closer to the high end of that range and that next year with the expected improvement in profitability as well as cash generation.
We would in essence grow our way down to the lower part of that range and that range find the right balance between allowing us to return a significant amount of capital to our shareholders the $400 million to $450 million, obviously dependent on leverage markets. When this deal closes.
And.
Leveraging the financing markets and having some.
I'm, saying that.
Just feels like a right balance considering the macroeconomic picture today.
We will continue to pursue our capital allocation strategy.
As I've stated publicly buybacks always serve as that benchmark by which we make capital allocation decisions.
We're still extremely excited about the on platform acquisitions and the profile, but that helps our business develop over time and so it just comes down to balance them going forward.
Got it that's helpful and maybe just last one and I'll step aside for others in the wealth management business continues to do well you gave us underlying market assumption in your long term outlook I think mark you've said historically that.
Rates, probably closer to three or three in a quarter or more.
Sustainable in there I assume you're taking kind of that longer term trajectory and assuming that you guys can continue to kind of drive productivity and net inflow that you're kind of the balance of the way to your organic number is that the right way to look at it.
Yes, I would say the revenue guidance figures, our long term outlook that we provided.
Is really M&A.
Static environment, one in which rates are not moving around so I wouldn't look at that ex rates. So it's a 4% baseline market growth assumption with the difference coming from those other elements that I spoke about.
Okay, well, congratulations on selling tax and another good quarter for wealth. So I will step aside guys. Thank you. Thanks Dan.
Again, if you have a question. Please press Star then one.
The next question comes from Josh Ziegler with cancer Fitzgerald. Please.
Please go ahead.
Yes, hi, good morning, Thanks for taking my question and congratulations on the results as well as the sale.
I'm curious about learning a little more on your vision for realizing competitive advantages on the manpack moving forward without pack that well then thats still focused on generating tax alpha and how do you see our client funnel evolving without the potential to cross sell and Pac man. Thank you.
Fortunately our team has been executing on a sustainable growth strategy for multiple years.
The business results have been quite strong.
So the plan going forward is to continue to execute that strategy, which is a tax focused wealth strategy, we wanted to be.
The best provider, who works with.
Tack firms CPA grant those who want to align with those firms to offer wealth management.
And so it will be a continued focus on providing best in class service supporting our financial professionals with the right growth and marketing efforts to help them grow their businesses.
And then we also have the mix shifts that are going on in our business, which is the gradual transition to advisory as well as <unk>.
Lately faster growth fueled by some of the on platform M&A.
Into the RA business, which is margin enhancing for us.
So we believe that we can continue to execute that strategy in width.
And level of focus we can see some really strong results going forward in terms of anything that would be lost with the.
The departure of the tax Act.
We have built over the last couple of years, a really strong tech and marketing functions or capabilities within the <unk> business that had levers a lot of knowhow and capability that has and processes that have come from the tax act business given that we've built a very strong team we do not expect.
Any degradation.
Degradation in the performance associated with the separation.
I appreciate that color Thats very helpful.
And then diving a little further in <unk> as the ongoing.
Macro slowdown.
Any impact on your outlook, where the wealth management business, specifically are there recessionary risk within the business model, perhaps aside from poor equity market performance such as net flows mix shift towards advisory that we do experience with global growth slowdown.
Yes, we feel really fortunate right clearly.
On certain kind of macro environment. There are some risks you highlighted the biggest one which is the equity market risks as we've talked about historically.
The interest rate impact on cash we tend.
<unk> tend to Trump the impacts of the equity market weakness.
And what you've seen is even in this current economic environment virtually all of our operating metrics were very strong and so we're quite optimistic about the outlook of the business.
Even in a potential recessionary environment.
Understood. Thank you very much and congratulations once again.
Great. Thanks, so much.
Just one moment. Please again if you have a question press Star then one.
The next question comes from.
Alex Paris with Barrington Research.
Please go ahead.
Hi, guys congratulations on the outperformance in the quarter and the sale of tax Act.
