Q2 2023 Avantax Inc Earnings Call
Welcome to the Q2 2023 event Tech's earnings conference call.
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After the speaker's presentation, there will be a question and answer session.
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Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to dealer trail.
Director of Investor Relations. Please go ahead.
Thank you and welcome everyone to <unk> second quarter 2023 earnings Conference call.
Yesterday afternoon following market close we issued our earnings release and posted the 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 everybody 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, 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 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 Dave.
Good morning.
I'm pleased to report that two quarters in operating as a pure play wealth management business. We have maintained strong operational performance across key metrics.
We delivered our sixth straight quarter of positive net asset flows and are on pace toward another record year.
We've also continued to see stabilization in our financial professional count and growth in count of our most productive financial professionals.
We continue to experience strong inflows of assets and minimal attrition, resulting in our production retention rate remaining above 99, 5% in the second quarter.
We have also continued to make significant progress towards streamlining our operations to provide a more scalable and efficient organization.
With regard to asset flows.
Our sixth straight quarter with positive net asset flows were driven by the growth and retention of our existing financial professionals through same store sales.
While Q2 same store sales were not quite as high as we saw in Q1 as expected. It is worth noting that we received over $200 million of new flows in just the first few days of Q3, putting us off to a great start for this quarter.
In addition to the positive organic flows. We also brought in additional net new assets by closing our FERC external acquisition into APB and expanding our national presence of our employee base.
Which now has more than seven 6 billion.
Associated assets under management.
From a newly recruited asset perspective, we recruited approximately $141 million in new assets and have an extremely robust pipeline, which mark will get into in a moment.
We added 50, new financial professionals, primarily from our recruiting efforts and also added 19 financial professionals to our strategic partners program.
It helps unite tax and wealth professionals to drive incremental growth to our existing and newly recruited financial professionals.
Overall this quarter was a strong indicator of the strength of our tax focused wealth management model.
<unk> and prospective clients are increasingly turning to <unk> financial professionals for a more comprehensive and tax inclusive approach to their financial plan.
Financial professional retention in Q2, we continued our trend of exceeding 99% production retention, which we believe continues to be best in class.
This strong performance on production retention is driven by multiple parts of the business.
Our client services and operations team, which continued to achieve superior service and processing metrics.
ROE business strategy team partnered closely with our largest financial professionals and their firms 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 to our financial professionals and their end clients.
We are excited about some of the future developments that will be coming towards the end of the year, which will enable our financial professionals and CPA affiliates, even more easily serve their tax clients with wealth management.
Our marketing team, which helped financial professionals market their firms through innovative support like our collaborative marketing mastermind program small group marketing coaching and our in House agency model signify that allows financial professionals to take marketing execution off their plates entirely.
In addition, our initiatives focused on growth strategies and practice management for a financial professional and accounting firms.
Such as our arrived to elite coaching program, which have proven successful as our financial professionals participating in these programs are outperforming expectations.
This peer to peer coaching program for our financial professionals have accelerated the growth of our graduate by more than their peers, which is a promising sign for the future.
Finally, our upcoming conference connect for growth will take place later this summer in Dallas and has shown strong financial professional interest.
<unk> already surpassed last year's registration numbers and last year's attendees ramped up their growth rate by more than others.
Now onto our mix shift.
We completed the acquisition of Minnesota based summit wealth advocates.
An independent RA and advisory firm that manages over $300 million in client assets.
This represents our first acquisition of a wealth management firm not affiliated with <unk> and we look forward to others in the future.
Our advisory assets under management continued setting a.
New high water Mark at just shy of 51% of total client assets.
This growth was partially enabled by strong same store sales of new advisory assets with net inflows from brokerage accounts.
We have a strong recruiting pipeline heading into the remainder of the year and we'll continue to look for acquisition opportunities for firms that are good fit for <unk>.
Now on the tax act separation finally, I'm happy to report that the transition services agreement or TSA.
In relation to the track tax Act separation is on track to complete this quarter and we have already <unk>.
Turning to progress on our post sale efficiency initiatives with savings expected to begin being reflected in our fourth quarter numbers.
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.
During the second quarter, we continued to build on the foundation. The team has created for a strong 2023 and beyond.
We continued the trend of breaking records for revenues and assets in advisory accounts as a percentage of total client assets.
As Chris mentioned, we saw net positive asset flows for the sixth consecutive quarter and a continued strong production retention rate of 99, 6%.
Before reviewing our second quarter results I would like to point out that we have brought back non-GAAP net income and non-GAAP net income per diluted share into our company and reporting and guidance.
We believe that this will provide meaningful information to management investors and analysts regarding the companys performance, while assisting investors with the public valuation of the business.
As noted earlier, our earnings release and supplemental financial information includes full reconciliations of those to the nearest applicable GAAP measures.
2023 has been a year of profound change for the business as we separated the tax act business from our operations and reset many of the financial and operational elements of our business.
This has been done amidst continued noisy macro backdrop of rising equity markets client cash sorting.
And continued volatility in interest rate expectations.
That said with the ending of the TSA this quarter, our term loan a fully drawn.
The fed apparently nearing the end of its hiking campaign and many of the planned actions to reset the business now complete we should have less noise and more predictability in our financial performance.
As it relates to those planned efficiency actions in the third quarter. We have acted on nearly $7 million of annual run rate savings, which when added to the actions taken earlier this year surpassed the $10 million in annual run rate cost efficiencies.
We are committed to continuous focus on managing our cost base in light of our pure play wealth focus and with the TSA almost behind US we have the focus and ability to do so.
We will have more to share at an Investor day, we plan to schedule later this year.
