Avantax, Inc.
Q3 2016 Earnings Call Transcript

Published: 27 Oct 2016

[Executives:]

Stacy Ybarra - VP, IR John Clendening - President and CEO Eric Emans - CFO

[Analysts:]

Dan Kurnos - The Benchmark Company Matthew Galinko - Sidoti

[Operator:]

Good day, ladies and gentlemen, and welcome to the Blucora Q3 2016 Earnings Conference Call. At this time, all participants are in a listen-only-mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] I would now like to introduce to this conference call, Ms. Stacy Ybarra. You may begin, ma'am.

[Stacy Ybarra:]

Good morning, and welcome to Blucora's investor conference call to discuss third quarter 2016 earnings. Before we begin, I'd like to remind you that during the course of this call, Blucora representatives will make forward-looking statements, including but not limited to statements regarding Blucora's expectations about its products and services, outlook for the future of our business and growth initiatives, and anticipated financial performance for the fourth quarter and full year. Other statements that refer to our beliefs, plans, expectations or intentions - which may be made in response to questions, are also forward-looking statements for purposes of the Safe Harbor provided by the Private Securities Litigation Reform Act. Because these statements pertain to future events, they are subject to various risks and uncertainties, and actual results could differ materially from our current expectations and beliefs. Factors that could cause or contribute to such differences include, but are not limited to, the risks and other factors discussed in Blucora's most recent Quarterly Report on Form 10-Q on file with the Securities and Exchange Commission. Blucora assumes no obligation to update any forward-looking statement, which speak only as of the date the statement is made. In addition, during this call, our management will discuss GAAP and non-GAAP financial measures. In the press release, which has been posted on our Web site and filed with the SEC on Form 8-K, we present GAAP and non-GAAP results along with reconciliation tables, and the reasons for our presentation of non-GAAP information. We have also provided supplemental financial information to our results in the Investor Relations section of our corporate Web site at www.blucora.com and filed with the SEC on Form 8-K. Now, I'll turn the call over to John Clendening. Following his comments, Eric Emans will review third quarter results and full year outlook. Then we'll open up the call to your questions.

[John Clendening:]

Thank you, Stacy, and good morning everyone, and thank you for joining our call today, especially those of you joining live from the West Coast where it's just after 5

[Eric Emans:]

Thanks, John. Today, I will cover third quarter results and then provide fourth quarter and full year outlook. A summary of our consolidated results for the third quarter are as follows

[John Clendening:]

Thanks, Eric. As evidenced by our results and announcements today, we are building a strong leadership team, rethinking our operating model to align with our new vision, acting to lift business unit performance, and driving synergies between HD Vest and TaxAct. We see encouraging signs of progress across our operations, and are committed to investing in technology, our teams and advisors to strengthen our business. I am pleased with the progress we have achieved over the last six months and I'm excited about additional opportunities as we successfully transition to a tech-enabled financial solutions company. With that, I'll turn it over to the operator for your questions.

[Operator:]

[Operator Instructions] Our first question comes from Dan Kurnos with The Benchmark Company.

[Dan Kurnos:]

Great. Thanks, and very early morning, guys. So John, I obviously moved to Texas, so you don't have to do the call any more at 5

[Eric Emans:]

Good morning, and thank you. It's certainly bright and early here, and yet we are all excited about what we have seen in the last three months here, Dan, that's for sure. Relative to fee-based advisory, we remain really bullish on our prospects there from a number of different angles as we heard [ph] before, we see it as real win, win, win for advisors, for clients, and for the firm. And so, over time we expect that that AUM as a percentage of AUA to continue to increase. We have been working hard on that over the past several years, and we find ourselves in a position even taking DOL off the table that we have been still working hard to continue to shift that number. DOL will provide a catalyst for some obvious reasons to continue to not only move that step forward, but also probably lift it up in step-wise fashion. And so, that explains why we are making investments on the advisory platform. It explains my comments that we are probably doing that anyway based on the economic value that's created for the firm as we move towards fee-based. We don't see that there is a natural barrier to continuing to move that number by the way, and we know that because other firms although we put ourselves at the upper end of the pack with regards to percentage of assets in fee-based offering, we see there is ample opportunity to move ahead. And one of the most important things that advisors have embraced is a concept of goals-based planning. And you saw and heard in the comments earlier that we are pretty pleased with the headway that we have made there, and we continue to focus on advisors at all levels of production at HD Vest to embrace that approach. I am sure that we will get as much clarity as possibly we can with clients. We've got the right clarity around what the clients are trying to achieve, and as a natural byproduct that we find that often client say, "You know what, based on this, where I am trying to go, where am I at today. I really like you guys take control in terms of making decisions on the portfolio and discretionary basis." And so, that's a catalyst going forward as well.

