Q1 2023 Avantax Inc Earnings Call
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Okay.
Thank you and welcome everyone to the <unk> first quarter 2023 earnings conference call.
In the afternoon following the market close we posted our 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.
Marc Mehlman, Chief Financial Officer.
Before we begin let me remind everyone that today's discussion contains 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.
SEC filings included in our most recent 10-K and Form 10-Q.
For more information on some of these specific risks and uncertainties.
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 a full reconciliation of each non-GAAP financial measure discussed to the nearest applicable GAAP measure.
With that let me hand, the call over to Chris.
Thank you Lee.
Good morning.
I am pleased to share our first quarter 2023 earnings results.
After announcing our corporate name change to a VAT tax earlier this year, we're off to a great start in our first quarter reporting as a pure play wealth management business with the continuation of our strong operational performance that we reported last night.
We delivered record setting net asset flows with strong inflows of assets and minimal attrition and continued positive momentum.
<unk> assets.
Our production retention rates continued to exceed 99%.
Based on the effective support that we provide to our financial professionals, including growth consulting marketing and service.
Lastly, average production per advisor continues to see steady increase.
And is now 15% higher.
Was just two years ago.
Last quarter, we focused our remarks on the significant progress, we made on focusing and streamlining operations and capital structure.
Since then we have made additional progress in both areas.
Beginning with operations for the first quarter.
With regards to sales.
We drove positive net new asset flows for the fifth straight quarter largely due to the strong same store sales flows and limited attrition.
Net new assets were at the highest level in years for the organization.
Same store sales across both advisory and brokerage assets outperformed building on a strong quarter over quarter results.
From a new store sales perspective, we recruited 54, new financial professionals, including nine new affiliates to a band tax planning partners across five new CPA firms.
We also added 13 financial professionals to our strategic partner program.
That helps pair up tax and wealth professional to drive incremental value.
Overall this quarter was strong with a strong indicator of the strength of our tax focused wealth management model coming off a year when both equity and bond markets were down considerably.
More existing and prospective clients turn to <unk> financial professionals looking for a more comprehensive and tax inclusive approach to their financial plans.
In addition, our initiatives focused on growth strategy and practice management from our financial professionals and accounting firms such as our connected for growth conference and arrive to wheat coaching program have proven successful as financial professionals participating in these programs are outperforming both are fantastic.
As well as industry benchmarks.
Financial professional retention.
In Q1, we continued our trend of exceeding 99% production retention, which we believe continues to be best in class.
This performance on retention was driven by multiple parts of the business.
Our client services and operations team, which continues to achieve superior.
Service and processing metrics.
Our wheat business strategy team that partners closely with our top performing financial professionals to help them maximize their performance.
Our growth consulting team, which provides data driven critical insights and solutions to our financial professionals to support their growth.
Our product and technology teams that continue to prioritize the financial professional experience and build out digital experiences that are easier to use more intuitive and can provide unique value for our financial professionals and their end clients.
As we move past tax season, our revamped chapter program.
Growth through community launching to drive more connectivity education and accountability.
Now onto our mix shift.
Our assets under management now are more than 50% of total client assets.
This shift was partially enabled by both strong same store sale.
New advisory assets as well as attrition be concentrated towards.
Commission based asset.
Additionally, we have continued to look to acquire firms that are good fit for advanced tax planning partners, our employee based raw business.
In the past we have focused our efforts on acquiring independent financial professionals affiliated with <unk> wealth management, but we are excited to note that we are now expanding our acquisition other wealth management firms not currently affiliated with advance tax wealth management and expect to close at least two external deal this year.
On capital structure during.
During Q1, we closed a modified Dutch auction pursuant to which we purchased approximately eight 3 million shares or approximately 17, 4%.
Of our outstanding shares for a total amount of approximately $250 million.
The tender was funded by cash on hand.
And $170 million draw from our term loan facility.
Additionally, in March we recommenced, our stock buyback program, which mark will detail in a few minutes.
On the <unk> separation.
Finally, I would like to share an update.
On the tax act separation.