Just a couple of questions clarifying questions I guess.
Net debt as of $9 30 was $430 million and Youre expecting $620 million in after tax proceeds from the sale of tax act by yearend.
Yeah.
Okay.
That leaves you about $190 million and net debt by year end you want to run the business at two to three times whats. The I don't have the 10-Q open what's the debt.
Charity.
Schedule kind of going forward.
And it sounds like Youre, implying that youre not going to pay off all the debt.
Which leaves more to return to shareholders and to fund organic growth and inorganic growth initiatives.
And so the expectation Alex would be too.
Basically refinance at the point of close.
Whether that takes the form of paying down the entire debt completely and then just basically refinancing back up to two to three times.
That enables us to return the number I mentioned earlier between four and 450 back to shareholders, which is our expectation.
To return significant majority if not all of the excess capital back to shareholders.
We're fortunate to operate a business that generates meaningful cash flow, especially going into next year, which will allow us on an ongoing basis to continue doing the things that we do to grow this business, whether it be capital investments on platform acquisitions.
Regular ordinary course buybacks, allowing us to basically return all of this capital back.
Great and then thank you for that.
And then you said that there'll be a temporary services agreement that blip Cora is going to provide services to the new owner of tax Act is that correct.
Yes, so we will be providing a variety of services to facilitate a really smooth transition right. They are excited about the business. They wanted to operate.
We effectively through the tax season and beyond and so we do have some shared services that operate across the business sense, where we'd be.
Providing the services for some period of time.
And then your compensation for providing those services would come in through in other line in the P&L I assume.
Yes, we will work through the actual mechanics of oral it'll show up Alex, but we will make sure to create some clarity.
Okay, and then last and associated question.
Over the medium term the pure play broker dealer in the wealth management business is expected to return in the half to 11% organic growth.
And adjusted EBITDA margins in the 16% to 18% what what assumption are you, making for overhead or corporate costs in that forecast.
And so it's an all inclusive number.
So as we first and foremost our goal is to get from signing to close.
After that we have this transition services period, where we need to ensure that tax act.
Has all the tools that it needs in order to continue delighting our customers.
It's after that where a lot of the savings or efficiencies will start to take hold and so it's an all encompassing number it's the core wealth management business plus what we call today unallocated corporate coming together to create that margin profile as we get closer to close.
We share the next quarter's earnings we'll be able to share a bit more detail.
Okay, well that sounds great again, congratulations on the quarter and thanks for the additional color.
Got it.
This concludes our question and answer session I would like to turn the conference back over to Chris Walters for any closing remarks.
Okay.
Thank you all for joining us today and for your interest in <unk> will speak to you next quarter.
The conference has now concluded goodbye. Thank you for attending today's presentation you may now disconnect.
Okay.
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Yeah.
Yes.
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Good morning, and welcome to the third quarter 2022 Blue Corp Earnings Conference call, all participants will be in listen only mode.
Should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
Please note. This event is being recorded I would now like to turn the conference over to <unk> Littrell director of Investor Relations <unk>. Please go ahead.
Thank you and welcome everyone to <unk> third quarter 2022 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.
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 will contain forward looking statements speak only as of the current date.
That's such they include risks and uncertainties.
Actual results and events could differ materially from our current expectations.
Please refer to our press release and our SEC.
SEC filings, including our most recent 10-K and Form 10-Q.
More information on the specific risks and uncertainties.
We assume no obligation to update our forward looking statements, except as required by law.
We will discuss both GAAP and non-GAAP financial measures today.
Our earnings release and supplemental financial information are available on the Investor Relations section of our website at <unk> Dot Com and include full reconciliations of each non-GAAP financial measure discussed to the nearest applicable GAAP measure with that let me hand, the call over to Chris.
Good morning.
Before we share our third quarter results, Mark and I will discuss the announcement we made earlier this morning.
Yesterday, we signed an agreement to sell our software business tax Act to an affiliate of Finland for $720 million in cash.
We expect to close the transaction by the end of the year.