We will show our medium to long term focus areas and expected financial outcomes.
Now.
To discuss our second quarter financial results.
Total revenue of $186 9 million.
It was up approximately 15% from the second quarter of the previous year and up approximately 5% sequentially from the first quarter of 2023.
The year over year increase of $24 3 million is due primarily to additional cash sweep revenue bolstered by strong production retention rate and net new asset flows.
Adjusted EBITDA from continuing operations was $31 1 million versus $5 2 million for the same period last year.
GAAP net income from continuing operations was $3 6 million or.
<unk> <unk> per diluted share.
This compares to $800000 or <unk> <unk> per diluted share for the same period last year.
non-GAAP net income from continuing operations was $13 9 million or.
<unk> 36 per diluted share this.
This compares to non-GAAP net income of $1 7 million.
Or <unk> <unk> per diluted share for the same period last year.
A few other details regarding our performance this quarter.
We ended the second quarter with total client assets of $83 8 billion.
That is up approximately 4% sequentially from the first quarter of 2023 due to market improvements and net positive asset inflows.
Fee based advisory assets were also up sequentially by approximately 5% from the first quarter to $42 $6 billion with advisory assets as a percentage of total client assets ending the quarter at a new record high of 59%.
Net asset flows into advisory for the quarter were $762 million with total client assets, having net inflows of $390 million for the quarter.
Newly recruited assets were approximately $141 million for the second quarter of 2023 versus $228 million for the first quarter of 2023.
The decline is a timing issue as our recruitment pipeline remained strong.
Through August as we have over $500 million and committed new store sale of assets we have.
We'll continue to experience variability with our newly recruited assets on a quarter to quarter basis.
This is partially due to the size of the recruits and onboarding of new client accounts.
Our pipeline remains stronger than we've seen historically.
And based on historical norms, a number of offers we currently have out to recruits would result in achieving our full year expectations of between 2% and two 5% annual growth and recruited assets.
At the end of the second quarter, our cash sweep balances were approximately $2 $8 billion.
This is down from $3 1 billion at the end of the first quarter and down slightly from the $2 9 billion, we reported having as of April largely in line with the rest of the industry.
As discussed last quarter balances has started to stabilize as clients reposition their mix of cash assets to higher yield products, such as treasuries and money market funds during the first half of the year.
During the second quarter month over month declines in these assets for May and June were down approximately 2% and 1% respectively.
As of August eight we had roughly $2 7 billion of cash sweep balances with the bulk of the difference from the end of the quarter due to the quarterly advisory fee charged in July .
During our first quarter earnings call, we discussed the possibility of putting into place hedges for our cash sweep income.
We in fact entered into derivative contracts this past quarter in essence allow us to float between two 5% and five 5%.
These hedges went into effect for June and will expire on May 31 2026.
The cost of implementing this program was just over $14 million, which we have elected to defer over the 36 months period, resulting in a monthly charge of approximately <unk> four.
$4 million, which first started hitting the P&L in June .
To frame the financial impact of executing on these hedges it is equivalent to earning about a quarter point less on our sweep balances. So the downside protection below two 5%.
We ended the quarter with a strong balance sheet with cash and cash equivalents of $109 8 million and total debt of 200.
$68 $3 million outstanding on our term loan.
At the end of Q2, our net leverage ratio was one six times.
In the medium term, we expect our net leverage ratio to be between one five times and two five times.
During the second quarter under our established $200 million repurchase authorization, we continued to repurchase our common stock with the repurchase of approximately $2 2 million shares.
<unk> purchase price of approximately $51 2 million.
As of June 32023, we had approximately $124 million remaining under our repurchase authorization.
Additionally between July one 2023 in August for 2023.
Purchased approximately 4 million shares of our common stock for an aggregate purchase price of approximately $9 1 million.
As of August four 2023.
We had approximately $115 million remaining on our authorization.
Earlier this year I shared guidance for interest expense, which assumed a more modest amount of stock repurchases.
So far in 2023 through August 4th we repurchased a total of approximately 11 9 million shares which is significantly greater than what we anticipated earlier this year.
As a result, we borrowed on the term loan a faster than expected, resulting in a new interest expense forecast I'll share in a moment as part of our updated guidance.
With the delayed draw term loan a now fully drawn interest expense will be some political forecast.
Our capital allocation priorities continue to be a mix of returning capital to shareholders investing in our business to fuel long term growth and executing on our acquisition program of independent financial professionals.
Our share repurchases moving forward will likely be less than the amount purchased in the second quarter as we adjust our purchasing is appropriate relative to other communicated capital allocation priorities.
With that let's turn to our full year 2023 outlook.
We are adjusting our previously issued guidance to account for our cash sweep balance hedging activities and a lower cash sweep balance with expected market improvement offsetting some of the downside from those two factors as well as some softness in transactional sales for instance, 10 31 exchanges.
We expect full year revenue of between $753 million and $756 million and adjusted EBITDA of between $124 $5 million and $126 5 million.
These figures assume 1% market growth per quarter from the end of Q2 2023.
As it relates to fed funds rates, we are including the recent 25 basis points increase which occurred in late July 2023, and we are assuming no additional rate hikes or cuts for the remainder of 2023.
Factors that can drive revenue and profit outcomes include the performance of transaction based commission revenues timing of asset flows throughout the year and changes in cash balances.
With respect to GAAP net income, we expect between $16 million and $18 million and GAAP earnings per diluted share of between 40 to 45 per share.
We anticipate non-GAAP net income to be between $49 million and $52 3 million.
non-GAAP net income per diluted share to be between $1 22, and $1 30 per share.
