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Edited Transcript of BCOR earnings conference call or presentation 8-May-19 12:30pm GMT

Q1 2019 Blucora Inc Earnings Call

BELLEVUE May 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Blucora Inc earnings conference call or presentation Wednesday, May 8, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bill Michalek

Blucora, Inc. - VP of IR

* Davinder S. Athwal

Blucora, Inc. - CFO

* John S. Clendening

Blucora, Inc. - President, CEO & Director

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Conference Call Participants

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* Bradley Allen Berning

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Christopher Charles Shutler

William Blair & Company L.L.C., Research Division - Research Analyst

* Daniel Louis Kurnos

The Benchmark Company, LLC, Research Division - MD

* Huang Howe

Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst

* William V. Cuddy

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Blucora First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, Mr. Bill Michalek, Vice President of Investor Relations. You may begin.

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Bill Michalek, Blucora, Inc. - VP of IR [2]

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Thank you, and welcome everyone to Blucora's First Quarter 2019 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 yet reviewed these documents, they're available on the Investor Relations section of our website at blucora.com. I'm joined today by John Clendening, Chief Executive Officer; and Davinder Athwal, our Chief Financial Officer.

Before we begin, let me remind everyone that today's discussion contains forward-looking statements based on the environment as we currently see it and 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 other SEC filings, including our Forms 10-K, 10-Q and other reports for more information on the specific risk factors. We assume no obligation to update our forward-looking statements.

We will discuss both GAAP and non-GAAP financial measures today, and all non-GAAP reconciliations are available on our earnings release and other supplemental information, including on the Investor Relations portion of our website at blucora.com.

With that, let me hand it over to John.

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John S. Clendening, Blucora, Inc. - President, CEO & Director [3]

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Thanks, Bill. Good morning, everyone. I'm pleased to report that Blucora had a very strong start to the year, posting double-digit growth rate and exceeding the high end of our guidance range on most metrics.

Compared to last year's first quarter, Blucora revenue grew by 10%, adjusted EBITDA by 26% and non-GAAP EPS by 30%. We generated strong cash flow and reduced our net leverage ratio to less than 1 at 0.8x prior to the acquisition closing versus 1.5x at the end of the fourth quarter.

So let's just jump right into segment performance, starting with Tax Preparation. For this discussion, I'll be talking about the full tax season, which is through tax day +1 [or] through April 16 as well as our full first half 2019 expectation for TaxAct. TaxAct delivered very strong financial results, and we continued to make progress on repositioning the business for the future.

We expect to grow first half TaxAct revenue by approximately 13% versus the comparable period last year, which should put us above the high end of our original and [upper new advised] outlook ranges for revenue.

Even with some incremental strategic investments in the business, we expect first half segment margin will come in at a 50% to 80% range. Obviously, very strong and at the high end of our revised outlook range and above our original range.

Monetized units for the season were approximately flat year-over-year, marking the second consecutive year of stability on its metric, following prior declines and commitment with some increases in list prices.

As a reminder, monetized units includes software units for which we have paid for either or both of the software or employee service as well as partnership units. Overall units, which includes free or unpaid units declined year-over-year as expected. So let's get into a bit of the detail.

As you'll recall, the season has gone up to a very slow start, with the government shutdown and customer uncertainty around tax reform and earn results from the IRS showing total filings down 12%, and DDIY down 9% as of February 1. The DDIY market saw nice recovery from there, and ultimately ended the season up about 4.2% in unit volume.

This season, we continue to focus on monetized units. As we would expect, we're aiming for higher-value customers and deemphasizing free, our total DDIY E-files declined year-over-year while our average revenue per user increased. Through April 16, our total U.S. consumer e-commerce were 3.1 million, representing total market share of about 5.5%, production of 160 basis points from last season. Again, due to a drop of unpaid products while maintaining stable monetized filers and increasing list pricing by more than 10%.

Big picture, and those of you who've been dialing in for a few years, know this because we've been consistent. We've done our multiyear journey to close the gap in our discount to the volumetric leader in order to create a more normalized discount or improving unit economics. While there is room for further price increases, we have clearly made substantial progress in unit economics.

