Andersen Group Inc. (ANDG) Earnings Call Transcript

Greetings, and welcome to the Andersen Group Q2 2026 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the conference over to Greg Vistica, Managing Director, Investor Relations. Please proceed.

Thank you, Latonya, and welcome, everyone, and thank you all for joining the Andersen call to discuss our second quarter earnings. I'm Greg Vistica, Head of Investor Relations. And joining us today are Mark Vorsatz, our Chairman and CEO; Neal Livingston, Chief Financial Officer; Bill Deckelman, Chief Legal Officer. With that, Bill, I'll turn it over to you to read our disclaimer.

Okay. Thank you, Greg. Before we begin, please note that certain statements made on this call are forward-looking statements within the meaning of federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied. These risks and uncertainties are described in our earnings release and SEC filings, including our 10-Q for our second quarter of 2026. Except as required by law, we undertake no obligation to update any forward-looking statements. We will also reference certain non-GAAP financial measures today. Reconciliations to the most directly comparable GAAP measures are included in our earnings release and will be available on our website. Now Mark, I will turn the call over to you.

Thanks, Bill. I'm going to cover 3 things. I'm going to talk briefly. I'll highlight an overview of the financial information that was already distributed. I'm going to comment on a few key financial factors that are probably not included in that information, but I think will be important to you in terms of evaluating our company. And the third thing I'm going to talk about is our transactional strategy. I first want to thank our partners and our people. I think we had a very solid second quarter. I also want to thank our Board for all the support that they've given and also those investors that have taken this journey with us, along with the analysts who have given me a lot of good personal input for which I'm extremely appreciative. So we had indicated in the call we had on May that we gave guidance for the second quarter, a 13% increase in revenue, with a range of $190 million to $205 million. We came in at about $217.7 million. So that's an increase of 23.7%. Of particular relevance is our organic growth rate was about 20.5%. I went back -- I have all of our financials for the last 24 years, and I went back and looked at each quarter. And I stopped at about year 7 or 8 earlier. This is the best second quarter we've had in terms of percentage growth, which considering the size that we're getting in terms of revenue is particularly relevant. On the adjusted EBITDA side, we came in for the second quarter, a little under $46 million versus about $30 million for 2025. So we had an increase of about 54%. For the first half, our revenue was about $458 million, or an increase of over $74 million, which was 19.3%. Keep in mind, the inorganic revenue was really nominal in the second quarter. So most of that growth rate is just pure organic. Our adjusted EBITDA year-to-date is up over 41%. And if you look at our margin and compare it June 30, 2026, to June 30, 2025, we're at 26.8% versus 22.6%. Keep in mind, we're still investing in Global Mobility and Consulting, and so the margins would be much higher, but for those investments. Several key statistics that I think are relevant if I were sitting in on the other side of the call. I mentioned Dan DePaoli has been working on our productivity. While the productivity growth has been modest year-to-date, it's at an increasing rate. So for the first half of the year, our productivity has increased 3.9%. That may not sound like a lot, but what I had indicated before is if we add 1-hour a week based on our effective rate, that's about $40 million at the bottom line. Our rate per hour continues to be very strong. It's come in year-over-year at a 10.1% increase. We had a rate adjustment in July. So I would expect we may get some modest improvement on that in the second half of the year. I'll talk about the client selectivity issue in a minute because I think that's a big factor in our growth of clients that's driving that number. And then I indicated on the last call that the 1 statistic I am particularly focused on, and I mentioned that based on accountants today on which they track about 60 tax firms, we've been #1 last year in revenue per professional. And our revenue per professional through the first half of the year was up 16.4%. That's a very, very important statistic in how I view our business. On the client side, on a gross basis, we added over 1,300 clients, which was a 10.6% increase. We had a modest net increase because we've had some clients where we've either completed work or we've had clients where we terminated the relationship because we didn't view it as productive as we would like. On the attrition rate because that may be an issue that you're focused on, Alexa LaBianca, I give her a shout-out. She tracks all this stuff in HR. We actually -- while our attrition is up a little bit, we had a rating system of 1 to 5, with 5 being the highest, and we probably have a lousy curve because if you're below 4, maybe you shouldn't be working here. 70% of our attrition was at ratings of 1 to 3. I view that as a positive, not a negative. Kelly Rath, who runs our recruiting group, has done a terrific job. We have a great recruiting team. The first half of this year for '26 hires, we've had the best year we've ever had in 24 years with acceptance rate. Most of our candidates have multiple offers. We're not just competing with accounting firms, we're competing with law firms. By way of example, in San Francisco, probably about 70% to 75% of our hires are lawyers. Our acceptance rate is tracking for 2026 starts at about 