As mentioned earlier, we expect onetime items relating to the cost of delivering cost savings transition items related to the sale of tax act and other onetime matters incurred this year to be higher than previously anticipated expecting that number to be closer to $20 million.
Mentioned earlier much of the originally anticipated changes behind us, which is several million dollars of below the line expenses expected to be incurred the balance of this year much of it in the third quarter.
This concludes our prepared remarks, we will now turn the call over to the operator for Q&A.
Operator.
Thank you.
We will now conduct a question and answer session to ask a question. During this session you need to press Star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile the Q&A roster.
Our first question comes from Josh <unk> from Cantor Fitzgerald. Please go ahead.
Yes, hi, guys. Good morning, Thanks for taking my question nice to see the strong kpis.
As you continue to shift the mix towards more profitable.
Was wondering if you could give us some more insight in how youre actively targeting these more productive ftes and successfully acquiring them.
Yes, we've talked about our shift in recruiting strategy over the last couple of years, which has been pretty notable so historically the business.
Virtually all of the financial professionals that were recruited or unlicensed tax professionals that we brought into the business. We continue to have a great tax focus but there are now three segments that we target one continues to be the unlicensed tax professionals that have never offered wealth management that we're bringing into the wealth management business.
Second segment is license tax professionals, where there are thousands of them that fit that other broker dealers. We believe that our value proposition is uniquely compelling for them and fortunately they bring assets and we're well positioned to win them from other broker dealers.
And then finally, there is a third segment of existing wealth professionals considered other broker dealers.
Who have great interest in growing their businesses more rapidly through collaborating with tax and accounting firms and so as we've shifted and expanded the segments that we're targeting we've seen great success because of our value proposition resonates very well with all three groups.
Great. That's very helpful color. Thank you and then in your prepared remarks, you mentioned considering more M&A in the future can you talk through what Youre seeing in the market right now and how youre thinking about valuations.
Sure Josh and it's good to hear from you again, so our M&A is going to continue focusing on the independent financial professionals that are currently affiliated with <unk> wealth management, but as Chris mentioned during the prepared remarks, we did close our first external acquisition.
The thing to note there is that the profile of this particular firm looks very much like the folks that are currently aligned to our fantastic and so our M&A strategy is going to continue focusing on those who culturally.
Just aligned with what we're trying to achieve here as a mission as it relates to valuations we don't share those publicly but I can say is they have remained fairly consistent for the size and type of firm that we choose to align with us.
Okay.
Understood. Thank you guys.
Thank you.
One moment for our next question.
Our next question comes from Alex Paris from Barrington Research. Please go ahead.
Hi, guys. Thanks for taking my questions and I appreciate the additional guidance on non-GAAP , because that's been quite noisy as you had said that in that regard first off.
Within your guidance you're guiding for.
18.
$4 million of executive transition tax act related reorganization et cetera.
By my math you've already.
Done $15 million or so on that so as you said it.
It's going to be less going forward than it has been year to date and did you say mark that that would be heavily concentrated into Q3.
That's correct.
The new number just reflects a lot of the actions that we've taken earlier this year. Some of the executive transition is a bit of a back and forth and so at the time of originally sharing guidance those are our best estimates, but at this point.
Much of the.
The actions that we're taking are behind us, but two to your exact question. Yes. Most of what's left is going to hit the third quarter.
Okay and then.
Yes.
While we're on the topic of of math.
How is the hedge going to work exactly in terms of how it runs through your P&L.
I understand by looking through the 10-Q.
The hedges are going to cost you a net of about $14 million youre going to recognize that.
Straight line basis does that come into interest expense or does that is that a contra revenue too.
Cash sweep revenue.
How should we model for that.
Yes. The simple answer is most of that's going to run as a contra revenue item.
So to keep it all in the same accounting bucket.
That's why I sort of described it it was basically taking a quarter point hit on the typical math.
So our.
Cash sweep revenue and profit will basically be $400000 less each month for the next three years.
Got you.
And then had we not a collar in place.
And then.
I see and then.
Sure.
The TSA.
On tax Act.
You say, that's going to be largely done by the end of the quarter did you forecast.
Relying on my memory here earlier, this year that cost cutting which you've been doing all year long streamlining the operation would accelerate post the conclusion of the TSA.
So as mentioned we were able to take some actions already in the third quarter.
I wouldn't necessarily say, it's going to accelerate what I would say now is we don't have anything holding us back from continually building efficiencies into our model.
So what we've shared during our prepared remarks.
In terms of the annualized cost savings.
Absolutely start hitting.
Later, this quarter and into the fourth quarter, but now we can start taking actions on a regular basis.
Okay.
Great and then just one follow up on the M&A. Congrats on your first unaffiliated wealth management acquisition this quarter.
I think on the last call when you kind of announced the strategy.
We're looking beyond euro affiliated independent fees.
You said that you might do one or two more before year end, what's your any update there and then secondly.
The affiliated Independents I think you've made 20 of those acquisitions over the last couple of years.
<unk> been active there year to date and what's the pipeline look like there.
Yes, so fortunately the pipeline is quite robust right. We've now been at this for over a couple of years and as we noted we've done 22.
Plus transactions of existing independent <unk>.
<unk> advisory we expect that to continue as we move forward and we've done a number of transactions throughout the early part of this year.
So we continue to expect that to be the bulk of M&A activity as we move forward because I think we've talked about the value prop of that M&A for our existing financial professionals. One of the big needs that were filling as for succession planning and some of them do not have succession plans in place and there are some that are looking to align with us too.
Realized some value from the business as they build foot could be part of.
