Q4 2022 Avantax Inc Earnings Call
Hello, and welcome to the advantaged fourth quarter 2022 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
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I would now like to turn the conference over to dealer Chao. Please go ahead.
Thank you and welcome everyone to the <unk> fourth quarter 2022 earnings Conference call.
On Wednesday afternoon, following market close we posted our 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 contains forward looking statements that speak only as of the current date.
As such they include risks and uncertainties and actual results and events could differ materially from our current expectations.
These refer to our press release, and our SEC filings, including our most recent Form 10-K and Form 10-Q for more information on some of these specific risks and uncertainties.
We assume no obligation to update our forward looking statements, except as required by law.
We will discuss both GAAP and non-GAAP financial measures today, our earnings release and supplemental financial information are available on the Investor Relations section of our website at <unk> Dot Com and include full reconciliations of non-GAAP financial measures discussed to the nearest applicable GAAP measure.
With that let me hand, the call over to Chris.
Thank you Lee.
Yeah.
I'm pleased to share our fourth quarter 2022 earnings results for the first time under the event tax payment on.
January 26, we changed our corporate name from <unk> to <unk> and changed our ticker symbol <unk>, marking our next step is a pure play a wealth management company.
During our third quarter earnings call, we shared that we had agreed to sell our tax software business.
Affiliate of syndrome for $720 million.
Subject to post closing adjustments.
On December 19th we announced the completion of the sale of tax act, which positioned us to shift our organization to reflect our singular focus on continuing to grow our wealth management business and return capital to shareholders.
We successfully achieved these milestones while at the same time, having a record breaking year and many of our key wealth management operating metrics.
I would like to thank all of our financial professional employees and board members for their contributions to realizing these accomplishments.
As noted we have made significant progress on.
On a more focused operations and capital structure.
On operations.
We have begun streamlining our organization and our positioning our team to execute our wealth only growth strategy as.
As part of this work you've announced the plan to reduce the size of our board of directors at our 2023 annual meeting and the departure of multiple executives whose contributions are greatly appreciate it.
Our team has been aligned to deliver our strategic priorities.
Growing <unk> by supporting existing financial professionals growth and recruiting new financial professionals and accounting firms.
Retaining existing financial professionals by providing exceptional service and tools.
And when in the best interest of the client.
<unk> to a higher value mix by increasing fee based assets and continuing our acquisitions.
We've also made targeted incremental investments to support our financial professionals affiliated CPA firms.
On capital structure in January we repurchased.
460160 shares for a total of $12 $5 million.
On January 24th we entered into a new term loan facility of up to a maximum principal amount of $270 million, but also provides for a $50 million revolving credit facility.
This facility has a lower interest rate compared to our previous credit agreement.
As a delayed draw feature.
That further enables us to keep interest costs down.
It does not have significant upfront costs as compared to other options.
On January 27th we announced that we commenced a modified Dutch auction tender offer to purchase up to $250 million of our common stock.
For between $27 and $31 per share.
This is in addition to our approved $200 million share repurchase authorization.
Moving onto our results for the fourth quarter, we continue to excel across the most important indicators that we use to measure the performance of our business.
First our net positive flows.
We have seen net positive asset flows for the fourth consecutive quarter in Q4, we had $495 million in net new assets.
Up $150 million over last quarter, and setting a new record of $1 3 billion for the business for the trailing 12 month period.
Second our recruiting.
We also continued to successfully recruit financial professionals with over $401 million and newly recruited assets during the fourth quarter, finishing another record year, adding approximately 79% more than recruited assets than our next best year.
We also recruited three new CPA firms to a van tax planning partners have a strong pipeline for 2023, and both our independent broker dealer model as well as our employee based all right.
Third our firm acquisition.
This quarter, we marked a milestone with 20 acquisitions completed in 20 months.
<unk> total client assets held in our employee based model to approximately $7 billion up from $4 4 billion a little over two years ago.
Fourth we continue to retain productive financial professionals are consistently high production production retention rate came in at 99, 3% for the quarter.
The financial professionals, who departed during the quarter, 90% were non producing financial professionals with less than 50000 enrolling gross production.
Lastly, our financial professional satisfaction with.
We regularly conduct financial professional satisfaction surveys to assist us in better meeting our financial professional fees.
In the survey our net promoter scores improved by 14 points from our spring 'twenty two survey and 21 points from Winter survey last year.