73%. When we were WTAS, we would run at about 36%. When we flipped the Andersen brand, we were at about 65%. There's probably a lot of factors involved, but I think execution is a very important one. Certainly, being public in the brand, I think, is also particularly relevant. The last topic I'm going to touch on briefly, and then I'm going to turn it over to Neal, is the transactions. I don't call these acquisitions because these are our partners. I have been involved in transactions for over 40 years. And I will tell you, I've done hundreds, if not 1,000 transactions, and some of them very large. And it's been my observation that the reason transactions don't work isn't because of economics. It's because of culture. Our whole process in identifying firms and having the collaboration agreement and working with those firms and how we interact with the firms comes down to values. We want to be best-in-class. We want to make this a better place for the next generation. We think we can do those types of things and also reward our investors. That's a really, really important litmus test for us. I would say the acquisitions are taking longer than I would hope and a little longer than expected, and I'll comment about what the economics of that will be. As you've seen now, because we had to disclose for financial purposes, we included 2 acquisitions that we did on Monday and Tuesday. So we now have signed 16 transactions. 8 of those have closed that represent over $130 million of revenue. That based on our 2025 revenue, and I'm sure the analysts will be all over this, would be about a 15.5% increase in our revenue over and above what the inorganic revenue will likely be for this year. We had originally planned that we would do about $55 million of inorganic revenue. One of the analysts had sent Greg a note, which he forwarded to me, and I thought we would address it on this call so we could deal in a comprehensive fashion. We are going to come in far short of that. So it is likely that we will probably come in at somewhere around 25 to 30. It's not because of a lack of opportunity. It is because these transactions take longer than we would hope. We've added additional resources. We now have 3 full-time lawyers in-house working on the transactions. Ed Prokop, who leads that group, spent 20 years at Sidley Austin and was a partner, and then 10 years as a partner at Winston & Strawn. We've added now 2 more people on the finance side. We have 4 full-time people on finance. We're supplementing that with our skills internally because we have about 60 people in the U.S. in M&A. We have deep skills in cross-border taxation. But there are requirements for us to go through from a regulatory standpoint, which sometimes takes the deals a little bit longer. As we do deals in each country, we're building a prototype, and I hope in the future, those deals will go a little bit faster. We're not changing our guidance at $980 million to $1 billion of revenue because I think that our organic performance will continue to be much higher than we had originally anticipated. I would say we also had a strong July. The third quarter is our biggest quarter because September is our busiest month in revenue and August is our second busiest month. So I actually view this as a positive. We're being deliberative. We're being measured. We're being disciplined about these transactions. But we're going to do this right. We're not going to do it fast. We have quite a pipeline. This year, last year, every other year, we do a global partner meeting, which we had 1 in November in Las Vegas. This year, there are regional partner meetings. So we have meetings in Singapore, in Athens, in Barcelona, in Atlanta, and in Cancun. And I'm bringing our deal team with me to Singapore, Athens, Barcelona, and Cancun. And I would say our dance card is completely full with meetings with new groups that want to join. So we have quite the pipeline. I would say our biggest challenge right now is maintaining our discipline on doing this thoughtfully and correct. I believe we have enough existing deals where we have active conversations that at a pace of 2 to 3 a month, we have enough deals in process through the end of next year. So while there is a little bit of slippage in terms of timing of closing, and so the deals we just announced, we've now completed a little over $130 million of deals this year in terms of annualized revenue. Some of that revenue will slip into 2027, but our organic performance for 2026 is so strong that we'll compensate for that differential. Those are generally positive things. I always say when Kelly Rath sends me a note and says that we had a 73% acceptance rate, much like how I deal with my children who are both adults, I say, what happened to the other 27%? So we obviously have areas for improvement. We still have areas for improvement in pricing. We have significant areas of improvement from productivity. Even though we've added gross client increase of 10%, I think we can do a much better job in that area. We had an internal Board, our U.S. Board call yesterday, where we spent a fair amount of time talking about how we can do a better job on business development, and we're going to have a call on Sunday to talk through that in greater terms. We're starting to see some continued modest improvement in integration, but we're just scratching the surface. Now the way I look at it is at 20% organic growth, better than 20% organic growth for the second quarter. And as my partners know, I'm never happy. I look at this and say, the glass is half full, but it's half empty. Let's focus on how we can fill up the rest of the glass. I'm very confident that we're going to continue to execute, and we're going to do an even better job going forward. So that's my overview. I'm going to turn it over to Neal.