More tightly aligned business and grow and move out some of the administrative responsibilities that will continue to be the bulk of the activities, but we see a healthy pipeline that has grown quite materially both for on platform and then as well as somebody off platform deals that we're going to see.
Specific to your question on any other external deals this year, Alex we would expect to close at least one more before the end of the year.
Great. That's helpful. Thanks for the additional color guys.
Thank you.
One moment for our next question.
Our next question comes from Dan <unk> from Benchmark Company. Please go ahead.
Great. Thanks, good morning.
Mark obviously the hedging programs.
Pretty well communicated by you guys just trying to find the right mix can you just talk through sort of a little bit.
Thats why you ended up with this particular.
Hedging program.
Recall, our I mean, we're starting to see some normalization of cash.
<unk> balances.
Obviously, none of us are.
Fed prognosticators, but.
Sort of a.
Seems like you have sort of a stable ish environment.
Maybe just some incremental color on sort of timing and the right sort of ultimate installation.
Sure.
Good morning, Dan.
The forward curve at the time of putting the hedges in place had assumed a number of cuts to the fed funds rate before end of the year.
As well as a number of cuts in early 2024.
If we had put in a fixed has like a swap or a fixed contract at that time. It would have resulted in meaningful short term financial impact and.
The forward curve is not really in alignment with what the fed was consistently saying. So therefore, we chose to float which in essence meant that we werent, taking a bet on where rates were going to go but rather we were comfortable operating within a range. Ultimately what we were looking for was downside protection, but we wanted to prevent sweep revenues from going to <unk>.
Zero during some unlikely macro events like what happened during COVID-19.
And what we got was that protection and it cost us a modest amount over a three year period.
In terms of going forward.
The way, we think about it is maintaining that downside protection without necessarily taking a bet on where rates are going to go and so we're going to continue consistently monitor.
Where we are in the time left to the hedges that we have in place.
And.
Any particular hedge or derivative instrument is really fair game.
As long as.
We maintain our focus on that downside protection.
Got it that's really helpful. Appreciate the additional color.
Chris maybe just.
One for you.
This last time by the way congrats on sort of the FTE stabilization I know that.
Certain important focal point.
<unk>.
I just wanted to ask you.
Some new products.
Kind of coming out later in the year I know you guys are always trying to improve the platform.
No.
Patients will be probably at the margin but.
Just love to kind of get a sense on.
What youre thinking about like you can see a pretty good plan farming here on how you guys are trying to get deeper.
Fully further deeper integrated with out.
On the tax side of the equation and some of the strategic Optionality over there.
Good to hear that and as a tangent everybody's asking about it on every other call.
I'll give you the chance to talk about any thoughts.
Implementing AI kind of your product suite or strategy.
We may have been one of the few firms out there that didn't have any I mentioned that dozen times or more.
Our remarks.
AI is a really important development on the technology front that will enable efficiency in our business.
We're monitoring multiple.
Applications of AI I would not say at our size and scale, we are going to be at the forefront of developing.
Any applications, but we will be monitoring the use across the wealth management sector and will be a very fast follower will also use more functional.
Elements of NII.
And leverage our partners right than what Theyre doing with it and when I say more functional elements. So theres already efficiencies that are being realized and software development right through effective use of tools that are used across many industries. Our teams are already experimenting with that and so we see real benefit.
Monitoring it closely and selectively using it and we will be fast in implementing things that we see that can work for our business.
So the other part of your question was more generally about technology, we look holistically across our financial professionals experience center and clients and we get a ton of feedback.
From our financial professionals about the things that will help them be more efficient we have a rigorous we prioritize product roadmap and are trying to improve each experience a fair bit more one of the things that we're really excited about is that intersection of.
Taxes, and and wealth management, we believe there is more that we can do to make it easier for our financial professionals to identify more rapidly opportunities within their tax book, both the magnitude of opportunity, but the specific clients as well as the specific wealth opportunities with those clients and so.
Over the next six to 12 months, it's one of the really exciting areas that we think we can make great progress on that will help our financial professionals grow more rapidly.
Got it thank you and Mark if I can just one last housekeeping just on the cost side of the equation.
Cost actually.
Even better than we would have bought and I know you talked about being able to take some additional actions in Q3.
Some of the streamlining I don't know.
It doesn't sound like you're sort of revise your forward projections and where that ultimately may land, but you guys have been pretty good at finding a few nickles.
Here and there so I'm just curious if you have any kind of update.
Update on once we get into 'twenty, four and beyond that there are incremental efficiencies.
Might be identified to be able to or have identified now.
Sure.
You get closer to 24, I think we'll be able to provide more details in terms of actions that we may take and what our expense base would look like.
I also said during the prepared remarks that we're looking to have an investor day later this year, where I think it would be a perfect time for us to sort of share or most of them.
Updated views on where the market is headed and how our firm is going to aid and as part of that you would expect us to share.
Updated reflection on the financial health of the business and where we would expect it to go but as you point out.
We are focus continuously on driving profitable growth.
And with US now operating as a pure play wealth business with the TSA largely behind us with a lot of the other corporate actions, having taken place whether it be tender offers or what have you. We are now in a position to focus our attention on just that so we're excited too.
Dig in.
Got it Super helpful.
Thanks, Mark Thanks, Chris.
Great.
Thank you.
I am showing no further questions at this time I will turn the conference back over to Chris Chris Walters for final remarks.
Great. Thank you all for joining us today and your interest in <unk> will speak to you next quarter.
This concludes today's conference. Thank you for participating you may now disconnect.
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Welcome to the Q2 2023 <unk> earnings Conference call.
At this time, all participants are in listen only mode.
After the speaker's presentation, there will be a question and answer session to.
