BCOR (2020 - Q4)

Ladies and gentlemen, thank you for standing by. And welcome to the Blucora Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. . Please be advised that today's conference is being recorded. . I would now like to hand the call over to, Dee Littrell, Investor Relations. Please go ahead. Dee Litt

Thank you, and welcome, everyone, to Blucora's Fourth Quarter 2020 Earnings Conference Call. By now, you should have had the opportunity to review a copy of our earnings release and supplemental information. If you've not reviewed these documents, they are available on the Investor Relations section of our website at blucora.com. I'm joined today by Chris Walters, Chief Executive Officer, and Marc Mehlman, Chief Financial Officer.

Thank you, Dee. And good morning, everyone. 2020 was a challenging, but more importantly, a transformative year for Blucora. Even as we navigated an unprecedented global pandemic, the company's new leadership team and refreshed Board of Directors repositioned our unique portfolio of profitable, tax focused, tech enabled businesses to sustainably grow long-term and build shareholder value as an integrated company that helps consumers build and preserve their wealth. This is a big opportunity. It addresses an enormous untapped and underserved market for consumers for whom taxes are one of life's biggest expenses, but who have traditionally not had access to effective long-term tax planning strategies and tools. Blucora's unique solution integrates powerful, but easy to use tax-focused technology, an extensive and highly trusted network of tax and financial professionals, and valuable data at scale to deliver holistic tax-focused planning and financial guidance that can efficiently enable wealth preservation and creation. Blucora's compelling mission, opportunity and solutions are the reason I was so excited to become CEO a year ago. They are also the reasons I am even more optimistic about our long-term outlook today. As I look back on the lessons we have learned and the tremendous progress we have made over the past 12 months. This morning, I'd like to review fiscal 2020, beginning with the short-term impact of the pandemic on our results and then turning to the long-term progress we are making, strengthening the foundation of our business and the connections between them for sustainable long-term growth. Marc will then review our financial results in more detail.

Thank you, Chris. And good morning, everyone. I'd like to provide some additional detail on our fourth quarter results and our outlook for Q1 2021. Starting with fourth quarter results, total revenue of $155.2 million, which is above the upper end of our guidance range, a GAAP net loss of $50.7 million or negative $1.05 per share. Our GAAP net loss was below our target ranges due to two main factors. A higher-than-forecasted impact of the accounting true-up associated with the HKFS earn-out. As I discussed last quarter, the change up or down in expectation associated with the earn-out payments will run through the P&L. The strong performance of the Avantax Planning Partners business in q4 has resulted in a more optimistic forecast for the business, resulting in a higher view of the total earn-out consideration. The second factor relates to higher-than-forecasted tax expense relating to a valuation allowance on our NOLs. This accounting driven result relates to our view of the three-year accumulated position with the impact of the write-down of the HKFS brand name, when we shifted to the Avantax brand, materially driving calculation. adjusted EBITDA, which excludes both of these factors, was $2.2 million, above the high end of our target range. Non-GAAP net income was negative $9 million or negative $0.19 per share, both better than the high end of our target range. Turning now to Tax Preparation. Tax Prep revenue in the seasonally slow fourth quarter was $5.8 million and segment operating income was negative $11 million, both just above the high end of our target range. Moving to Wealth Management. Results were meaningfully higher than the top end of our target range. Fourth quarter reported Wealth Management revenue was $149.4 million, up 10% sequentially and included a 10% increase of legacy Avantax. This revenue growth was primarily driven by market improvement, an 8% increase in trailing revenue, and an 18% increase in transaction commission revenue. On a year-over-year basis, total Wealth Management revenue was up 3%, which included revenue of $10.5 million from Avantax Planning Partners. Wealth Management segment operating income came in at $20.4 million, above the high end of the target range, primarily due to better-than-expected top line performance. Total client assets increased 17% year-over-year to $83 billion, which included approximately $5 billion from the addition of Avantax Planning Partners. Fee-based advisory assets were up 29% year-over-year to $35.6 billion. This is a new record for advisory assets, even excluding APP. And advisory assets as a percentage of total client assets ended the quarter at 42.9%, up about 380 basis points from the same quarter last year, also hitting a high watermark. We saw net outflows in advisory assets of $140 million, consisting of $203 million of net inflows into Avantax Wealth Management, more than offset by outflows of $343 million at HKFS, which were driven in part by the departure of in-house financial professionals. We always understood there could be a certain amount of attrition when we acquired HKFS as some financial professionals prefer to operate in a smaller environment . We continue to partner with our in-house financial professionals to create an environment supportive of continued growth. Total client assets had net outflows of just under $600 million, which consisted of net outflows of about $260 million from Avantax Wealth Management, combined with the net outflows from Avantax Planning Partners that I just mentioned. At the corporate level, unallocated corporate expenses came in at $7.1 million. During the quarter, we had about $2.5 million in integration costs related to HKFS and 1G and $9.5 million of transaction costs, the majority of which relates to the accounting impact of the earn-out calculation. We ended the quarter with cash and cash equivalents of $150.1 million and net debt of $413 million. Our reported net leverage ratio at the end of the quarter was 4.3 times compared to 4.5 times at the end of the prior quarter. We continue to be prudent from a capital allocation perspective. Our ongoing priorities, aside from unique strategic opportunities, are to support organic growth, invest in our financial professionals who are interested in a different affiliation model, or want to retire and pay down debt. Our long-term net leverage goal remains to be below 3 times. And until we get closer to this target, we do not have plans to repurchase shares. With that, let's turn to our first quarter 2021 outlook. As Chris discussed, given the delayed start of the tax season, we are not providing a Q1 outlook for TaxAct revenue or segment operating income, but are reaffirming our full-year outlook of low single-digit revenue growth and a minimum of $20 million of additional segment operating income relative to 2020. For our Wealth Management business, we expect first quarter revenue of between $150 million to $155.5 million and segment operating income of between $17 million to $19.5 million. Lastly, we expect corporate unallocated expenses to be between $7.5 million and $8.5 million. As the year progresses, our expectation is to hold an investor day, likely late in Q2, where we will be able to share longer-term growth and margin targets, a deeper view of the metrics driving performance for businesses, and lastly, the metrics by which we can track the success of our synergistic endeavors. This concludes our prepared remarks. We will now turn the call over to the operator for Q&A. Operator?