While the decision to sell tax act may come as a bit of a surprise for some of your the board has been consistent and it's positioned to remain open to opportunities to create or unlock value for shareholders.
We commenced the process to explore such a transaction and citizens offer validates the extraordinary work our tax team has done to grow the business by enhancing our products and customer care approach as well as the significant strides made acquiring customers by increasing the sophistication of our marketing efforts and scaling partnerships.
A few of the teams numerous accomplishments over the last few years include increasing NPS scores, providing exemplary customer care with free access to tax experts and having tax ex products rated as the best in market by multiple third party reviewers including business insider.
We believe the sale of the syndrome, a highly respected private equity firm with deep experience in the tax space is the right next step for tax act to continue to scale.
Through our discussions we recognize that we are completely aligned with them on the importance of meeting customers needs, including delivering exceptional software combined with best in class customer care for the upcoming tax year and in the future.
<unk> has indicated that it intends to operate tax act independently during the transition period expected to be six to nine months post closing.
On a business as usual basis and prepare for the upcoming tax season to ensure our customers are not impacted by the transaction.
Following the closing we will rebrand <unk>, two <unk> and focus solely on executing our long term sustainable growth strategy for our tax focused wealth business, which has delivered impressive results over the last couple of years.
This means aligning the company's operations and enabling strategic investment in high return initiatives to best support the needs of our financial professionals and CPA firms and their clients.
Additionally, the transaction should allow us to return significant capital to shareholders.
Looking ahead, we see many opportunities for our wealth business as a pure play wealth management company, we will be laser focused on further differentiating ourselves as the partner of choice for tax focused financial professionals tax professionals and ppas.
Now I'll turn it over to Mark to discuss some of the other details regarding both capital return and a long term growth algorithm for <unk>.
Thank you Chris as Chris shared the sale of the tax Act business is compelling for a number of reasons.
First we will create a differentiated pure play tax focused wealth management company.
Monetizing tax act and a meaningful valuation following a successful turnaround by the management team.
Second the proceeds of the transaction totaling expected after tax net cash proceeds of roughly $620 million will be used to pay down existing debt.
With the go forward net debt to EBITDA target of two to three turns we will be in position to return significant capital to shareholders, which is expected to be in the range of $400 million to $450 million post close.
Moving forward <unk> will have the focus and cost structure to invest for growth and deliver strong adjusted EBITDA margins, which following the transition services period, we would expect to be in the 16% to 18% range, assuming a more streamlined corporate structure.
This transaction will position each of our businesses to operate from a position of strength. After both turned at peak performance is this year across the most critical kpis.
To focus on <unk>, given it will be the Gulf power company to the firm.
First nine months of this year. It has delivered record breaking results across the following metrics.
One 3 billion and newly recruited assets on a year to date basis.
It is roughly $329 million more than our record performance in all of 2021.
$380 million in Q3 positive net flows our highest result since Q1 2018.
Roughly $810 million and year to date positive net flows.
Highest since at least 2015, when we acquired HD vest.
Our 99% plus average quarterly production retention rate year to date considered best in class in the industry.
And lastly advisory assets, representing 48, 8% of overall assets with 10 straight quarters of upward movement.
With this strong foundation in place we project <unk> to grow revenue annually in the eight 5% to 11% range over the medium term with an assumption of the market growing at 4% and additional growth drivers of newly recruited assets net growth on existing assets and lastly high value mix shifts towards advisory.
<unk> and Ara NRA business rounding out our growth algorithm.
As stated earlier, our profitability expectations of 16% to 18% adjusted EBITDA margins for the go forward company are grounded in a streamlined corporate structure.
The current interest rate environment, and our ability to focus our attention on growing <unk> tax and an efficient and scalable manner.
The TSA period is likely to last between six to nine months after which we would expect the new margin profile to begin to take hold.
With that let me turn it back to Chris to discuss our third quarter results.
Thanks, Mark now I'll highlight our third quarter results, beginning with our tax software segment.