To ask a question. During this session you will need to press star one one on your telephone you would deem here an automated message advising your hand is raised to withdraw your question. Please press star one again, please be advised that today's conference is being recorded.
I'd now like to hand, the conference over to dealer Trail director of Investor Relations. Please go ahead.
Thank you and welcome everyone to <unk> second quarter 2023 earnings Conference call.
Yesterday afternoon following market close we issued our earnings release and posted the release and supplemental information on the Investor Relations section of our website at <unk> Dot com.
Im joined today by Chris Walters, Chief Executive Officer, and Marc Mehlman, Chief Financial Officer.
Before we begin let me remind everybody 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, 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 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 report that two quarter, then operating as a pure play wealth management business. We have maintained strong operational performance across key metrics.
We delivered our sixth straight quarter of positive net asset flows and are on pace toward another record year.
We've also continued to see stabilization in our financial professional count and growth.
<unk> of our most productive financial professionals.
We continue to experience strong inflows of assets and minimal attrition, resulting in our production retention rate remaining above 99, 5% in the second quarter.
We have also continued to make significant progress towards streamlining our operations to provide a more scalable and efficient organization.
With regard to asset flows.
Our sixth straight quarter with positive net asset flows were driven by the growth and retention of our existing financial professionals through same store sales.
While Q2 same store sales were not quite as high as we saw in Q1 as expected. It is worth noting that we received over $200 million of new flows in just the first few days of Q3, putting us off to a great start for this quarter.
In addition to the positive organic flows. We also brought in additional net new assets by closing our FERC external acquisition into APB and expanding our national presence of our employee base.
Which now has more than seven 6 billion.
Associated assets under management.
From a newly recruited asset perspective, we recruited approximately $141 million in new assets and having an extremely robust pipeline, which mark will get into in a moment.
We added 50, new financial professionals, primarily from our recruiting efforts and also added 19 financial professionals to our strategic partners program that.
That helps unite tax and wealth professionals to drive incremental growth through our existing and newly recruited financial professionals.
Overall this quarter was a strong indicator of the strength of our tax focused wealth management model.
<unk> and prospective clients are increasingly turning to <unk> financial professionals for a more comprehensive and tax inclusive approach to their financial plans.
Financial professional retention in Q2, we continued our trend of exceeding 99% production retention, which we believe continues to be best in class.
This strong performance on production retention is driven by multiple parts of the business.
Our client services and operations team, which continued to achieve superior service and processing metrics.
ROE business strategy team the partners closely with our largest financial professionals and their firms 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 to our financial professionals and their end clients.
We are excited about some of the future development that will be coming towards the end of the year, which will enable our financial professionals and CPA affiliates, even more easily serve their tax clients with wealth management.
Our marketing team, which helped financial professionals market their firms through innovative support like our collaborative marketing mastermind program small group marketing coaching and our in House agency model signify that allows financial professionals to take marketing execution off their plates entirely.
In addition, our initiatives focused on growth strategies and practice management for a financial professional and accounting firms.
Such as our rise to elite coaching program, which have proven successful as our financial professional participating in these programs are outperforming expectations.
This peer to peer coaching program for our financial professionals have accelerated the growth of our graduate by more than their peers, which is a promising sign for the future.
Finally, our upcoming conference connect for growth will take place later this summer in Dallas and has shown strong financial professional interest.
<unk> already surpassed last year's registration numbers and last year's attendees ramped up their growth rate by more than others.
Now on to our mix shift.
We completed the acquisition of Minnesota based summit wealth advocates.
An independent RA and advisory firm that manages over $300 million in client assets.
This represents our first acquisition of a wealth management firm not affiliated with <unk> and we look forward to others in the future.
Our advisory assets under management continued setting a.
New high watermark at just shy of 51% of total client assets.
This growth was partially enabled by strong same store sales of new advisory assets with net inflows from brokerage accounts.
We have a strong recruiting pipeline heading into the remainder of the year and we'll continue to look for acquisition opportunities for firms that are good fit for ACP.
Now on the tax act separation finally, I'm happy to report that the transition services agreement or TSA.
In relation to the track tax Act separation is on track to complete this quarter I know we have already.
Turning to progress on our post sale efficiency initiatives with savings expected to begin being reflected in our fourth quarter numbers.
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.
During the second quarter, we continued to build on the foundation. The team has created for a strong 2023 and beyond.
We continued the trend of breaking records for revenues and assets in advisory accounts as a percentage of total client assets.
As Chris mentioned, we saw a net positive asset flows for the sixth consecutive quarter and a continued strong production retention rate of 99, 6%.
Before reviewing our second quarter results I would like to point out that we have brought back non-GAAP net income and non-GAAP net income per diluted share into our company reporting guidance.
We believe that this will provide meaningful information to management investors and analysts regarding the companys performance, while assisting investors with the public valuation of the business.
As noted earlier, our earnings release and supplemental financial information include full reconciliations of those to the nearest applicable GAAP measure.
2023 has been a year of profound change for the business as we separated the tax act business from our operations and reset many of the financial and operational elements of our business.
This has been done amidst continued noisy macro backdrop of rising equity markets client cash sorting and continued volatility in interest rate expectations.
That said with the ending of the TSA this quarter, our term loan a fully drawn.
The fed apparently nearing the end of its hiking campaign and many of the planned actions to reset the business now complete we should have less noise and more predictability in our financial performance.
As it relates to those planned efficiency actions in the third quarter. We have acted on nearly $7 million of annual run rate savings, which when added to the actions taken earlier this year surpassed the $10 million in annual run rate cost efficiencies.