Mark, thanks very much, and good afternoon, everyone. Thanks for joining us today. Obviously, we appreciate the ongoing interest in Andersen. So our third earnings call as a public company. I'm going to cover our aspects of our financial performance that Mark has not already covered. And let me just start back with revenue. So to reiterate the top line numbers for the quarter, for the second quarter, revenue of $217.7 million. That equates to a $41.7 million or 23.7% increase year-over-year. Included in that is $5.5 million of revenue from acquisitions that were closed during the second quarter. So if you take those out, excluding acquisitions, organic revenue increased 20.6% year-over-year for the quarter. That result exceeds the midpoint of the second quarter revenue guidance previously provided by around 10%. So equating, we think, to a solid top line beat for the quarter. We've provided first half information as well. Mark mentioned the revenue for first half, which was up 19.4% or 17.9% on an organic-only basis. Going forward, and you'll note in the 10-Q, we are now including last 12-month financial information in the MD&A section of our quarterly reports. This is intentional to provide additional insight on the annualized performance of the business, excluding some of the seasonal effects that Mark mentioned, driven by U.S. tax filing deadlines. So looking at the last 12 months ended June 30, 2026, our revenue was $913 million. That equates to a year-over-year increase of $176 million or 18%. And again, taking out the inorganic piece of that on an organic-only basis that equates to a revenue increase of 17.2%. So solid top line momentum. Breaking that down by -- breaking that revenue down, the growth in the second quarter was underpinned by solid growth across all of our service lines and U.S. regions. We had no large nonrecurring items of revenue for the second quarter. Specifically, I'd call out Business Tax Services, which reported strong growth of 36.9% for the quarter and accounted for 39.2% of revenues. And our largest service line, Private Client Services also reported solid growth of approximately 17% for the quarter. Mark mentioned it, but we are seeing positive momentum in Consulting and Mobility, whilst continuing to invest. The revenue from those service lines is up on a year-over-year basis. Mark mentioned some of the underlying drivers that contributed to that growth. I will add one, which is increase in volume, up 5% as measured by chargeable hours for the first half of 2026. So alongside the pricing increase and the productivity increases that Mark already mentioned, a nicely balanced picture in terms of underlying revenue drivers. We also added headcount for the quarter, albeit at a more moderate pace compared to prior periods on a net basis. Just a reminder that as part of our 2026 pricing strategy, we introduced a 3% tech surcharge. We've discussed that previously for client contracts that were signed from the second quarter of 2026. This has obviously contributed to the year-over-year revenue increase and is over and above the rate increase that Mark mentioned previously. So overall, the picture is one of revenue growth that is well diversified across practice lines, U.S. regions and by driver. Turning to net income. For the second quarter, we recorded a net loss on a GAAP basis of $10.1 million. That compares to a net loss of $96 million for the second quarter of 2025. Earnings per share for the second quarter was negative $0.08 per share basic and negative $0.09 per share on a diluted basis. That is also in line with previous guidance where we indicated a net loss and negative earnings per share for the second quarter. For the first half of 2026, we recorded net income on a GAAP basis of $7.6 million. That compares to a net loss of $45.4 million for the same period of 2025. And the smaller net loss in the second quarter and then the swing from a net loss to net income for the first half of '26 is primarily attributable to a combination of higher revenue and reduced equity-based compensation expense. Turning back to non-GAAP measures, and I'll try not to repeat what Mark has already mentioned. But for the second quarter, we had adjusted net income of $39 million with an adjusted net income margin of 17.9%. This compares to $28 million and 16% for the equivalent period in '25. Our adjusted EBITDA was $45.9 million, an increase