As part of the sale, we agreed to execute transition services agreements for TSA and several key operational areas to ensure a smooth transition.
We expect to complete the services provided by the end of Q3.
We expect to be positioned to deliver deliver stable run rate financial performance.
For the business beginning in Q4.
Now I'll turn it over to Mark we'll be happy to answer questions. After the prepared remarks.
Thank you Christian good morning, everyone.
We must continue to execute our business plan extremely well and we are performing in line with our internal expectations.
The investments that we made over the past couple of years continue to drive record breaking results.
We are extremely proud of the efforts of our team over this time period.
And have our financial professionals will continue to guide their end clients through volatile times.
We believe that the business is well positioned to deliver sustained long term annual growth.
Please delivered another well executed record breaking quarter.
So van tax broke records for revenues.
Total net new assets and assets in advisory accounts as a percentage of total client assets.
Now to discuss our first quarter financial results.
Total revenue of $178 million was up approximately 7% from the first quarter of the previous year.
And up 3% from the fourth quarter of 2022.
Achieving this revenue figure continues to be a reflection of the favorable interest rate environment as well as asset mix shifts we've seen in our portfolio.
Transaction based commission revenues were down slightly from the fourth quarter to $18 8 million.
Which is a reflection of the higher interest rate environment, which has impacted alternative investments by 2031 exchanges.
Year over year transaction based commission revenues decreased 9% during the first quarter.
Adjusted EBITDA from continuing operations for the first quarter of 2023 with $28 1 million versus $5 7 million for the same period last year.
GAAP net income was $1 7 million.
<unk> <unk> per diluted share.
Included in our GAAP net income was the Finalization of the working capital estimate for the tax Act sale.
And income from discontinued operations of $1 9 million.
A couple of items of note that I would like to point out our $5 2 million and executive transition costs and $7 8 million stock based compensation costs.
The stock based compensation costs include an additional approximately $2 million and costs associated with actions. We took earlier in the year to right size our team.
A few other details regarding our performance this quarter.
Our payout rate increased in the first quarter was 75, 2% up from 74, 2% during the FERC fourth quarter of 2022.
This was driven in part by our largest share performance coming from our highest tier financial professionals.
And a continued mix of assets into advisory based accounts.
We will continue to see fluctuations in our payout rate depending on the concentration of transaction based revenues.
The make up of net flows.
And the mix of assets in the quarter.
We ended the first quarter with total client assets of $86 billion.
That is up approximately 5% sequentially from the fourth quarter of 2022 to the market improvements and net positive asset inflows.
Fee based advisory assets were also up sequentially by approximately 6% from the fourth quarter to $40 6 billion.
Advisory assets as a percentage of total client assets and in the quarter at a new record high of 53%.
Net asset flows into advisory for the quarter were $906 million with total client assets, having net inflows of $932 million for the quarter.
This compares to net asset inflows into advisory of $638 million.
And total client asset inflows of $495 million for the fourth quarter of 2022.
Newly recruited assets were approximately $228 million for the first quarter of 2023.
$401 million for the fourth quarter of 2022.
This decline is a timing issue as our recruitment pipeline remains strong and we would expect some lumpiness quarter to quarter based on the size of a cruise.
I would like to turn your attention to cash balances and our sweep driven revenues.
So I'll point, you to slide number 10 in our earnings presentation deck.
This provides a three year look back at our test suite balances as a percentage of total client assets, which tend to fluctuate between 3% and 4% of assets.
Similar to our peers, we have noticed that our clients have been repositioned in cash assets to higher yielding products, such as treasury and money market funds. However.
However, we don't see the assets, leaving our platform just repositioned.
Because of this movement client cash sweep balances have declined year over year to $3 1 billion at the end of March 2023.
Is down 14% from the end of 2022, although.
Although we had a number of large deposits towards the end of the year or are subsequently invested in the first part of January .
Balance it started to stabilize in mid March and have stayed relatively stable.
With cash balances currently at $2 9 billion as a result of advisory billings that took place in April .