We are committed to continuous focus on managing our cost base in light of our pure play wealth focus.
The TSA almost behind US, we have the focus and ability to do so.
We will have more to share at an Investor day, we plan to schedule later this year.
We will show our medium to long term focus areas and expected financial outcomes.
Now.
To discuss our second quarter financial results.
Total revenue of $186 9 million.
Was up approximately 15% from the second quarter of the previous year and up approximately 5% sequentially from the first quarter of 2023.
The year over year increase of $24 3 million is due primarily to additional cash sweep revenue bolstered by strong production retention rate and net new asset flows.
Adjusted EBITDA from continuing operations was $31 1 million versus $5 2 million for the same period last year.
GAAP net income from continuing operations was $3 6 million or <unk> <unk> per diluted share.
This compares to $800000 or <unk> <unk> per diluted share for the same period last year.
non-GAAP net income from continuing operations was $13 9 million or <unk> 36 per diluted share. This.
This compares to non-GAAP net income of $1 7 million or <unk> <unk> per diluted share for the same period last year.
A few other details regarding our performance this quarter.
We ended the second quarter with total client assets of $83 8 billion.
That is up approximately 4% sequentially from the first quarter of 2023.
Due to market improvements and net positive asset inflows.
Fee based advisory assets were also up sequentially by approximately 5% from the first quarter to $42 6 billion.
With advisory assets as a percentage of total client assets ending the quarter, adding new record high of 59%.
Net asset flows into advisory for the quarter were $762 million with total client assets, having net inflows of $390 million for the quarter.
Newly recruited assets were approximately $141 million for the second quarter of 2023 versus $228 million in the first quarter of 2023.
The decline is the timing issue as our recruitment pipeline remained strong.
Through August as we have over $500 million and committed new store sale of assets.
We will continue to experience variability with our newly recruited assets on a quarter to quarter basis. This.
This is partially due to the size of the recruits and onboarding of new client accounts.
Our pipeline remains stronger than we've seen historically.
And based on historical norms, a number of offers we currently have out so recruits would result in achieving our full year expectations of between 2% and two 5% annual growth and recruited assets.
At the end of the second quarter, our cash sweep balances were approximately $2 8 billion.
This is down from $3 1 billion at the end of the first quarter and down slightly from the $2 9 billion, we reported having as at April largely in line with the rest of the industry.
As discussed last quarter balances has started to stabilize as clients reposition their mix of cash assets to higher yield products, such as treasuries and money market funds during the first half of the year.
During the second quarter month over month declines in these assets for May and June were down approximately 2% and 1% respectively.
As of August eight we had roughly $2 7 billion of cash sweep balances with the bulk of the difference from the end of the quarter.
The quarterly advisory fee charged in July .
During our first quarter earnings call, we discussed the possibility of putting into place hedges for our cash sweep income.
We in fact entered into derivative contracts this past quarter in essence allow us to float between two 5% and five 5%.
These hedges went into effect for June and will expire on May 31 2026.
The cost of implementing this program was just over $14 million, which we have elected to defer over the 36 month period, resulting in a monthly charge of approximately <unk> four.
$4 million, which first started hitting our P&L in jail.
To frame the financial impact of executing on these hedges it is equivalent to earning about a quarter point less our sweet balances. So the downside protection below two 5%.
We ended the quarter with a strong balance sheet with cash and cash equivalents of $109 8 million and total debt of 200.
$68 $3 million outstanding on our term loan.
At the end of Q2, our net leverage ratio was one six times that.
For the medium term, we expect our net leverage ratio to be between one five times and two five times.
During the second quarter under our established $200 million repurchase authorization, we continued to repurchase our common stock with the repurchase of approximately $2 2 million shares.
<unk> purchase price of approximately $51 2 million.
As of June 32023, we had approximately $124 million remaining under our repurchase authorization.
Additionally between July one 2023 in August for 2023.
Purchased approximately <unk> 4 million shares of our common stock for an aggregate purchase price of approximately $9 1 million.
As of August four 2023.
We had approximately $115 million remaining on our authorization.
Earlier this year I shared guidance for interest expense, which assumed a more modest amount of stock repurchases.
So far in 2023 through August 4th we repurchased a total of approximately 11 9 million shares which is significantly greater than what we anticipated earlier this year.
As a result, we borrowed on the term loan a faster than expected.
<unk> and the new interest expense forecast I'll share in a moment as part of our updated guidance with.
With the delayed draw term loan a now fully drawn interest expense will be simpler to forecast.
Our capital allocation priorities continue to be a mix of returning capital to shareholders investing in our business to fuel long term growth and executing on our acquisition program of independent financial professionals.
Our share repurchases moving forward will likely be less than the amount purchased in the second quarter as we adjust our purchasing is appropriate relative to other communicated capital allocation priorities.
With that let's turn to our full year 2023 outlook.
We are adjusting our previously issued guidance to account for our cash sweep balance hedging activities and a lower cash sweep balance with the expected margin improvement offsetting some of the downside from those two factors as well as some softness in transactional sales for instance, 10 31 exchanges.
We expect full year revenue of between $753 million and $756 million and adjusted EBITDA of between $124 $5 million and $126 $5 million.
These figures assume 1% market growth per quarter from the end of Q2 2023.
As it relates to fed funds rates, we are including the recent 25 basis points increase which occurred in late July 2023.
We're assuming no additional rate hikes or cuts for the remainder of 2023.
Factors that can drive revenue and profit outcomes include the performance of transaction based commission revenues timing of asset flows throughout the year and changes in cash balances.
With respect to GAAP net income, we expect between $16 million and $18 million and GAAP earnings per diluted share of between 40 to 45 per share.