In short we are executing well on our mission to be the leader serving a community of cpas tax professionals and tax focused financial professionals by providing client tax advantaged investment solutions in.
<unk> technologies and tax inclusive financial plan.
We remain focused on extending our lead on key differentiated aspects of our strategy which include.
Nurturing and growing the largest community of tax focused financial professionals in the wealth management midstream through training gross communities coaching programs and purpose driven events.
Providing best in class service and support.
And delivering capabilities to accelerate our financial professionals growth, including continuing to develop investment solutions growth consulting practice management and digital products.
In addition to these efforts we are providing opportunities for financial professionals to work with <unk> and the way that aligns with their priorities, which has led to a rapidly growing <unk> planning partners, our employee based raw and resulted in a significant pipeline to further grow this portion of our business.
Our pure play wealth management business is effectively executing on plan is serving our financial professionals and clients well and is taking actions on our capital structure that together. We believe will result in exciting future for our financial professionals employees and shareholders.
Now I'll turn it over to Mark and we'll be happy to answer questions.
After the prepared remarks.
Thank you, Chris and good morning, everyone.
The work over the last several months since the announced sale of tax Act has culminated in this moment, where we can share our financial results as a standalone wealth business and as you can tell from our financial performance our business is strong.
Starting with fourth quarter results as Chris mentioned, we are thrilled to have executed well this quarter.
2022 was a strong year for the business are banned tax broke records for recruited assets total net new assets for the year and the percentage of our assets and advisory.
Now on to fourth quarter financial results.
Total revenue of $172 $4 million was a record for the business slightly up from the fourth quarter of the prior year.
Up 4% versus the third quarter of 2022 and.
And above the high end of our guidance.
Achieving this record revenue figure despite the market being down meaningfully as it were.
Reflection of the favorable interest rate environment as well as asset mix shifts we've seen in our portfolio.
Return on assets is up 109 basis points versus Q4 of 2021.
Transaction based commission revenues were $19 million, an increase of 7% sequentially.
Year over year transaction based commission revenues decreased 21% for the quarter.
16% for full year 2022.
As it is difficult to tell from the discontinued operations treatment for ease of comparison, the adjusted EBITDA for both continuing and discontinued operations came in at $18 6 million for the fourth quarter, which is near the high end of our guidance.
As for adjusted EBITDA for continuing operations. The result was $25 $9 million with performance driven by favorable revenue performance and lower than expected costs in the quarter.
Q4 is a higher expense quarter than Q3 because of the National conference.
GAAP net income was $368 million or $7 66 per diluted share.
Included in our GAAP net income is a pre tax gain on sale of tax at a $472 2 million.
A few other details regarding our performance this quarter.
Our payout rate in the fourth quarter decreased to 74, 2% from 75, 1% in the third quarter. The lowest rate we have seen since Q1 2021, when it was 74, 4%.
We will see fluctuations in payout rate, depending upon the concentration of transaction based revenues to make up of net flows and the mix of assets in the quarter.
We ended the year with total client assets of $76 9 billion.
Fee based advisory assets were down 9% year over year $38 $3 billion with advisory assets as a percentage of total client assets ending the quarter at a new high of 49, 8%.
Net flows into advisory for the year were $2 9 billion.
With $638 million in the fourth quarter with.
With total client assets, having net inflows of $1 $3 billion for the year and $495 million for the fourth quarter.
We have driven our newly recruited assets for full year 2022 to $1 7 billion.
Versus $929 million in 2021.
This was a record for the business at that time.
As shared previously our goal is to drive 2% to two 5% organic growth, Colorado via newly recruited assets.
Turning to the balance sheet, we ended the year with cash and cash equivalents of $264 million and no debt as we paid off the outstanding term loan with proceeds from the tax Act sale.
We have subsequently entered into a term loan a with a newly established banking group, where we can borrow up to $270 million over the next 12 months, along with a $50 million revolver.
We expect to draw $170 million in late February to help fund the tender offer with the remaining capacity of the $270 million term loan expected to be borrowed over the course of the year to primarily fund continued share repurchases.
We were pleased with the financing result, and the confidence our bank group showed in our business.
We believe the interest rate and low cost of fund our attractive relative to other options.
<unk> the opportunity to create meaningful value.
Our capital allocation priorities continue to be returning capital to shareholders. Following the tender offer under the remaining 187 $5 million and our repurchase authorization.
Investing in our business to fuel growth.