In online consumer, our segment income per filer is roughly double the amount that was in 2016, and thus we now feature a much healthier economic profile.

We've also stepped up our efforts in making the tax filing experience easier and more rewarding for our customers. To enhance the customer experience, we introduce in upgraded mobile experience as well as innovations like Ten Minute taxes, a streamlined process to guide certain filers with simple returns, to give bigger returns in just 10 minutes or less. Innovations like this are designed to enable our customers to do more in less time. So they get back to the things that matter most to them.

We also introduced Refund Marketplace, which rewarded filers with a bonus amount and a gift card, when they allocated a portion of the refund to get cards from an assortment of national retailers.

This bonus made the tax filing process better than free for many filers, with about 40% of all filers who took advantage of the marketplace walking away from the TaxAct filing experiencing with more bonus money than they've paid us to file.

In total, TaxAct customers place more than $6.5 million in refund dollars, and nearly 40,000 cards. And they are in hundreds of thousands of dollars in bonus money. This year, the bonus has ranged up to $599, which is a nice bonus just for choosing TaxAct.

In addition to the enhanced customer experience, we had some new and expanded partnerships this season. Partner volumes increase significantly year-over-year, albeit from a small base driven by distribution partnerships.

Our proprietary BluPrint analysis, which analyzes the tax return and it uncovers real savings opportunities for our customers, was also back this year, although with a late start and it's helping customers in connecting them with other partner products where appropriate.

Consistent with our mission to provide the most value to customers across their financial lines, many of these products are offered with monetary or other bonuses where they discounted rate. For example, these products could include a 50 basis point reduction on loans or no interest for first 15 months on credit cards.

We look forward to continue to engage with the now roughly 4 million cumulative customers that have indicated through BluPrint, that they are interested in TaxAct, helping them with their financial lines even outside of tax season. We have to build on this on over time in should how and when our TaxAct customers work with us.

We believe we're the only online tax software company that offers this level of insight and guidance into the financial health of our customers, and provides comprehensive solutions, which can save our customer's real money now and for years to come. This is phenomenal value creation opportunity for our customers.

TaxACT Pro, our product for professional tax preparers, had a successful season and outperformed the market. In a market that saw overall IRS-assisted market decline by about 0.7%, TaxAct Pro grew e-complex 4% year-over-year and increased market share.

So overall on tax preparations, we delivered very strong financial results, and we continue to make incremental progress on repositioning the business for the future.

As you know, Curtis Campbell joined us late last year to lead our TaxAct business. While he joined late in the year and largely inherited the strategy for the season, he had made an enormous impact not only on our results this season, but also making significant improvements in our capabilities across all aspects of the business, including leadership, marketing, product management and engineering.

He has brought in great new talent into the organization, has already spent an incredible amount of time with customers and is establishing a clear vision and road map to significantly strengthen our strategic and competitive position in this business with an eye toward organic growth on the strength of our now attractive unit economics. We're looking forward to our first tax season next year with Curtis at the helm for the full cycle.

As we look ahead, there's some changes we'd expect to see as a result of Curtis's leadership as well as the fruits of the progress we've been able to make over the past few seasons. This is because we have never been more clear on the steps necessary to restore this business as strong organic growth with a reduced dependence on list price increases.

We will really lean into the customer and their experience as they use unlock what is most valuable to them.

We will accelerate our investment in technology, in particular, the timing of our code [refactoring] work to complete over the next 2 years. We will continue to evolve our BluPrint solution to leverage a tremendous potential to uncover opportunities for customers.

We will aim to continue to build on our partnership strategy. One of the change you may see is an increased return back to the free market. Over the past few seasons, we have pivoted our focus away from free. Our goal is to pick the most attractive segments of the market. We could be the most effective and drive the highest lifetime value customers. And for us, to serve the monetized units and a focus on those customers willing to pay us in year 1.

While we've been committed to creating attractive economics on the monetized side. And as noted, we've made dramatic progress in this regard. This has naturally come at a cost to overall units as well as monetized units as it's hard to grow units at the same time as raising prices. Now that we have built a healthier business with better lifetime value and attractive economics on monetized units, we believe we can now afford open back up to free.