. Our first question comes from Chris Shutler with William Blair.

A few questions on the tax business. Maybe first, just what kind of impact has the late start to the season had on your marketing efforts, both in terms of effectiveness and costs?

So, a delay in the start of the season ultimately shifts the demand curve in some way, right? Consumers actually get keyed in on that start date. And that's one of the periods where demand ramps up. And so, you would expect for us and others in the industry that some of the top of the funnel activities early in the season would still have an impact, but that impact might be a little bit more muted than you'd normally expect. But it's critical at the start of the season to get out there and make sure that consumers are both aware of your brand and positioning and your offering, but there's likely to be some diminishment in terms of the impact of that spending.

As you think through the low single-digit revenue growth target for the current tax season, just help us think through the tailwind and headwinds to that number in your view, Chris. I would think they're tailwinds around the refined marketing approach, the new assisted offering and what's pretty easy comp, but there's a headwind associated with what seems like a kind of a reduced pricing effort or an effort to widen the pricing margin between yourself and the leader in the category. So, anything there that you would point out that – is that fair? Or is there anything else that you would add?

I would say the primary tailwinds are the historic market growth that has existed, this consistent shift over many years, which has been in the mid-single-digits and last year was more pronounced in terms of the shift from tax preparers to online offerings. And so, that's clearly a tailwind. We've also got, from a unit perspective, our return to a bit stronger value positioning is ultimately a helpful thing from a unit perspective. We also have making assisted available to all consumers coming in, which is something that provides an ARPU lift is compelling. There are some tailwinds from a revenue perspective. Ultimately, the lower pricing levels does provide a bit of a drag this season. In addition, some of the confusion in the market associated with the start date of the season, stimulus payments, and many of the things that are related to COVID have consumers asking questions about what their tax situation is. Actually, that can be beneficial for us. But ultimately, some of the uncertainties for consumers will lead to some shifts in behavior. And so, those uncertainties will impact everyone in the industry in a consistent way.

Lastly, I just want to get your thoughts on partnerships in the tax business, especially any kind of opportunities around white label deals, just given the Square/Credit Karma deal and the broader movement of financial services towards one-stop shop platforms, I would think that digital wallets as they become more and more common would want to add taxes as an offering. So, do you think that's a realistic opportunity for TaxAct? Have you had any meaningful discussions to date? And I'm also curious, in that type of scenario, would the digital wallet firm be able to utilize the consumers' tax data if they got consent?