We anticipate non-GAAP net income to be between $49 million and $52 3 million.
non-GAAP net income per diluted share to be between $1 22, and $1 30 per share.
As mentioned earlier, we expect onetime items relating to the cost of delivering cost savings transition items related to the sale of tax act and other onetime matters incurred this year to be higher than previously anticipated.
The number to be closer to $20 million.
As mentioned earlier much of the originally anticipated changes behind us with just several million dollars of below the line expenses expected to be incurred the balance of this year much of it in the third quarter.
This concludes our prepared remarks, we will now turn the call over to the operator for Q&A.
Operator.
Thank you.
We will now conduct a question and answer session to ask a question. During this session you 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 standby, while we compile the Q&A roster.
Our first question comes from Josh Seigler from Cantor Fitzgerald. Please go ahead.
Yes, hi, guys. Good morning, Thanks for taking my question nice to see the strong kpis.
As you continue to shift the mix of FTE towards more profitable.
Was wondering if you could give us some more insight in how youre actively targeting these more productive ftes and successfully acquiring them.
Yes, we've talked about our shift in recruiting strategy over the last couple of years, which has been pretty notable so historically the business.
Virtually all of the financial professionals that were recruited or unlicensed tax professionals that we brought into the business. We continue to have a great tax focus but there are now three segments that we target one continues to be the unlicensed tax professionals that have never offered wealth management that we're bringing into the wealth management business. The second second thing.
One is license tax professionals, where there are thousands of them that fit that other broker dealers. We believe that our value proposition is uniquely compelling for them and fortunately they bring assets and we're well positioned to win them from other broker dealers.
And then finally, there's a third segment of existing wealth professionals considered other broker dealers, who have great interest in growing their businesses more rapidly through collaborating with tax and accounting firms and so as we've shifted and expanded the segments that we're targeting.
We've seen great success, because of our value proposition resonates very well with all three groups.
Great. That's very helpful color. Thank you and then in your prepared remarks, you mentioned considering more M&A in the future can you talk through what Youre seeing in the market right now and how youre thinking about valuations.
Sure Josh and it's good to hear from you again, so our M&A is going to continue focusing on be independent financial professionals that are currently affiliated with <unk> wealth management, but as Chris mentioned during the prepared remarks, we did close our first external acquisition.
The thing to note there is that the profile of this particular firm looks very much like the folks that are currently aligned to a van tax and so our M&A strategy is going to continue focusing on those who culturally.
Just aligned with what we're trying to achieve here as a mission as it relates to valuations we don't share those publicly but I can say is they have remained fairly consistent for the size and type of firm that we choose to align with us.
Okay.
Understood. Thank you guys.
Thank you.
One moment for our next question.
Our next question comes from Alex Paris from Barrington Research. Please go ahead.
Hi, guys. Thanks for taking my questions and I appreciate the additional guidance on non-GAAP , because that's been quite noisy as you had said that in that regard first off.
Within your guidance you're guiding for.
18.
4 million executive transition tax act related reorganization et cetera.
And by my math you've already.
Done $15 million or so on that so as you said it.
It's going to be less going forward than it has been year to date and did you say mark that that would be heavily concentrated into Q3.
That's correct.
The new number just reflects a lot of the actions that we've taken earlier this year. Some of the executive transition is a bit of a back and forth and so at the time of originally sharing guidance those are our best estimates, but at this point.
Much of the.
The actions that we're taking are behind us, but two to your exact question. Yes. Most of what's left is going to hit in the third quarter.
Okay and then.
Yes.
While we're on the topic of of math.
How is the hedge going to work exactly in terms of how it runs through your P&L.
I understand by looking through the 10-Q.
The hedges are going to cost you a net of about $14 million youre going to recognize that.
Straight line basis does that come into interest expense or does that is that a contra revenue too.
Cash sweep revenue.
How should we model for that.
Yes. The simple answer is most of that is going to run as a contra revenue item.
So to keep it all in the same accounting bucket.
Why I sort of described it it was basically taking a quarter point hit on the typical math so are.
Cash sweep revenue and profit.
Well basically the $400000 less each month for the next three years.
Got you.
Had we not a collar in place.
Yeah.
And then.
I would say and then.
Sure.
The TSA.
On tax Act.
You say thats going to be largely done by the end of the quarter did you forecast.
Relying on my memory here earlier, this year that cost cutting which you've been doing all year long streamlining the operation would accelerate post the conclusion of the TSA.
So as mentioned we were able to take some actions already in the third quarter.
I wouldn't necessarily say, it's going to accelerate what I would say now is we don't have anything holding us back from continually building efficiencies into our model.
So what we shared during our prepared remarks.
In terms of the annualized cost savings will absolutely start hitting.
Later, this quarter and into the fourth quarter, but now we can start taking actions on a regular basis.
Okay.
Great and then just one follow up on M&A.
That's on your first unaffiliated wealth management acquisition.
This quarter.
On the last call when you kind of announced the strategy that you were looking beyond Youre affiliated independent Fs fees.
You said that you might do one or two more before year end what's your.
There and then secondly.
The affiliated Independents I think you've made 20 of those acquisitions over the last couple of years.
Have you been active there year to date and what's the pipeline look like there.
So fortunately the pipeline is quite robust right. We've now been at this for over a couple of years and as we noted we've done 20 plus.
Plus transactions of existing independent.
<unk> advisory we expect that to continue as we move forward and we've done a number of transactions throughout the early part of this year.
So we continue to expect that to be the bulk of M&A activity as we move forward because I think we've talked about the value prop of that M&A for our existing financial professionals. One of the big needs that were filling is for succession planning and some of them do not have succession plans in place and there is some that are looking to align with us too.