[John Clendening:]

Did that answer your question, Dan?

[Dan Kurnos:]

Yes. That's very helpful. Thanks. And just, look, I know both you and Eric touched on it in your remark, you have got sort of an -- an uptick in cash cost near term. You are still going to hit your de-leverage target here. There's been interestingly though, John, I don't know how much people want to think about this, but there's also been some consolidation in the brokerage space. I know we've talked about on both sides of the ledger eventually getting some more scale and sizing up possibly even tuck-ins or something larger. I am just curious how you think about sort of the cash flow situation clearly eye towards paying down debt near term, but if this -- both near term changes any of your thought process or longer term because the margin profile is better give you some enhanced flexibility?

[John Clendening:]

Well, look, are consistent in our thought process around -- we are committed to getting down to 3x net leverage. And we see line of sight to getting to that number, and that's certainly due to divestitures. It's also due to the strong operating cash flow profiles of our businesses. And behind the scene, we've already been thinking about what are our next moves once we get to that number. There's no doubt about it that when we look back some years from now, couple of years from now, maybe even 18 months from now, that there will be consolidation in the IBD space in particular based on DOL. And so, we want to be ready for that. And we are always fairly honest that we want to get that 3x number, that net number. We are committed to that. We want to be a company that is seen as delivering on the commitments that it makes. And also just make sense from a capital structure to get to that sort of number. We'll be ready. Believe me, we see -- we are very optimistic around the two positives coming out of DOL. One is it will help spur consolidation in a very fragmented business. Side note, as we participate in that consolidation, we're going to be pretty choosy how we like the differentiated elements around our business model that drive better economics than players who are far larger than us. And so, you can count on us if you are looking at those sorts of opportunities with the lens of, hey, this needs to be accretive around the firm's valuation. Now the second thing, it brings actually back to your first question, the second thing we will see couple of years down the road is that there is substantially increases in the percentage of assets that are in a for fee advisory solution. That's going to be a plus for us as well. But as it relates to consolidation, we do feel that's going to be an outcome of it. We are going to be well-positioned to participate in that outcome. And on top of that, we have to be focused on what's the right [indiscernible] and do we have the right [indiscernible] to bring in acquisitions and that investment we are making around the advisory trading platform is fit such the backbone that we are going to need to bring in acquisitions as well. So, I am excited about going down that path because we will be able to still value add it to advisors that are in other IBDs that are -- advisors of other IBDS that we would be looking to acquire it on the basis of having superior technology.

[Dan Kurnos:]

Great. And then just let me finish up by asking sort of a two-part question on tax, and you guys did -- were kind enough to provide some details around that. First, John, just based on your prepared remarks, do you have the relationship already on the robo-advisor partnership? And then, just as we think about the growth, good growth again for next year in line with what we were thinking, I am assuming that you're thinking more of an industry in line unit versus pricing type of balance versus what we've seen historically?

[John Clendening:]

So, I'll take the first one there. And the answer -- short answer is no, we don't. We are really close. And we have done ourselves close enough recently to began framing out what that experience is going to be from the client's point of view. So, we are roughly close. It's been a byproduct of a very robust RFP process where we have been really thoughtful about all angles of relationship like this one, because once you are entering into it you really want to make sure it going to continue to be a long-term relationship. We are really excited about it, but it's a multifaceted contract and we are going to make sure we absolutely get it right. And so is the other party. We want to enter into a relationship where both parties feel really good about relationship where the business is going. And we hope to have some news in this in the not too distant future that we have announced publicly. Eric, would you mind covering second question?