of approximately 55% with an adjusted EBITDA margin of 21.1%, and that compares to $29.7 million or 16.9% for the equivalent period in '25. So if you do the math, you'll see that, that is a margin increase for the quarter of approximately 420 basis points. Looking at the same numbers for the last 12 months, adjusted net income, $240.6 million with an adjusted net income margin of 28.8% compared to $172.8 million and 23.2% for 2025. That's the adjusted net income. Adjusted EBITDA was $262.9 million, about a 46% increase with an adjusted EBITDA margin of 28.8%, and that compares to $179.6 million and a 23.2% adjusted EBITDA margin for the same period in '25. So once again, doing the margin expansion or margin increase, that's an increase of 560 basis points for the last 12 months. Why is that? Lots of underlying reasons for that, but primarily what this does reflect is favorable operating leverage in our business, whereby if you look at our annualized revenue growth, it's consistently outpaced the growth in operating costs, excluding the noncash equity restructuring costs and some of the stock-based compensation expense associated with the IPO and the vesting of Class X Aggregator Units. Costs have also improved in Q2 for similar reasons. Cost of services has reduced from 128% to 79.7%. For the second quarter, SG&A decreased from 30.6% to 23.2%, and again, that is primarily related to equity-based compensation changes. Let me speak briefly to stock-based compensation because that's an important part of our P&L. For the second quarter, stock-based compensation expense was $48.2 million, of which $42 million -- $42.3 million to be exact, or 88% was linked to the vesting of Class X Aggregator Units. And for the first half, that stock-based compensation expense number was $93.9 million, of which $83.4 million or 89% was linked to those -- the vesting of those Class X Aggregator Units. Again, as a reminder, that expense item is a noncash and non-dilutive expense with no cash flow or operational impact. I'll briefly cover our balance sheet and cash flow and then also comment on the lock-up and Tax Receivable Agreement because we do get those questions from time to time. As of the end of June 30, '26, our cash and cash equivalents were $175.6 million and investments in U.S. Treasury securities of $2.1 million. We had no third-party debt, and the company continues to maintain a conservative stance towards financial leverage. Our net working capital, which we're defining as current assets less current liabilities, was stable at $220 million as of the end of June as compared to $216 million at the end of December 31, 2025. I'll repeat what we've said previously in terms of our funding needs. Historically, we've generated sufficient cash flow or cash to meet our funding needs. And we believe that the existing cash and cash equivalents, cash flow from operations and the residual proceeds from the IPO will be sufficient to meet our foreseeable funding requirements. On the lock-up and Tax Receivable Agreement, as of June 30, 2026, we had not yet incurred any liability in connection with the Tax Receivable Agreement. So I just wanted to make sure that is clear. And as a reminder, there are limits on the number of Class X units and the paired Class B shares that can be exchanged for Class A shares post expiration of the IPO lock-up in the middle of June. There's a 10% cap that's relevant to us in aggregate. And so we wanted to make sure everybody understood that position post lock-up. I'll just briefly reiterate our outlook and forward guidance. So we are reaffirming our 2026 full year guidance, which is revenue in the range of $980 million to $1 billion. That equates to annualized growth of approximately 18%. Adjusted EBITDA projected to be in the range of $225 million to $250 million. That equates to growth of approximately 5%. And adjusted EBITDA margin, we are holding to a range of 22% to 23%. Briefly in closing, we're really proud of our second quarter results, which surpassed the previous guidance. We think this financial performance is indicative of a business that is performing well and an affirmation of our no-audit business model and some of the discipline around client selection that I know Mark is very passionate about and our approach to client service. So that's it for me. Thank you very much for listening. And with that, we'd be happy to take any questions.