Realize some value from the business as they built but could be part of.
More tightly align business and grow and move off some of the administrative responsibilities that will continue to be the bulk of the activities, but we see a healthy pipeline that is growing quite materially both for on platform and then as well as some of the off platform deals that we're going to see.
Specific to your question on any other external deals this year, Alex we would expect to close at least one more before the end of the year.
Great. That's helpful. Thanks for the additional color guys.
Thank you.
One moment for our next question.
Our next question comes from Dan <unk> from the Benchmark Company. Please go ahead.
Great. Thanks, good morning.
Mark obviously, the hedging program has been pretty well communicated by you guys. Just trying to find the right mix can you just talk through sort of a little bit.
Thats why you ended up with this particular.
Hedging program.
Hillary color, we're starting to see some normalization of cash.
Our balances.
Obviously, none of us are.
Fed prognosticators, but.
Sort of.
I think perhaps sort of a stabilized environment or balances that.
Maybe just some incremental color on sort of timing and thoughts in light of the rate sort of ultimate installation.
Sure.
Good morning, Dan.
The forward curve at the time of putting the hedges in place had assumed a number of cuts to the fed funds rate before end of the year.
As well as a number of cuts in early 2024.
If we had put in a fixed has like a swap or a fixed contract at that time. It would have resulted in meaningful short term financial impact and.
The forward curve is not really in alignment with what the fed was consistently saying. So therefore, we chose to float which in essence meant that we werent, taking a bet on where rates were going to go but rather we were comfortable operating within a range. Ultimately what we were looking for was downside protection, but we wanted to prevent sweep revenues from going to <unk>.
Zero during some unlikely macro events like what happened during COVID-19.
And what we got was that protection and it cost us a modest amount over a three year period.
In terms of going forward.
The way, we think about it is maintaining that downside protection without necessarily taking a bet on where rates are going to go and so we're going to consistently monitor.
Where we are in the time left to the hedges that we have in place.
Yes.
Any particular hedge or derivative instrument is really fair game.
As long as.
We maintained that focus on that downside protection.
Got it that's really helpful. I appreciate the additional color.
Chris maybe just.
One for you.
This last time by the way congrats on sort of the FTE stabilization I know thats been sort of an important focal point.
I just wanted to ask you.
Some new products.
Kind of coming out later in your I know you guys are always trying to improve the platform.
And if patients be probably at the margin.
Just love to kind of get a sense on.
What youre thinking about like you can see a pretty good plan army.
You guys are trying to get deeper.
Fully further deeper integrated with the.
The tax side of the equation.
T J optionality over there.
To hear that and as a tangent everybody's asking you about it on every other call ill give you the chance to talk about any thoughts.
Implementing AI kind of your product suite or strategy.
We may have been one of the few firms out there that didn't have any I mentioned that we have dozen times or more.
Our remarks, we think AI is a really important development on the technology front that will enable efficiency in our business.
We're monitoring multiple potential applications of AI I would not say at our size and scale, we are going to be at the forefront of developing.
Any applications, but we will be monitoring the use across the wealth management sector and will be a very fast follower will also use more functional.
Elements of AI.
Leverage our partners and what they're doing with us and when I say more functional elements. So theres already efficiencies that are being realized and software development right through effective use of tools that are used across many industries. Our teams are already experimenting with that and so we see real benefit are monitoring it closely and selectively.
Using it and we will be fast in implementing things that we see that can work for our business.
So the other part of your question was more generally about technology, we look holistically across our financial professionals experience center and clients and we get a ton of feedback.
From our financial professionals about the things that will help them be more efficient we have rigorously prioritized product roadmap and are trying to improve user experience a fair bit more one of the things that we're really excited about is that intersection of.
Taxes.
And wealth management, we believe there is more that we can do to make it easier for our financial professionals to identify more rapidly opportunities within their tax book, both the magnitude of opportunity, but the specific clients as well as the specific wealth opportunities with those clients and so over the next six to 12.
It's one of the really exciting areas that we think we can make great progress on that will help our financial professionals grow more rapidly.
Got it thank you and Mark if I can just one last housekeeping just on the cost side of the equation.
The cost actually.
Even better than we would have thought and I know you talked about being able to take some additional actions in Q3.
Some of the streamlining I don't know.
No it doesn't sound like you're sort of revise your forward projections on where that ultimately may land, but you guys have been pretty good at finding a few nickles calculations here and there. So I'm just curious if you have any update.
Update on once we get into 'twenty, four and beyond that there are incremental efficiencies.
Might be identified to be able to or have identified now.
Sure.
You get closer to 24, I think we'll be able to provide more details in terms of actions that we may take and what our expense base would look like.
As I said during our prepared remarks that we're looking to have an investor day later this year, where I think it would be a perfect time for us to sort of share or most of them.
Updated views on where the market is headed and how our firm is going to aid and as part of that you would expect us to share.
Updated reflection on the financial health of the business and where we would expect it to go but as you point out.
We are focus continuously on driving profitable growth.
And with US now operating as a pure play wealth business with the TSA largely behind us with a lot of the other corporate actions, having taken place whether it be tender offers or what have you. We are now in a position to focus our attention on just that so we're excited to really dig in.
Got it Super helpful.
Thanks, Mark Thanks, Chris.
Great.
Thank you.
I am showing no further questions at this time I will turn the conference back over to Chris Chris Walters for final remarks.
Great. Thank you all for joining us today and your interest in <unk> will speak to you next quarter.
This concludes today's conference. Thank you for participating you may now disconnect.