Assuming a stable cash balance for the remainder of the year.
Most recent interest rate hike in May and our current sharing amounts we anticipate a small negative impact to the sweep revenue. We expected earlier this year in the low to mid single digit millions offset in part by stronger equity markets.
Turning to the balance sheet.
We ended the quarter with cash and cash equivalents of $145 million and total debt of $170 million outstanding on our term loan.
In early March we announced the results of the completion of our modified Dutch auction tender offer.
We were able to repurchase and retire approximately $8 3 million shares at $30 per share.
The cost of the tender offer of approximately $250 million.
We're satisfied with cash on hand.
And proceeds from our delayed draw term loan facility.
For reference by the end of the second quarter, we expect to have borrowed the entire amount of the $270 million term loan.
As mentioned in the fourth quarter, our board of directors authorized the company to repurchase $200 million of our company's common stock.
In addition to the purchase of approximately $250 million of shares with a tender offer.
So far in the first three months of 2023, we have also purchased approximately 1 million shares of our common stock at a total purchase price of approximately $24 8 million.
Also between April one 2023 and 2023.
Purchased approximately 700000 shares.
The total purchase price of approximately $17 million.
This brings our total share repurchases through May five to approximately one 7 million shares for approximately $41 $8 million.
Our capital allocation priorities continue to be returning capital to shareholders.
That thing in our business to fuel long term growth and executing on our acquisition program.
Independent financial professionals.
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 are reconfirming, our previously issued guidance in February .
We expect full year revenue between $750 million and $758 million.
And adjusted EBITDA between $124 5 million to $135 $5 million.
These figures assume 1% market growth per quarter from the end of Q1 2023.
As it relates to fed funds rates, we are assuming no additional rate hikes or subsequent to the main meeting decision.
Factors that can drive revenue and profit outcomes include the performance of transaction based commissions revenues.
Timing of asset flows throughout the year change.
Changes in cash balances and the timing of the conclusion of the provision of services under the TSA.
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 conclusion of the provision of transition services in connection with the tax Act sale.
Which we believe will be substantially 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 up between 63 to <unk> 96 per share.
We are also anticipating coming in at the higher end, if not a bit higher up the previously shared range for adjusted expense items.
Leading to the cost of delivering cost savings and transition items related to the sale of tax Act.
As a reminder, that range was between $7 8 million a $14 5 million.
Lastly, we have received several questions as it relates to our cash sweep program and whether we plan to hedge the variable rate tied to the fed funds rate.
We have explored a number of options and intend to hedge a significant portion of our notional balance for between three and five years.
We will provide additional details once we enter into a hedging agreement and thereafter, we will report quarterly on cash balances hedged amount tenors and rates hedged.
This concludes our prepared remarks, we will now turn the call over to the operator for Q&A.
Got it.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please stand by while we compile the Q&A roster.
Okay.
Okay.
Our first question comes from Jeff Schmitt of William Blair, Jeff Your line is open.
Hi, good morning, everyone.
Looking at net flows in the quarter, they look to be about 5%.
It's actually kind of in line with your.
Target I think if you back out the market growth.
It was sort of four 5% to 7%. So I was just curious how sustainable that is and if you could see that sort of moving up.
But we feel good about the net flows.
They are generally in line with expectations. We've had some very positive trajectory on that incredibly important metric over the last couple of years.
We expect to be able to continue to perform well.
The only thing I would add to that Jeff and first of all welcome aboard.
Glad to have William Blair, a new covering the company.
It starts with.
Making sure that we don't have a leaky bucket right and so our production retention rates and the assets that we've been able to retain.
Really sets us up for really strong long term growth in asset flows.
As the folks who are with us today stick with us and Thats very exciting.
Okay.
Great and.
Just on your shift to acquire wealth management firms that arent affiliated with <unk> I think that's the first time that you've started doing that have you done anything to sort of change your strategy in terms of the size of our character the firms that you're targeting.
Even though it's kind of early in that next step is that are you seeing competitors being pretty aggressive on the recruiting front in this market.
Also in terms of how we think of recruiting.