And continuing to execute on our acquisition program of individual financial professionals into our employee base model.
For the medium term, we expect our net leverage ratio to be between one five times and two five times.
With that let's turn to our full year 2023 outlook.
We expect full year revenue between $750 million and $758 million.
And adjusted EBITDA of $124 5 million to $135 5 million.
These figures assume 4% market growth from the end of 2022 with 1% growth per quarter.
As it relates to fed funds rates, we continue to leverage the forward curve and at the time of finalizing our guidance.
One more 25 basis point hike in March.
Other factors that can drive revenue outcomes include the performance of transaction sales and the timing of asset flows throughout the year.
Our guidance assumes that we will drive meaningful cost efficiencies in the business that will be realized throughout the year with a larger amount following the provision of transition services in connection with the tax Act sale, which.
Which we believe will most of that would be completed by the end of the third quarter 2023.
With respect to GAAP net income, we expect between $25 $5 million and $40 1 million.
And GAAP earnings per share of <unk> 63.
96.
Sure.
We are anticipating between $7 8 million and $14 5 million and.
And adjusted expense items relating to the cost of delivering cost savings.
<unk> proxy matters and other one time items related to the sale of taxes.
Lastly, we have assumed between $12 7 million and $13 5 million and interest expense.
Roughly $14 million in depreciation and $25 million in amortization expenses for the year.
This concludes our prepared remarks, we will now turn the call over to the operator for Q&A operator.
Thank you very much we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw from the question queue. Please press Star then two at.
At this time, we will pause momentarily to assemble our roster.
Yeah.
Today's first question comes from Josh <unk> with Cantor Fitzgerald. Please go ahead.
Yes, hi, good morning. Thanks for taking my question now that management has a sole focus on the wealth management business. What are you. Most excited about for allocating more of your time to and how are you thinking about growing your competitive advantage over this next year.
It's interesting that this is really a continuation of the strategy that's been working incredibly well and so we are intensely focused on executing that as you know from a.
Time and attention perspective.
Delivery <unk> through late this year and so there still is time associated with supporting the tax business.
Ed the elements of our strategy that have been working you have been a significant improvement in our business development efforts recruiting new financial professionals to the platform, where we're setting records.
So we're excited to lean into that even more.
Delivering exceptional customer service.
Pure financial professionals to be the best partner for them to work with and as we make things easier for them to have more time to grow their business.
And then supporting them in their growth efforts in every way from growth consulting, but some of them are phenomenal events that we put on that or training and education.
We're actually focused on all of those areas and finally technology, great technology and tools that improve their efficiency and so as we talked about that increased focus and we're spending time and each one of those areas as we have over the last few years.
Understood. That's helpful color. Thank you very much I want to also dial into one specific kpis.
Advisory assets as a percentage of total assets continued to trend positively throughout the year with healthy net new assets. Despite negative market impact do you expect this trend to continue in 'twenty, three and advisory assets to become a larger part of the mix.
Yes, we have talked about high value mixed shifts being a important part of our growth strategy going forward and we expect the trends that we've seen.
Got it thank you.
The next question comes from Dan <unk> with Benchmark Company. Please go ahead.
Great. Thanks, good morning.
<unk> finish to the year and congrats on yet another name change.
This name for a long time.
Maybe just one for Mark first just housekeeping on the TSA is there any way to tease out the economic impact. So we can kind of understand the clean run rate of the.
Pure plays.
Once the TSA is finished.
Yes, so the TSA is expected to run for a minimum of six months and up to nine months and there are a fair amount of.
Operational support that we're providing considering that the sale closed so close to tax season.
What's a little bit difficult to provide an exact number is certain elements of those operational support elements are going to fall off sooner than others and so each quarter. When we report our results.
B teasing out the income associated with the TSA from the core part of our financial performance. So that will make it easier for you to see what came from underlying operations versus the TSA.
But the reality is the vast majority of our guidance for 2023 is coming from our underlying business versus the TSA. It is not really a meaningful impact.
Okay and also one other or do you have any.
Rate ceilings on interest rates if for some reason the fed decides to go crazy.
We do now.
Alright.
And then thank you for that and then Chris.
Maybe to ask the question a different way you have a.
A.
Clean currency now.
Directly and sort of Fintech and wealth management.
I'm curious on two fronts, one because we didn't really have a chance to discuss so new it's how the conversations are going both internally and externally.
Obviously, you talked about having a really good pipeline on the PPA front all the time.