[Few] years ago, it would not have sense, but our improved economic footing point is to look to grow quality monetized units as well as quality free units. Overall, we're already very excited about our plans for next year. While we're just a short time out of this past tax season and there's a long way to go next year, I wouldn't be surprised if year-over-year change improvement next year is the most significant in our history. More to come on that.

Turning now to Wealth Management. HD Vest results were generally in line or better than our targeted ranges. Revenue was at about the midpoint of our target range, and down about 3% year-over-year to $89.5 million driven by a reduction in trailer revenue, resulting from the industry's mutual fund share class conversion from C shares to A shares.

The reduction in transactional activity that we discussed last quarter resulted from a clearing conversion and higher adviser payout, partially offset by our sweep revenue.

Segment income was above the high end of our target range down about 12% year-over-year to 11.5%. The decline year-over-year was primarily driven by higher adviser payout in incremental expenses associated with the clearing conversion. The outperformance relative to expectations was driven by better expense control as well as certain anticipated clearing-related costs being reimbursed or credited.

Fee-based advisory assets were up 10% year-over-year to $14 billion, setting a new record level for the company and [causes] 30% of total assets threshold for the first time.

Total finances increased 4% year-over-year to $46.2 billion. Net inflows in advisory assets in Q1 was about $270 million. Net inflows in the total client assets was about $100 million.

A few updates I'll call out here for HD Vest. As it relates to the current conversion, our service double metrics are back in line with our preconversion norms.

While transactional volumes for the quarter remained soft as expected, as advisers continue to ramp to speed with the new technology implemented during the conversion as well as work to the complexity that tax law changes with our tax clients. Now that tax season is behind us, risking a significant rebound in transaction activity and continue to expect to be back to normalized range by the end of the second quarter.

This is important as we tend at a lower average payout ratio on transaction due to adviser mix. Recruiting continues to be strong, with about 40 new advisers joining in Q1, including new Tax Pro advisers as well as established adviser transfers.

Luggage transfer in Q1 was an adviser with about $180 million in assets, transferring from one of the top warehouses. About $10 million from that adviser transferred in Q1, we expect the remainder will continue to transfer over the coming months.

We also added 4 more high-value accounting firms in the quarter with approximately $13 million in cumulative accounting revenue, representing an estimated $1.3 billion prospecting opportunity in total client assets. And in Tax-Smart innovation, we've told you about the tax we're investing in software platform to help revise its systematically capture tax outlook for clients that we had in beta testing.

The product has continued to evolve and improve and has exceeded my expectations at where we would be at this point. I'm excited to say that it we'll officially launch next month, and be available to all HD Vest advisers.

Investors unnecessarily give up 1 to 2 percentage points in performance each of their taxes. And this product identifies the top opportunities in advises client base every day to help capture that opportunity.

This is a big deal for investors. Over, say, a 30-year period, it could mean as much as $800,000 in incremental assets at retirement for an average investor. We'll continue to provide updates here after we launch and work to provide broad adviser adoption.

This is also a big deal for Blucora as we continue to unlock the differentiated value of the combination of tax and wealth management through proprietary technologies.

The other big news in our Wealth Management segment is that our acquisition of First Global has closed as of May 6. To briefly summarize the 4 key points from the conference call we held in mid-March. First, First Global add significant scale for wealth management business, which drives substantial revenue and cost synergy. A meaningful amount of the revenue synergy is external and contracted and the bulk of the remainder are fully under our control.

Second, it is complementary and enhances our business with a strong position in large accounting firms, a large proportion of advisory assets and strong capability in key areas such as onboarding, advisory development and in-house portfolio management.

Third, we expect the transaction will financially [cure] the EPS and other key performance metrics, such as adviser productivity and return on client assets.

And finally, it expands our established tax optimizing investing footprint by creating by far the largest and most capable tax-focused wealth manager, position to provide better service and capabilities to our advisers, and ultimately, better outcomes for their clients. And assets managed under their NRA framework now totaled approximately $24 billion.

It's been terrific to meet dozens of First Global advisers in the past few weeks. And I'm excited that they are now part of Blucora family.