As we have mentioned before our plan to drive <unk> to profitable sustainable long term growth has been built on a base of unit growth fueled by new customer acquisition and customer retention, enabling market share gains combined with higher <unk> through delivering more value to customers.
Now that we're past the October tax extension window and with the overall positive third peak performance, we have better visibility across the entirety of the tax season.
The DIY market has performed in line with expectations for the second half of the year, we have maintained our market share gains and our forecast for the balance of the year has us coming in slightly higher on revenue and stable at the midpoint of our segment income guidance.
With tax year 'twenty, one now largely behind US the tax act team will shift their efforts to fully prepare for the upcoming tax season.
This season, the team will focus on a few key areas.
Investing in tools and technologies to further improve the efficiency of our industry, leading customer care and tax expertise.
Enhancing our products, including an improved mobile offering for consumers enhanced data import capabilities in forms covered for tax pros.
And then continuing to scale, our partnership efforts and refine our marketing approach to acquire new customers.
Overall, we had a strong season, despite the headwind of market declines, we met or exceeded most operating metrics, we accelerated topline growth gain market share ahead of schedule and increased <unk> by utilizing bundling, our various products and enhanced our value proposition by providing free access to <unk>.
Experts.
I am confident that <unk> will carry this momentum into next season and continue to deliver the best full featured value software and exceptional customer care in the market.
Now turning to our wealth management business.
As has been the case over the past several quarters underperformance in the equity markets negatively impacted either driven revenue as assets associated with equities have declined with the market.
However, this was partially offset by an increase in cash sweep revenue driven by the portion of assets held in cash and increased interest rates.
In addition, we saw lower payout for financial professionals due to decreased market levels.
Beyond these financial metrics, we have continued to reach new heights across a range of our most important key indicators.
First our net positive flows for the third straight quarter, we have seen net positive asset flows in Q3, we had $380 million and net new assets the highest since Q1 2018 our.
Our year to date net flows have now topped $810 million.
Second recruiting.
We also continued to successfully recruit financial professionals away from larger firms with over $200 million in newly recruited assets this quarter and have a great pipeline for the remainder of the year.
Third.
Firm acquisitions and succession plans this quarter, we closed four acquisitions and our RA business totaling 20 acquisitions since we began the program.
Fourth on financial professionals attrition, we had fewer departures than anticipated and this combined with recruited financial professionals allowed us virtually stay flat quarter over quarter.
However, the financial professionals, who departed during the quarter about 81% were non producing financial professionals with less 50000 enrolling gross production.
Finally, our production retention rate, we maintained our consistently high production retention rate coming in at 98, 6% for the quarter.
Now I'll turn it over to Mark and we'll be happy to answer any questions. After the prepared remarks.
Thank you Chris I'll provide some additional detail on our third quarter results and our outlook for the remainder of the year Star.
Starting with third quarter results.
Total revenue of $171 $7 million.
A decrease of 1% versus the third quarter of the prior year total revenue was driven primarily by the wealth management business.
GAAP net loss of $21 8 million or a loss of <unk> 46 per diluted share.
Which are 21% and 20% better than prior year, respectively.
Adjusted EBITDA, which excludes certain other factors was $7 7 million meaningfully better than the prior year third quarter figure loss.
Of the $800000.
non-GAAP net loss of $9 8 million or a loss of <unk> 20 per diluted share.
Both 23% better than prior year.
Turning now to the tax software stack.
Tax software segment revenue for the third quarter was $6 7 million.
One $6 million improvement versus prior year, driven by greater extensions volume versus prior year.
We expect this trend to continue into the fourth quarter, resulting in a slight improvement at the midpoint for tax act full year revenue.
Segment operating loss was $12 5 million better.
Better than the prior year by $1 $3 million driven primarily by the improved revenue performance move.
Moving on to wealth management.
Third quarter reported wealth management segment revenue was $165 million up 1% sequentially. Despite a meaningfully lower asset base on which we build for advisory assets offset.
Offset by the impact of the rising interest rate environment.
Transaction based commission revenues were flat quarter over quarter coming in at $17 9 million.