It does present opportunity in the medium to long term. We have worked on partnerships this year more extensively than we have in the past, but not to the extent or the full extent of what you described. But our primary focus on partnerships has really been around traffic driving partnerships from brands that consumers have deep connections with and can logically be connected with our product and then also data partnerships that actually make the experience for taxpayers more frictionless. As I said, in the medium and long term, the opportunity that you described, clearly, is compelling as those who have banking products, wealth products, financial information offerings see the value in tax. There could be some more integrated experiences going forward. And third, just to address the last question you had around the use of data, as you know, there's meaningful restrictions that the government has in place, 7216, that limits the use of data. However, if consent is provided and consumers have full awareness of how their data may be used, then it can be used for purposes that are outlined at the time they provide consent.

Our next question comes from Dan Kurnos with Benchmark Company.

Just a follow-up, Chris. Look, we've seen some pretty aggressive ads out there now, interesting places, by the way. So, kind of two part question. One, it's taken a long time – I think you've seen this from the beginning to get the feature set, the offering set out there. And it was always TaxAct being a big prop, but kind of sort of screaming out there, hey, we're 50% cheaper than Turbo. Is it kind of a big departure from kind of narrowing that gap? And so, I'm just curious, obviously, you must feel pretty confident what the data is telling you that this is sort of the right messaging you want to get out there and that the feature set you have is more than competitive to drive pay unit growth. So, I'd just love to hear some color around that. And then separately, on the explicit kind of marketing channels, as I said, seeing some of these ads in some unique digital places, it seems very digitally driven at this point. And I know it's early. So, you guys are probably adjusting your marketing strategy on the fly here, given the delay in tax season, but just kind of love to hear sort of your thoughts on how your spends evolves by channel as you think the tax season progresses and where you're seeing some initial positive returns. Thanks.

In terms of the messaging that we extensively research anything that we actually put out there to ensure that the messages that we're conveying are ultimately the ones that consumers and really specific consumers that we're reaching with those marketing platforms are ultimately going to be most responsive to. And so, for certain customers, that price messaging is critically important. As consumers move further along in the funnel or have different kind of interest in different segments, then we'd focus more on a feature benefits or refund maximization, and so it's not one message that you'll hear. Ultimately, there's an overarching message and positioning for the brand, and then a variety of messages in different channels based on what we've tested and what we think will lead consumers to respond most favorably. In terms of the marketing mix that we are using, all channels of marketing, so typical top of the funnel marketing like television and radio, often and this is not unique for us, typically weight a bit more towards the front of the season because all customers are still available at that point in time. It's important to become top of mind for more customers in the market. That's something that you should expect to continue to see as we progress through the season. And then, we're using digital marketing, both search, display advertising, online video, and social. And then we're also doing some interesting things in terms of partnerships that I mentioned earlier, really traffic driving partnerships with brands that actually have deep connections with their customers, and some experimenting with some sponsorships. And you'll see in certain markets, some sports connections that we've made with teams where they have deep fan base or deep connections with their fan base. And ultimately, we're hopeful that those connections can be capitalized on to bring their customers our way.

If I could just sneak one in on the Wealth Management side, just in terms of your color, I just want to sort of aggregate some of the comments you made. I know people like to focus on the attrition number, even though it's sort of some becoming less relevant, I just want to make sure I understand. You did say further potential advisor attrition probably on some more cleanup efforts on your side. But then you also talked about synergies post tax season to accelerate conversion from kind of tax over – that could be the other way around. I just want to understand if we're expecting attrition through the course of the year. And then subsequently, even if we are that there's certainly more than enough improvements in rev per advisor to offset that and to kind of improve growth once you get this thing kind of level set.

Yeah. We have a number of things that we're excited about this year that are going to continue to improve the advisor experience. That said, it's normal in our business to actually have some advisor churn. And that typically is at the lowest performing end of the spectrum. We expect that to continue this year. And ultimately, as we make the improvements that we're so optimistic about in terms of the advisor experience, we think the business will ultimately be in a position as we come out of the year to grow meaningfully. That said, there's a variety of things that offset that, the performance of the advisors that will continue with the business and then a variety of actions that we're taking to bring in new advisors, including what you referenced, which is us marketing more aggressively to our tax pro base where we have 23,000 plus tax professionals that we have a longstanding relationship with. And many of them could be referral partners. So, they can be referral partners in that captive model or they ultimately could be independent advisors. And so, we actually will see some attrition, but are optimistic the actions that we're taking to bring in new folks and ultimately drive growth with the people that will remain with us will lead to a positive year.

. There are no further questions. I'd like to turn the call back over to Chris Walters for any closing remarks.

Great. Thank you for joining us today and for your interest in Blucora. I look forward to speaking with you next quarter.

Ladies and gentlemen, this does conclude the program and you may now disconnect. Everyone, have a great day.