[Operator Instructions] The first question comes from Toni Kaplan with Morgan Stanley.

This is Greg Parrish on for Toni. Congrats on another great result. Maybe just to start with business tax. It was a really fantastic quarter there specifically. Maybe anything to call out on what drove the strength there?

I'll make a couple of comments. This is Mark Vorsatz, and then I'll let Neal respond. I think some of it is client focus. I often say that a couple of the considerations and why our financial performance continues to be very strong, and this isn't like we just had a good quarter. We've had 96 good quarters. So we've never had a down quarter in revenue or net income for the U.S. in 24 years. Part of it is client selection. It's the type of clients that we pursue in our business development strategy. When we started out, we had to do that just to survive. Today, we're a little bit better than that. And I'd say the other thing are the types of services that we're providing to those clients. So we're not providing services that I would consider to be more commoditized. So we don't do audit work. We don't do, for the most part, large-scale tax compliance engagements. So the reason I think we drive so well on the pricing side is because we try to build relationships with clients. And the reason they hired us isn't necessarily because we're the lowest cost provider. They hire us because they think we can add the most value. And that's a focus that we drive through the organization across the board. It's embedded in our business development strategy that we want to help our clients be successful, and we want to help them from a financial perspective, achieve their objectives. Neal, do you want to add some comments?

I'll come off mute. No, that's well said, Mark. Thank you. Nothing to add. Thanks for the question, Greg.

Great. And just as a follow-up, maybe just add some color on the acquisitions this week. I think 6 of the 8 were U.S.-based consulting firms, but you can correct that if that's wrong. Just given how fast technology is evolving with AI, how do you judge the capabilities of these firms? And what really gives you confidence in their ability to continue to grow as technology evolves?

So I would say there's a couple of factors involved. First of all, we know these firms very well. So I'm going to highlight several of the firms that have joined us. So Zenger Folkman, they are not just a talent management firm. They are the benchmark of talent management firms. Unfortunately, Jack passed away about 3 or 4 weeks ago, but they have a very deep bench, and Joe is a superstar. Those 2 individuals have written 21 books on the subject. They are the standard. They are best-in-class, and it's totally consistent with our strategy around being in the C-suite. We want to be where the real decision-makers are. We're not interested in dealing with the head of procurement. We want to deal with the CEO. We want to deal with the Board. We want to deal with the people that make the decisions around the company. So we have a forum to provide services to those groups to help them be successful. I was so impressed with them when we first started recruiting them that we hired them to do a program for us. They've now done a program for 75 of our partners. So it's a group that we know very well. Amy Daniels out of Chicago. Amy used to work at Andersen. Amy has a very close relationship with Rosa De Luna, who is the Head of our Chicago office. In fact, their husbands were roommates together in college. So this isn't like dialing for dollars here where we said, well, geez, let's go talk to somebody. We have a long-time relationship. Her firm out of Chicago is also in the talent management space and gives a lot of depth. SPR, Rob, we've talked to for a long time. Joe Karczewski, one of our best partners. It's been a client of Joe's for over 30 years. Long-time relationship. I've spent a fair amount of time with Rob on working through some of the technical aspects of the deal. We traded 2 or 3 notes today because in every deal, we're giving RSUs to the managers and directors as a retention tool, but also because we want these people to participate in the financial upside of the business. Strategically, what you will see, while we will be opportunistic and we will continue to do deals in multiple jurisdictions. You'll see a focus on the U.S., North America, Canada and Mexico. We announced a deal with Alonso Montes firm in Mexico. I've known Alonso for a very long time. They have been with us for 11 years. Now I've known his father much longer than that because his father started at Arthur Andersen in 1968. And his father and I were partners together at Arthur Andersen for 15 years, okay? They share our values. They share our culture. We have an intimate familiarity. And what's already transpiring, we had a Board call this morning, and I commented several -- I made several comments to our Board related to the transactions that are generating transactions. Alonso and I have a call within the next 2 weeks with a law firm in Mexico that's approached us that would like to merge into the business. We've already identified what we think is the best Private Client Service practice in Ireland that we're advancing conversations with because they have a relationship with our colleagues in Ireland. Our group in New Zealand sent me a note yesterday that they have 2 deals that have been approached since they've been announced that they're part of Andersen and part of the public company. So what you'll see strategically is we will do deals in North America because of the relationship with the United States and Canada and Mexico. We obviously announced the U.K. Kevin Hindley, who's the managing partner there. We've worked with him for a long time. I helped to recruit Kevin when he came to the firm. That group was originally started by a former Andersen person. Paul Finlan, who has been affiliated with us for many years, used to run our law firm called Garretts, where we had 1,000 lawyers in the U.K. at Arthur Andersen. These are people we've known for a long time. You will see more deals in France, Germany, Italy, Spain for obvious reasons. And we will be generating activity in Asia as well. Now we can walk and talk and chew gum at the same time, so we can have a lot of conversations. So you'll see some other deals in Latin America, more deals in Africa. Interesting phenomenon is that in South Africa, they may allow in the region, legal services to be provided outside of the country where the regulatory issue is more like it might be in the States in the United States. So we see a lot of opportunity in these spaces. We're looking at groups that we have a significant relationship with where we believe that we can help leverage them into our business model and can add a lot of value to our clients.