On a year over year basis, total third quarter wealth management revenue was down 2%.
Wealth management segment operating income came in at $27 6 million for the third quarter up 74% sequentially driven by the rising interest rate environment and up 41% versus the third quarter of the prior year.
Segment operating expenses were down $9 4 million sequentially and $12 $2 million year over year.
<unk> and operating expenses included declines in cost of revenue, which is highly variable and dependent on changes in advisory and commission revenue.
Of $8 $2 million at $15 1 million respectively.
On a year over year basis, our other operating expenses increased at a lower rate than compared to the first and second quarters of the year.
The investment has the investments made in the second half of 2021 began to normalize.
We saw net inflows in advisory assets of $514 million with total client assets, having net inflows of $380 million the third straight quarter of driving positive net flows for both advisory and total assets our.
Our year to date net flows of $810 million is the highest value since at least 2015.
Newly recruited assets continued to be another bright spot for the business in the third quarter. We added another $214 million of total client assets, bringing the year to date total to $1 3 billion.
Total client assets decreased 16% year over year to $72 6 billion, reflecting broader market declines partially offset by successful recruiting efforts.
Fee based advisory assets were down 11% year over year to $35 $4 billion with advisory assets as a percentage of total client assets ending the quarter at 48, 8% an increase of 80 basis points versus last quarter and up 290 basis points versus Q3 of 2021.
We ended the quarter with cash and cash equivalents of $91 $1 million and net debt of $434 3 million.
Our reported net leverage ratio at the end of the quarter was three three times.
In the quarter, we paid down $35 million on our term loan balance as well as paid the final installment of the earn out related to the <unk> acquisition and the amount of $23 million.
With that let's turn to our full year 2022 outlook.
For the full year, we expect our tax software segment revenue of between $249 million to $250 million.
And segment income of 89 million to $91 million.
For our wealth management segment, we now expect full year revenue of between $660 million to $665 million.
With segment income of $93 million to $95 million, reflecting an uptick in more profitable sweep income.
This translates to a consolidated full year outlook of revenue of between $909 million and $915 million adjust.
Adjusted EBITDA of 152 million to $156 5 million.
GAAP net income attributable to <unk> of $36 million to $41 million or <unk> 73 to 83 per diluted share and non-GAAP net income of $86 million to $90 5 million or <unk>.
$1 75 to $1 84 per diluted share.
This outlook includes $30 million to $29 5 million in corporate unallocated expense.
Expectations for next year continue to be robust based on current fed rate expectations IHS.
It showed last quarter that based on rate expectations and of course market levels, we could see wealth management segment income approached $120 million to $150 million in 2023.
While market levels are down somewhat from the end of Q2 and commission revenues continue to show weakness, we estimate that an improved outlook for rates at 4% by year end, we now have us delivering roughly $135 million of segment income at an S&P level of 3000, which is another 16% decline from the S&P close.
As of September 30th.
Upwards of $170 million at market levels above $42 50.
This concludes our prepared remarks, we will now turn the call over to the operator for Q&A operator.
We will now begin the question and answer session.
Ask a question you May press Star then one on your telephone keypad.
We are using a speakerphone please pick up your handset before pressing the keys.
At any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Dan.
Excuse me Dan Kronos.
With the benchmark company.
Please go ahead.
Great. Thanks, good morning.
Jeff and I thought I'd seen everything from you guys Chris.
So the scale up.
Maybe can you just give us.
Some thoughts on timing, obviously the market basket right now.
Thank you guys had really good momentum.
Clearly taking share.
I know that you guys have.
The debt.
Back coming up so obviously this takes care of all of that end market.
Mark you gave some good color on capital returning her prepared remarks, but just kind of why why now.
Can you talk a little bit about the bidding process how competitive was it.
Just maybe some initial thoughts around that would be helpful. Thanks.
Sure we've been monitoring the business and market conditions for selling <unk> for a number of years right. We've shared publicly that we are.
Constantly been reviewing our strategic options.
