Avantax, Inc.
Q2 2016 Earnings Call Transcript

Published: 30 Jul 2016

[Executives:]

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

[Analysts:]

Dan Kurnos - The Benchmark Company Mitch Bartlett - Craig-Hallum

[Operator:]

Welcome to the Second Quarter 2016 Blucora 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 second 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 2016. 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 website 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 website 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 second quarter results and full year outlook. Then we'll open up the call to your questions.

[John Clendening:]

Thank you, Stacy. Good morning everyone, and thank you for joining our call today. I would like to begin by simply expressing my appreciation to the entire Blucora team, our customers and our shareowners, for their support as I lead Blucora through our transformation to a strong and growing technology-enabled financial solutions company. After a little over 100 days as CEO, I am pleased to provide an update on the exciting and positive changes going on at our company and my views on how we will create long-term value. When I first joined Blucora in April of this year, I knew the company had significant potential. Over the last few months, I have had the opportunity to watch our business evolve and to see the hard work of our teams begin to affect positive change across our operations. I have been consistently impressed with the efforts of our people, who are fully focused on delivering great value to our customers, clients and advisors. It's exciting to be a part of a company that is so committed to doing everything possible to assist those that depend upon us in the markets we serve. As we transform Blucora our commitment to our shareholders is to deliver reliable financial performance that generates attractive returns. The full team is focused on this commitment. In these updates, you can expect me to share a balanced perspective on the company, both in terms of what's working well along with challenges we need to overcome to meet that commitment. Last quarter, I shared our near term focus on the four Ds

[Eric Emans:]

Thanks, John. Today I will cover second quarter results and then provide third quarter outlook and update our full year outlook. Our consolidated results and year-on-year pro forma growth for the second quarter are as follows

[John Clendening:]

Thanks, Eric. In my short time with the Company, we have made substantial progress towards our transformation objectives. Our focus on the four D's is already beginning to yield results and we are excited about the future of the new Blucora. We will now move to Q&A.

[Operator:]

[Dan Kurnos:]

Great. Thanks. Good morning, very early morning to you guys. Look, I'm just obviously going to focus around HD Vest here. Just a few questions. First, John, look, I -- you've kind of -- you've inherited this; you've obviously made some changes already. So I know the long-term outlook very promising. To me, the first question is, you talked a lot about the headwinds, I know when we had a chance to meet up, you were talking about implementing your game plan. And I'm just really trying to get a sense of how much of this sort of downtick near-term is a result of macro versus possibly you taking a chance to get more aggressive on shifting towards more of a recurring revenue stream model, given that recurring did actually tick up in the quarter sequentially, and was a greater portion of the overall revenue base?

[John Clendening:]

Hey, Dan, good morning. Thanks for the question, appreciate that. So in terms of the order of your question I'll sort of answer going in the same order. There definitely is some cyclical issues in this business that are not unique to when we have an HD Vest, as we've shared, we feel good about the future potential that business over time. In fact, we had done as we had sized this business up as the year unfolded; we had felt that we had largely avoided some of the sector issues they caught up with us a bit. Last quarter, we see some of these elements stabilizing, and that we still believe very confidently that the impacts around the sector will be less overtime on this business. Now, to your point on the shift, we're definitely experiencing some short-term headwind around that shift. We love and we discussed this, we love businesses that can be moving into a more recurring sort of revenue stream. A stickier revenue; it's higher quality revenue and the sort of offers that clients end up in tend to be better for them over time. So there is an element of that and we are encouraged and delighted really when we make that shift. On the short-term, though, there is some pain. We've done the math and had done the math earlier around. Do we like to trade from an economic point of view on top of liking the trade from a consumer point of view? And the answer is definitely yes. So we're going to continue to push on that. In fact, we'd like to see acceleration in the move to fee-based offers. We feel good about our offers. There's lot of room to grow there and that's the linkage in the conversation that I just led earlier around focusing on advisor engagement. And though the markets have not been generous and kind to anybody, we got to focus on the things that we can control and that's getting advisors more and more engaged with their clients using the tools that we've built, because we know that they turn into future revenue.

[Dan Kurnos:]

Do you think that because you guys have this unique organic advisor growth development strategy that that puts you more at risk or less at risk? How would you characterize it when the market becomes more uncertain and you've got guys that are primarily tax guys having to deal with a more challenging equity market?

[John Clendening:]

So decidedly less at risk. If I've the option, door one, business like HD Vest, tax professionals, deep relationships with clients used to being a fiduciary. Door two, typical IBD stuck in the trade-day broker business or rent-day broker business where you're paying for practices and looking to grow through that fashion. Sometimes you're in that mode; you're tempted to try to speak to generate so you sort of drive your business by getting more and more tempted around buying and overpaying for practices. So we're not in that model. Now, what it does clearly is put more pressure on us to be more creative on who we can find out of the 250,000 group of tax repairs that we can convince to become wealth advisor. And there's a long -- there's a longer sales cycle on that and then we've got the added need to be really good never better at convincing people to move through that funnel to pass the test and become effective. Now, the good news there is, first of all, you're not going to get tempted and do a bunch of things around sort of manufacturing advisor growth. Second thing about that is though we are looking through that entire process, Roger and the team are very focused on adding ever more science to that process so that we can generate net growth in advisors over time. We see no structural reason why we can't do that. But I think it's actually -- for me it's very clearly an advantage and you get some issues short-term, when it becomes more difficult to recruit, it looks like it's hard to wealth management and that sort of thing, but it's a far better model than the alternative. And over time it's a good model.