Great. That color is very helpful. Congrats again on the really strong quarter.

Thanks, Greg. If I could say to the analysts, let's just ask one question this time around. And if we have time for follow-up, we'll follow up.

The next question comes from Andrew Nicholas with William Blair.

I wanted to ask on EBITDA and maybe margins broadly. Another like really, really good quarter in Q2. I understand you reaffirmed guidance on the top line because maybe a little bit slower cadence of deals. But on the EBITDA front, I think even at the top end, it's implying a little bit of a step down year-over-year in the back half, which doesn't sound consistent with kind of the mid-teens, mid-teens plus organic growth that your guidance implies. So can you talk a little bit about the EBITDA guide, whether or not there's some conservatism in there and any potential impact from the deals you've announced?

Thanks, Andrew. So first of all, thank you for your note to Greg about, you really nailed it about the inorganic revenue, and that's why I wanted to address it on this call. I think what's really exciting is these are just timing issues for us, okay? In some of the countries, it just takes a little bit more time to get deals done because we're actually, in some markets, we are creating the strategy. So getting regulatory issues even approved in Canada took us 3 or 4 months to get that approved. Yes, I will say that Neal advocated increasing our guidance on adjusted EBITDA, and I said no, okay? Does that mean I'm any less bullish about it? As I've shared with you before. We haven't borrowed money since the first quarter of 2008 since we went private, okay? I'm a conservative guy. And while I am very bullish on our third quarter, and I think you'll see an increase in our adjusted EBITDA in the third quarter because it's clearly every year our best quarter. We're going to continue to be relatively modest about how we communicate things. I played -- when I was younger, I played football in high school and college. And when our team scored a touchdown, I didn't give any high 5s. I looked around on the field to see if there were any flags. And then I ran down again on the kickoff team. We have a lot more work to do. Now am I any less bullish? I'm even more bullish. We've had 2 outstanding back-to-back months, far exceeded my expectations. When we gave guidance of 13% for the second quarter, that was conservative that I think we've come in at 23.7%. If you had said to me in May, take the over/under on 23.7%, I would have been a little bit balanced in my view, okay? So I would just say this, we're going to continue to focus on those areas and improvement in the firm. We're not taking anything for granted. We get up every day, and we -- I always say to people, what I do for living is I pound rocks. And I just get up early and I work late and we pound rocks, and we're going to continue to give our clients the best-in-class service that we can. And fortunately, our clients have been very generous with us in rewarding us with new business and new business opportunities. And so Andrew, I will say, I will volunteer that for some of the projections that we looked at multiyear that we probably have $100 million of revenue that has joined us that will not hit in the 2026 numbers at all, $100 million of annualized revenue. So as you guys evaluate or reevaluate your projections, you should think about that. And you should probably also understand that we have quite a few conversations going. I can't guarantee anything. What I would say realistically is I would be disappointed if we didn't sign another 8 to 10 deals between now and the end of the year. I think we're at a point where we can do 2 or 3 deals a month. It's not every month. Some months, we get 4 or 5, some we don't get any. But I think that's a realistic benchmark for us to consider because we're adding more resources in this area. And in some countries, where we've built the prototype, it's much easier for us to do a second and a third deal in that country, and the process is much quicker.

The next question comes from Kevin McVeigh with UBS.

Great. Obviously, a lot to like here. Mark, I think one of the, hard to say understated, but understated parts of the story is the client success you have, right? And maybe help us understand why you continue to add at such a high level. My sense is there's probably some incubation that's kind of perpetual, but help us understand that client add motion a little bit.