Welcome to the Q2 2023 Avantax Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Dee Littrell, Director of Investor Relations. Please go ahead.

Thank you, and welcome, everyone, to Avantax 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 avantax.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 that 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 avantax.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, Dee. 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 professions. 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 was 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's worth noting that we received over $200 million of new flows in just the first few days in 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 first external acquisition into APP and expanding our national presence of our employee-based RAA, which now has more than $7.6 billion of 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 Marc 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 helps unite tax and wealth professionals to drive incremental growth to our existing and newly recruited financial professions. Overall, this quarter was a strong indicator of the strength of our tax-focused wealth management model. Existing and prospective clients are increasingly turning to Avantax 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. Our Elite business strategy team that 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 developments that will be coming toward the end of the year, which will enable our financial professionals and CPA affiliates to even more easily serve their tax clients with wealth management. Our marketing team which helps financial professionals market their firms through innovative support like our collaborative Marketing Mastermind program, small group marketing coaching and our in-house agency model, SigniFI, that allows financial professionals to take marketing execution off their plate entirely. In addition, our initiatives focused on growth strategies and practice management for our financial professionals and accounting firms, such as our Rise 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 has accelerated the growth of our graduates 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. We've 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 RIA and advisory firm that manages over $300 million in client assets. This represents our first acquisition of a wealth management firm not affiliated with Avantax 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 a good fit for APP. Now on to TaxAct separation. Finally, I'm happy to report that the Transition Services Agreement, or TSA, in relation to the TaxAct separation is on track to complete this quarter, and we have already continued 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 Marc, 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 and 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 the 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 and guidance. We believe that this will provide meaningful information to management, investors and analysts regarding the company's 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 TaxAct business from our operations and reset many of the financial and operational elements of our business. This has been done amidst a 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, surpasses $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 well 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, where we will share 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 $0.09 per diluted share. This compares to $800,000 or $0.02 per diluted share for the same period last year. Non-GAAP net income from continuing operations was $13.9 million or $0.36 per diluted share. This compares to non-GAAP net income of $1.7 million or $0.03 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 50.9%. 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 a timing issue as our recruitment pipeline remains strong. Through August 8, we have over $500 million in committed new store sales assets. We will 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, the number of offers we currently have out to recruit would result in achieving our full year expectations of between 2% and 2.5% annual growth in 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 have 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 8, we had roughly $2.7 billion in cash sweep balances with the bulk of the difference from the end of the quarter due to the quarterly advisory fee charge 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 that, in essence, allow us to float between 2.5% and 5.5%. 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 $0.4 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 0.25 point less on our sweep balances for the downside protection below 2.5%. We ended the quarter with a strong balance sheet, with cash and cash equivalents of $109.8 million and total debt of $268.3 million outstanding on our term loan. At the end of Q2, our net leverage ratio was 1.6x. For the medium term, we expect our net leverage ratio to be between 1.5x and 2.5x. During the second quarter, under our established $200 million repurchase authorization, we continued to repurchase our common stock with a repurchase of approximately 2.2 million shares for an aggregate purchase price of approximately $51.2 million. As of June 30, 2023, we had approximately $124 million remaining under our repurchase authorization. Additionally, between July 1, 2023 and August 4, 2023, we repurchased approximately 0.4 million shares of our common stock for an aggregate purchase price of approximately $9.1 million. As of August 4, 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 4, 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 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 as 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 2 factors, as well as some softness in transaction sales, for instance, 1031 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 $0.40 to $0.45 per share. We anticipate non-GAAP net income to be between $49 million and $52.3 million and 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 TaxAct and other onetime matters incurred this year to be higher than previously anticipated, expecting the number to be closer to $20 million. As mentioned earlier, much of the originally anticipated change is behind us, with just several million dollars of below-the-line expenses expected to be incurred in 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?

[Operator Instructions] Our first question comes from Josh Siegler from Cantor Fitzgerald.

Nice to see the strong KPIs. As you continue to shift the mix of FPs towards more profitable FPs, I was wondering if you could give us some more insight on how you're actively targeting these more productive FPs 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 broaden into the business. We continue to have a great tax focus, but there are now 3 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 segment is license tax professionals, where there are thousands of them that fit at 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 that sit at other broker-dealers who have great interest in growing their businesses more rapidly through collaborating with tax and accounting firms. And so as we shifted and expanded by the segments that we're targeting, we've seen great success because our value proposition resonates so well with all 3 groups.

Great. That's very helpful color. And then in your prepared remarks, you mentioned considering more M&A in the future. Can you talk through what you're seeing in the market right now and how you're 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 Avantax 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 Avantax. And so our M&A strategy is going to continue focusing on those who culturally just align with what we're trying to achieve here as a mission. As it relates to valuations, we don't share those publicly. What I can say is they remain fairly consistent for the size and type of firm that we choose to align with us.

Our next question comes from Alex Paris from Barrington Research.