And M&A.
Separate categories, but on the M&A front and moving off platform.
The characteristics of the firm that we are targeting is very similar we want wealth managers who are.
Aligned with our culture aligned with our strategy have a deep appreciation of our tax focused approach.
And largely have a.
Our book of business that is aligned to advisory relationships and so as we move off platform. We're sticking to the common profile and we see opportunity, which is why we announced that we expect to have that.
A couple of deals this year.
Our own platform.
Okay.
Okay, that's very helpful.
Yes, sorry, I think you also asked a question about recruiting and.
Recruiting in the market, we think of this as independent financial professionals and recruiting them to transition from one broker dealer to another versus acquiring them and on that front, we arent seeing a notable change in the competitive dynamics, it's been a competitive market for multiple years and it continues to be so but theres nothing note.
<unk> in this quarter that that's changed.
Okay very helpful. Thank you.
Thank you very much for standby for our next question.
Okay.
Our next question comes from Dan <unk> of the Benchmark Company Dan Your line is open.
Great. Thanks, Good morning Super helpful color, Marc by the way and all the cash sweep stuff. So appreciate that.
Chris maybe just on some of the.
The part you guys you called out.
End of the third party partner.
Opportunity that you guys had been pursuing I know you've done that in the past you've been very successful.
On both fronts, even when you are on tack back doing that can you just talk a little bit about sort of contribution runway there.
That's sort of contributing to results that we're seeing.
That's also helping drive sort of better.
Next I guess, if it's helping with recruitment.
Yeah, and I don't believe that I commented on.
Third party partnerships. However, we have talked about it in the past.
Look to partners, we Havent multiple software partners that tack software partners that work with us and.
But give us access to their client base to introduce the wealth management opportunity.
Never provided specific data on how significant those contributions are it's one of many tactics that we employ to reach the right target accounting firms that can be great partners for our business.
We continue to see success through those forms of partnerships, but haven't provided any specific data on the size of the magnitude of it.
Okay.
And on the off platform stuff.
So I am assuming when you say similar characteristics I assume you also mean.
<unk> wise for M&A and.
You or Andrew or Marc can kind of take this as we kind of go through the year given the success you're seeing in both.
Recruitment.
Inflows in kind of the growth trajectory is there any thought to kind of shifting the bucket.
Tween cap allocation between more towards M&A and I know you can kind of walk and chew gum at the same time, but how do we think about kind of that balance.
Okay.
It's a constant review of the various options in front of us.
What we've said historically as we look at the share buyback as a benchmark by which we make all capital allocation decisions.
To the extent that M&A is presenting an opportunity to add meaningful value.
We're going to take that seriously.
Very fortunate to have been successful over the last couple of years and our M&A program.
And so expanding out to not just internal or those who are currently affiliated with <unk> wealth management, but also to those who are external.
Just curious how much more opportunity to make those capital allocation decisions. So we look at it on a regular basis.
And just mark just to be clear one housekeeping question and then ill step aside given the last rate hike here.
I know you tend to take more of a stay.
Stable outlook approach, but has your own view internally changed with regards to how long rates stay at current levels.
<unk>.
Differing beliefs between sort of what long term rates are and what current rates are so is that your outlook at all.
I would say that.
That is above my pay grade.
The fed is going to do what does that is going to do based on the data that's being presented to them.
What we're doing is.
China.
Support our financial professionals to make the right decisions for their own clients.
We will take the rate environment into account as it relates to the hedging program that I discussed at the end of my prepared remarks.
Our goal is not to take a position on where things are going but rather to create stability.
More stable our earnings potential is then the smarter decision, making we can.
The smaller of our decision, making as it relates to capital allocation in the long term. So that's really how we think about it.
Okay fair enough. Thanks for the color guys I appreciate it.
Yeah.
Thank you at this time I would now like to turn our call back to Chris Walters for closing remarks.
Great. Thank you all for joining us today and for your interest in <unk> will speak to you next quarter.
Thank you for your participation in today's call Goodbye program you may now disconnect.
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