[Eric Emans:]

Sure. As we talk about our -- given a little color on the first half of next year. I don't want to get into too many specifics of rate versus volume, but I would say that -- reiterate what John has focused and then just make an overall market comment. So where we are focused on is finding [indiscernible] user, right kind of user to [indiscernible] product which is really about a value conscientious user that is more savvy than the average person is going to be baited into free-type offers or lowered back into a store front maybe based upon a refund advance which we saw that block came out with yesterday. So, we're going to be remained focused on that. I mean the challenge of talking about the overall DIY and market right now is giving the dynamics of that market and the competition and how we are seeing the competitors go after or trying to pull folks out of the store front into DIY, I don't think that's the right way we should think about market. We really should be thinking about market as the organic growth of DIY which are the new products that are coming in and that we would like to secure and have a nice lifetime value as well as the folks that are sitting in our competitors products right now paying too much that we can bring over and be value conscientious via TaxAct user long term. And then lastly, as we think about our user base and our retention of our user base, we are going to be more and more focused on the paid mix of our user base, how our paid users are growing, as well as what is the profile of the folks that come in free and do we believe that there is a opportunity for those to be long-term TaxAct customers that pay. And so, those are the metrics we are going to be more focused on. We are going to looking at things on a multi-year basis. And we are not going to be dragged into to this conversation of year-to-year share gain just quite frankly because the market is really being driven by this whole lot of store front. And yes, there are some good high value folks that are coming out of that, but there is also some very low value folks that we just don't want to get into mix or fighting for it. So, that's kind of our view right now. We will be able to give a little more color when we get into the tax season, but hopefully that helps you for now, Dan.

[Dan Kurnos:]

No, that's perfect. Thanks very much guys for all the color. Congrats on a good quarter. And for the record, Eric, I think your boots would fit in very nicely in Texas.

[Eric Emans:]

Thank you.

[Operator:]

Our next question comes from Matthew Galinko with Sidoti.

[Matthew Galinko:]

Hey, good morning guys. Thank you for taking my question. I guess you could just cover how you are feeling about your advisor count and turn? And if you are comfortable with where that sat today, if there is room for improvement and how you see implementation of DOL impacting that equation?

[Eric Emans:]

Hey, good morning. Thanks for the question. Really appreciate it. So, relative to advisor recruiting couple of thoughts here as organize this in terms of sort of the immediate term and then longer term, where we are at right now is this, given our business and the pace of our business understanding that we are a company that primarily deals with tax preparers, recruiting season really gets growing in June. And so it's the back half of the year where we see most of the action. And you got to split that down into those that we are recruiting into becoming wealth managers who today are simply a tax preparer and see the wisdom of adding wealth management. We are doing really well in that part of the business. Now the top end of the funnel if you will is really robust. We are excited about it. The second element of course is bringing in folks who are licensed already. But again who typically are tax preparer. We have seen that part of the intake valve if you will slow a bit. And it's very clear to us that these folks that we cal transfers are looking to see more clarity on DOL. How will that shake out my current firm before I make a move to a new firm is going to be a catalyst. As these transferees are -- as they get further in the year, going to be closer and closer to the point at which they will pay their annual acknowledging and services fees to their current providers so that will be a bit of a spark to we think unlock some of those folks that are sort of waiting and seeing where their firm goes to be well. But the shorter answer is yes, we are seeing that people are taking a bit of wait and see attitude that slowed down the transfers coming into the firm. Longer term where we remain bullish on our ability to grow advisors based on the value proposition that we offer to them, based on superior service levels that we offer, and certainly based on the success we have had over time. Having said that, part of your question was do we see opportunities in the future, and absolutely we do. In fact, we're in the midst -- team at HD VEST in the midst of taking a look at a number of different tactics that we might deploy to increase the number. But actually even more importantly increase the quality of the new advisors that are coming and be it a transferee or be it that person that being converted from tax only into tax plus wealth management. Our early analysis is giving us a lot of optimism that we can do for example, a better job of targeting those who can come out of the [indiscernible] and be effective much more quickly. And so, the answer to your question is yes, I have added some additional color there, hope that's helpful. The answer is yes, we see that there are opportunities ahead of us to re-engineer that process to make sure they not only bring in numbers of advisors but again ones that are going to be really high value to the firm.

[Matthew Galinko:]

Great. Thanks for the color.

[Eric Emans:]

You bet.

[Operator:]

[Operator Instructions] I am not showing any further questions at this time. And this does conclude today's presentation. You may all disconnect, and have a wonderful day.