Till now there were a number of obstacles to achieving an attractive value for the business, including the pandemic any unusual revenue and expected expense variations associated with 2020 in 2021 seasons with the shifts in timing.
So we decided earlier this year that it was the right time.
And then some more deliberate process to explore such a transaction.
Simmons offer validates the extraordinary work of the team over the last couple of years that you were highlighting we do feel good about the progress in the business.
And that progress in the business allowed us to get a evaluation that we thought was a.
Good good number for the business.
Going forward.
And just how do we think about and maybe this is for Mark how do we think about.
Where leverage should be now that you'll be in a net cash position I mean, we can kind of do the math you've laid out for us, but I just wanted to get a sense from you how.
How much cash you wanted to keep on the balance sheet here, obviously, you talked last quarter, Okay, Chris into those do about the environment being.
Maybe a little bit harder to make to do M&A.
But.
With sort of the streamlined business you have and is a net cash position you have an interesting opportunity.
More attractive potentially to others to go out there.
Really aggressively add especially among all right.
How do we think about kind of those puts and takes.
Sure.
Thanks for the questions. This morning, Dan.
So I'm not going to get into exact cash balances that we expect to hope we have a lot of work to do.
Getting from sign to close and working through transition. So what have you, but what I did share is that we're targeting a two to three times net leverage ratio for this business going forward.
Based on where we expect to end this year.
I would expect that that leverage ratio would be closer to the high end of that range and that next year with the expected improvement in profitability as well as cash generation.
In essence grow our way down to the lower part of that range and that range find the right balance between allowing us to return a significant amount of capital to our shareholders the $400 million to $450 million.
Dependent on leverage markets when this deal closes.
And.
Leveraging the financing markets and having something that.
Just feels like a right balance considering the macroeconomic picture today.
We will continue to pursue our capital allocation strategy.
As I've stated publicly buybacks always serve as that benchmark by which we make capital allocation decisions. We are still extremely excited about the on platform acquisitions.
The profile, but that helps our business develop over time.
So it just comes down to balance them going forward.
Got it that's helpful.
Just last one and I'll step aside for others in the wealth management business continues to do well and gave us underlying market assumption in your long term outlook, Mark you've said historically that.
Rates, probably closer to three or three and a quarter or more.
Sustainable in there.
I assume you're taking kind of that longer term trajectory and assuming that you guys can continue to kind of drive productivity and net inflows. If you kind of the balance of the way to your organic number is that the right way to look at it.
I would say the revenue guidance figures, our long term outlook that we provided.
Is really M&A.
Static environment, one in which rates are not moving around so I wouldn't look at that ex rates. So it's a 4% baseline market growth assumption with the difference coming from those other elements that I spoke about.
Okay well.
Congratulations on selling tax and another quarter or so I will step aside guys. Thank you hey, thanks, Dan.
Again, if you have a question. Please press Star then one.
The next question comes from Josh Ziegler with cancer Fitzgerald.
Please go ahead.
Yes, hi, good morning, Thanks for taking my question and congratulations on the results as well as the sale.
I'm curious about learning a little more on your vision for realizing the competitive advantages in a band Act moving forward without tax that well then thats still focused on generating tax alpha and how do you see our client funnel evolving without the potential to cross sell and Pac man. Thank you.
Fortunately our team has been executing on a sustainable growth strategy for multiple years.
The business results have been quite strong and so the plan going forward is to continue to execute that strategy, which is a tax focused wealth strategy, we wanted to be.
The best provider to <unk>.
Works with.
Tax firms CPA grant those who want to align with those firms to offer wealth management.
And so it will be a continued focus on providing best in class service supporting our financial professionals with the right growth and marketing efforts to help them grow their businesses.
And then we also have the mix shifts that are going on in our business, which is the gradual transition to advisory as well as.
Slightly faster growth fueled by some of the on platform M&A.
Into the <unk> business, which is margin enhancing for us.
So we believe that we can continue to execute that strategy in width.
And level of focus we can see some really strong results going forward in terms of anything that would be lost with the.