I appreciate the additional guidance on non-GAAP because that's been quite noisy, as you had said. In that regard, first off, within your guidance, you're guiding for $18.4 million of executive transition TaxAct's related reorganization, et cetera, and by my math, you've already done $15 million or so in that. So as you said, it's going to be less going forward than it has been year-to-date. And did you say, Marc, 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 were best estimates. But at this point, much of the actions that we're taking are behind us. But to your exact question, yes, most of what's left is going to hit the third quarter.

Okay. And then -- while we're on the topic 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 that the hedges are going to cost you net of about $14 million. You're going to recognize that on a straight-line basis. Does that come in through interest expense? Or is that a contra revenue to 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. And so to keep it all in the same accounting bucket, that's why I sort of described it as basically taking a 0.25 point hit on the typical math. So our cash sweep revenue and profit will basically be $400,000 less each month for the next 3 years. And then what -- had we not color in place.

And then -- I see. And then the TSA on TaxAct, you say that's going to be largely done by the end of the quarter. Did you forecast -- I'm just relaying in 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. And so what we've shared during our prepared remarks, in terms of the annualized cost savings, we'll absolutely start hitting later this quarter and into the fourth quarter. But now we can start taking actions on a regular basis.

Great. And then just one follow-up on 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 that you were looking beyond your affiliated independent fees. You said that you might do one or two more before year-end, what you're -- any update there? And then secondly, the affiliated independents. I think you 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?

Yes. So fortunately, the pipeline is quite robust, right? We've now been at this over a couple of years. And as you noted, we've done 20-plus transactions of existing independent Avantax advisers. We expect that to continue as we move forward, and we've done a number of transactions throughout the early part of this year. And 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 we're filling is for succession planning, right? Some of them do not have succession plans in place. And there are some that are looking to align with us to realize some value from the business they've built, but be part of a more tightly aligned 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 has grown 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.

Our next question comes from Dan Kurnos from The Benchmark Company.

Great. Marc, obviously, the hedging program has been pretty well communicated by you guys just trying to find sort of the right mix. Can you just talk through sort of a little bit of the end process why you ended up with this particular hedging program, this particular collar, I mean we're starting to see some normalization of cash sweep balances. And obviously, none of us sort of Fed prognosticators but sort of seems like you have sort of a stable environment for now. So just maybe some incremental color on sort of timing and thoughts why this is the right sort of ultimate solution?

Sure. So 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 hedge like a swap or a fixed contract at that time, it would have resulted in meaningful short-term financial impact. And that forward curve was not really in alignment with what the Fed was consistently saying. So therefore, we chose to float, which in essence, meant that we weren't 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. We wanted to prevent sweep revenues from going to 0 during some unlikely macro event like what happened during COVID. So what we got was that protection, and it cost us a modest amount over a 3-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 and the time left to the hedges that we have in place. And any particular hedge or derivative instruments, is really fair game as long as we maintain that focus on that downside protection.

Got it. That's really helpful. Appreciate the additional color. Chris, maybe just 1 for you. I should have said this last time, by the way, congrats on sort of the FC stabilization. I know that's been sort of an important focal point. I just want to ask you, you've kind of seen some new products kind of coming out later in the year? I know you guys are always trying to improve the platform and efficiency. It's probably at the margin, but just love to kind of get a sense on what you're thinking about, like you've been seeing a pretty good plan forming here on how you guys are trying to get deeper even fully or further deeper integrated with kind of the tax side of the equation and some of the strategic optionality over there? So love to hear that. And as a tangent -- since everybody is asking about it on every other call, I'll give you the chance to talk about any thoughts on implementing AI into kind of your product suite or strategy?

We may have been one of the few firms out there that didn't have AI mentioned at least a dozen times or more in 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. We'll also use more functional elements of AI, right, and leverage our partners, right, and what they're doing with that. And when I say more functional elements. So there's already efficiencies that are being realized in software development, right, through effective use of tools, there is 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'll be fast in implementing things that we see that can work for our business. So the other part of your question, which is more generally about technology, we look holistically across our financial professionals experience and our end 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 rigorously prioritized product road map, 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 wealth management, we believe there's 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 with the specific clients as well as the specific wealth opportunities with those clients. And so over the next 6 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. And Marc, if I could just 1 last housekeeping. Just on the cost side of the equation, 2Q costs actually even better than we would have thought. And I know you talked about being able to take some initial actions in Q3 and some of the streamlining. I don't know, it doesn't sound like you sort of revised your forward projections on where that ultimately may land, but you guys have been pretty good at finding a few nickels and couch cushions here and there. So I'm just curious if you have any kind of update on once we get into '24 and beyond if there are incremental efficiencies that you might be identify -- able to or have identified now?

Sure. As we 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 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 our most updated views on where the market is headed and how our firm is going to compete. 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 focused 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.

I am showing no further questions at this time. I will turn the conference back over to Chris Walters, for final remarks.

Great. Thank you all for joining us today and your interest in Avantax. We'll speak to you next quarter.

This concludes today's conference. Thank you for participating. You may now disconnect.