[Dan Kurnos:]

And just to press on one of the points that you made in terms of accelerating the shift. I mean, is it fair to think that the back half of this year now that you've been, you passed your 100-day period; you've got the lay of the land that you're going to now start to get more aggressive with some of the changes that you like to implement with sort of an eye towards having a much solid much more solid base in 2017 to go forward?

[John Clendening:]

Yes, there's no doubt about that. The answer is 100% yes. It's up to the team and myself over the next little while here to determine which spots we pick first, what are the highest leverage spots. That'll range from aligning the organization to what are the priorities around deploying some new tactics in each of the business, not just HD Vest, but each of the business, so that can in the case of HD Vest rebuild momentum that you can point and say that's the business that's on a move and moving ahead despite whatever may be happening in the market at that time. And on the TaxAct's business, that's not begun to grow itself in terms of paid filers, without paying it's heavily dependent on ARPU sorts of gains. So it's at all those levels that we're operating right now. And we're focused on executing those it in a way that begin to show up in the results.

[Dan Kurnos:]

And then just lastly for me. Obviously, I know you guys had planned or were thinking about having Monoprice at least announced. I know it's on going, I'm not obviously asking for an update here. But anything that you can sort of -- give us any, shed any light on in terms of is it possible that because InfoSpace took so long to divest that markets read -- only read the Monoprice's gotten pushed back?

[Eric Emans:]

Dan, its Eric. You know look, I think it's just the dynamics of the sales process. And as John touched on in his comment, we're pleased that the process remains competitive and with multiple parties continuing to do work and best intentions to get those done by today. But obviously we also want the best execution for shareholders, so that's what we're focused on. And pretty much what John has said in his comments is really the update we can give at this time.

[Operator:]

[Operator Instructions]. Our next question comes from Mitch Bartlett with Craig-Hallum.

[Mitch Bartlett:]

Good morning. Just following up on the last discussion there. Is it -- was it your strategies that you were putting in place that caused the change in the new investment in variable annuities or what again was the -- I mean, a 35% decline seems fairly precipitous. Is it just a reaction to something that you were doing or is there something larger in the marketplace? And then the second question. I know you don't want to talk any more about Monoprice. But is Monoprice with the core business continues to perform kind of within expectation?

[John Clendening:]

Okay. Why don't you grab the later one and I'll come back to the first question?

[Eric Emans:]

Sure. Well, Mitch, we haven't given a lot of color on either InfoSpace or Monoprice and we're going to continue not to. What I would say is, it's not really a end-year performance issue as it relates to the process. It's just the dynamics of a deal process, we're trying to get folks to the finish line and get the right deal for shareholders. So I wouldn't read too much into the timing versus the performance. Obviously, you know, if you know, this performed since we've owned it, so that creates its own challenges in a process. But as it relates to end-year that is not our primary issue now, it's just getting folks to the finish line. John, you want to take the first question?

[John Clendening:]

Yes. Thank you. And thanks for the question. So no -- I mean, big pictures, absolutely no new strategy that that would have generated that sort of delta in that month. It is a highly variable part of P&L, more variable than that we'd anticipate actually. But at the same time that was a sort of dip we've not seen previously. It's fair to say, I shared upfront though that there have been some operational things that we we've deployed. One of which we believe actually brought forward some volume relatively significantly. There is another factor that brought forward some volume as well. And it seems to us that that had been a factor not necessarily just in June, but in the last couple of months, as advisors have absorbed new ways of working with us around annuities which are going to be pluses over time. But also, given the fact that they were able to close business much more quickly drying in Q1; and in summary, Q4 drying up a bit the pipeline for us in Q2.

[Mitch Bartlett:]

But overall, looking forward, your guidance is affected by a number of things, where we are at right now on total volumes in trailer commissions and the things that you'd describe. But you feel the variability is not swinging widely at this point, it's stabilized?

[John Clendening:]

So Mitch, I think what I would say is, you think about the revenue line, fee-based and trailers are much more stable than transaction. Transactional revenue is based upon sales that are happening. And quite frankly, we had something in June that we -- as went back and looked over multiple years that we hadn't seen around variable annuities in that time period. So it did catch us a little off guard. What I would say is, what -- it has given us an appreciation around the variability of that particular line item. And so what I would say is the forward outlook built-in that variability, as well as takes into account the performance through second quarter. And therefore, I wouldn't say stability per se, but I think as we look forward we feel fee-based and trailers are pretty stable, transaction has got a lot of variability and we captured that in our go-forward projection.

[Operator:]

[Operator Instructions]. And I'm not showing any further questions at this time. This also concludes today's presentation. You may now disconnect and have a wonderful day.