Those patients are going.
Now that you are rebranded and sort of ex tax act if that has any bearing on it.
Sort of the way.
People perceive the company's tax centric focus.
Or now that you have have you seen currency, if youre able to go out there and say hey, we've got more interesting opportunities.
And maybe that might sort of recalibrate the way you're thinking about M&A understanding that obviously.
So it's sort of a choppy market right now.
Yes, So let me take the first one so you can imagine our financial professionals, we're really excited about the name change right.
There was some complexity that was introduced over the past years has been communicated learned clients about the backing and support the AD in the organization they were working with because.
Any of their clients had to look up a name that was not directly connected to the name is on their statements and so I think theres real enthusiasm across our financial professional base. We think that is a great thing. It also kind of raises the profile of the <unk> brand for prospects just given that it is now the name of our public company and so I think the.
There is significant enthusiasm as it relates to M&A and how we may think about it we've had a really disciplined strategy over the last few years, where we are strong believers in our unique tax focus and so as we've looked at M&A. There are a couple of primary categories that are relevant one is.
Our independents, who want to affiliate with us in a different way for multiple reasons, one maybe either theyre looking for a succession solution and we can provide that and others are very growth oriented and want to.
Monetize their great efforts, but also focused our efforts solely on growth and.
Some of the back office work to us and so as you know the 20 deals that we've done over the last.
Last couple of years have fallen into that category.
The second area is other tax focused financial firms in each campus.
It falls into that category right. It was a that was born out of an accounting firm.
And so we will continue to look there what we've seen is that the multiples have been.
Pretty healthy or extraordinary in those areas for the last couple of years and so we'll continue to monitor the situation in both categories and move Opportunistically.
Great. Thanks, very much and yes, I agree Chris and then taxes.
Quarter so congrats.
Great. Thanks Pam.
The next question comes from Alex Paris, with Barrington Research. Please go ahead.
Hi.
Everybody. Thanks for taking my questions congratulations on a strong finish to the year.
You got done.
So I have a couple of questions.
First starting a little bit more information on the TSA.
Where does that come in on the P&L is it is it all within discontinued operations or is it.
It doesn't come into other line items.
The TSA is not going to come in and disc ops, it's continuing.
The operations part of our business and it's going to show up on another income line, but will be part of our adjusted EBITDA forecast.
So it will be split out, but it will be part of our continuing operations for the answers.
Okay got you and then.
I think you said on the last call.
That your medium term target for organic revenue growth is eight 5% to 11% with adjusted EBITDA margins of 16% to 18% once the TSA is behind you.
Based on the guidance that you just provided today at the midpoint revenue growth is 13%, which is above that and.
And the midpoint of the adjusted EBITDA target is 17, 2% margin. So youre kind of solidly in that EBITDA range. Despite the fact that you are still running the TSA.
Any additional color there would be helpful.
Sure.
First on the revenue side, the eight 5% to 11% is in a clean interest rate.
So the slash sweep environment.
So what we're trying to do is take the noise out of sweep and the fact that interest rates continue to go up is helping to some degree our revenue growth for the year from a margin perspective.
You've probably seen from some of our announcements we've already been able to take some actions as it relates to our cost base.
And again as a result.
The rising interest rate environment, we find ourselves in a position to be able to deliver.
What we believe is strong profitability for the business as we continue to work through the GSA.
Great that's helpful and then.
You kind of outlined your assumptions that underlie that guidance for the year.
There is a bigger variance in the net income guidance than there is in the revenue guidance.
What would drive net income to the higher end of that range versus the lower end of that range.
So what are the parameters that I shared was how much it would cost to potentially deliver some of the synergies.
As well as some other matters that may take place this year and so what we're trying to do early on in 'twenty three is to provide a wide enough lane.
Some of the unknowns that may play out over the course of the next 12 months.
Just certain.
Cost savings may cost more than others.
And just some of the other factors that I mentioned during the script may cost more than others and so we're trying to create enough flexibility.
Okay got you. Thank you I'll take the rest of my questions offline I appreciate it.
Got it.
Again, if you have a question. Please press Star then one.
No.
Pardon me seeing no further questions. This concludes our question and answer session.
I'd now like to turn the conference back over to Chris Walters for any closing remarks.
Great. Thank you all for joining us today and for your interest in <unk> will speak to you next quarter.
The conference Goodbye. Thank you for attending today's presentation you may now disconnect.