The departure of the tax Act business.
We have built over the last couple of years of really strong tech and marketing functions or capabilities within the <unk> business that had levers a lot of knowhow and capability that has and processes that have come from the tax act business given that we've built a very strong team we do not expect.
Any degradation.
Degradation in the performance associated with the separation.
I appreciate that color Thats very helpful.
And then diving a little further into event as the ongoing macro slowdown.
Any impact on your outlook, where the wealth management business, specifically are there recessionary risk within the business model, perhaps aside from poor equity market performance such as net flows mix shift towards advisory that we do experience with global growth slowdown.
Yes, we feel really fortunate right clearly.
Certain kind of macro environment. There are some risks you highlighted the biggest one which is the equity market risks as we've talked about historically.
The interest rate impacts and cash sweep.
Tend to Trump the impacts of the equity market weakness.
And what you've seen is even in this current economic environment virtually all of our operating metrics were very strong and so we're quite optimistic about the outlook of the business.
Even in a potential recessionary environment.
Understood. Thank you very much and congratulations once again.
Great. Thanks, so much.
Just one moment. Please again if you have a question press Star then one.
The next question comes from.
Alex Paris with Barrington Research.
Please go ahead.
Hi, guys congratulations on the outperformance in the quarter and the sale of tax Act.
Just.
Couple of questions clarifying questions I guess.
Net debt as of $9 30 was $430 million and Youre expecting $620 million in after tax proceeds from the sale of tax act by year end.
Yes.
That leaves you about $190 million and net debt by year end you want to run the business at two to three times whats. The I don't have the 10-Q open what's the debt.
The maturity.
Schedule kind of going forward and it sounds like youre, implying that youre not going to pay off all the debt.
Which leaves more to return to shareholders and to fund organic growth and inorganic growth initiatives.
And so the expectation Alex would be too.
Basically refinance at the point of close.
Whether that takes the form of paying down the entire debt completely and then just basically refinancing back up to two to three times.
That enables us to return the number I mentioned earlier between four and 450 back to shareholders, which is our expectation.
To return significant majority if not all of the excess capital back to shareholders.
<unk> fortunate to operate a business that generates meaningful cash flow, especially going into next year, which will allow us on an ongoing basis to continue doing the things that we do to grow this business, whether it be capital investments.
On platform acquisitions.
Regular ordinary course buybacks, allowing us to basically return all of this capital back.
Great and then thank you for that.
And then you said that there'll be a temporary services agreement that blip Cora is going to provide services to the new owner of tax Act is that correct.
Yes, so we will be providing a variety of services to facilitate a really smooth transition right. They are excited about the business they want it to operate.
Are we effectively through the tax season and beyond and so we do have some shared services.
Right across the business since we'll be providing those services for some period of time.
And then your compensation for providing those services would come through and other line in the P&L ASO.
Yes, we will work through the actual mechanics of oral it'll show up Alex.
Make sure to create some clarity for host.
Okay, and then last and associated question.
Over the medium term the pure play broker dealer in the wealth management business is expected to return to 11% organic growth.
And adjusted EBITDA margins in the 16% to 18% what what assumption are you, making for overhead or corporate costs in that forecast.
And so it's an all inclusive number.
So as we first and foremost our goal is to get from signing to close.
After that we have this transition services period, where we need to ensure that tax act.
Has all the tools that it needs in order to continue delighting our customers.
It's after that where a lot of the savings or efficiencies will start to take hold and so it's an all encompassing number it's the core wealth management business plus what we call today unallocated corporate coming together to create that margin profile as we get closer to close.
We share the next quarter's earnings we'll be able to share more detail.
Okay, well that sounds great again, congratulations on the quarter and thanks for the additional color.
Got it.
This concludes our question and answer session I would like to turn the conference back over to Chris Walters for any closing remarks.
Okay.
Thank you all for joining us today and for your interest and we of course will speak to you next quarter.
The conference has now concluded goodbye. Thank you for attending today's presentation you may now disconnect.