All of First Global advisers we've met with us, share in our fundamental believe that true wealth management must consider all aspects of the client's financial life, and tax is a crucial piece of that. The days of the adviser disclosure to tell the client to consult your tax adviser are gone. And a new age of wealth management, which capitalizes on the combination of tax professionals, financial advisers and value-creating technologies is here.

So in closing, I'm very pleased with our strong consolidated first quarter results with double-digit revenue, adjusted EBITDA, and earnings growth and significant cash flow. TaxAct posted great financial results led by a significantly strengthened team.

Wealth management is showing growth in each of the 3 key drivers of value creation, organic growth, conversion of fee-based AUM and increased income from sweep.

And it continues to position the business for continued future success where attractive consolidating acquisition, which extends our lead in the market segment and key innovations like our tax-run investment platform.

Simply put, we continue to make great progress and best position the company for the future.

One final thought before I turn it over to Davinder. As many of you may have read in our recent file proxy, one of our Board members, Lance Dunn, had indicated his intent to retire from the Board at the upcoming annual meeting.

Lance has made many significant contributions to Blucora over the years. Not only as a member of the Board since 2012, but also the cofounder and former CEO of TaxAct. I'd like to sincerely thank Lance for those contributions as well as his great support and guidance personally.

With that, let me turn it over to Davinder.

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Davinder S. Athwal, Blucora, Inc. - CFO [4]

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Thanks, John, and good morning, everyone.

As a follow-up to John's comments, I'd like to provide some additional detail on first quarter performance, a balance sheet update and an outlook for each of the second quarter and both fiscal year.

Beginning with consolidated results for the first quarter and year-on-year growth. Revenue was up $225.8 million, or up 10%, adjusted EBITDA was $83.7 million, up 26%, non-GAAP net income was $77.2 million or $1.56 per diluted share, representing an improvement of 33% and 30% respectively.

GAAP net income was $62.2 million or $1.25 per diluted share representing an improvement of 37% and 34%, respectively. And lastly, operating free cash flow for the quarter was $69 million, up 22%.

Turning to segment performance and beginning with Tax Preparation. TaxAct first quarter revenue was $136.2 million, which is in line with our updated revised guidance range with segment income of $79.3 million, which is above the high end of our target range driven largely by shift in marketing dollars between quarters.

As John mentioned, we expect first half revenue growth to be approximately 13% versus last year. These results are driven by an approximate 37% increase in DDIY consumer average revenue per user.

Segment margin for the first half is expected to come in at 58%, which is at the high end of the updated revised range.

Moving on to wealth management. HD Vest first quarter revenue was $89.5 million at about the midpoint of our target range.

And segment income was $11.5 million, which is above the high end of our guidage range driven by lower-than-expected impact from both clearing and conversion items as well as better expense control.

As previewed on our last earnings call, we did have some unusual items in the first quarter, including approximately $1 million in adviser bonuses recognizing our top adviser based on production and advisory assets.

This will decline to that $700,000 in Q2, $400,000 in Q3 and go away thereafter. An increase of $300,000 in legal affairs, which should we do not expect to see again in Q2.

And finally, a charge of $400,000 with short-term contract to [cut] cost. However, I would note that these costs were ultimately are the reimbursed or credited sort of no net impact in the quarter.

We are pleased that our total client asset net flow for the quarter of about $100 million and an advisory net flow of $270 million.

Finishing up on first quarter performance, unallocated corporate expenses came in at $7.1 million and in line with our expected range.

Moving on to balance sheet. We ended the quarter with cash and cash equivalents of $149.8 million and net debt of $115.2 million, which reflects continued strong cash flow.

Our net leverage ratio ended the quarter with 0.8x down from 2.1x a year ago, and while we implemented a new accounting standard or GAAP reporting in Q1, there would be no change in how we report segment income, adjusted EBITDA or free cash flow.

As John noted in his remarks, subsequent to the end of the quarter we close the acquisition of First Global, which we're very excited about. We believe it's a good opportunity for us to accelerate our growth and profitability in significant revenue across synergies, and expect that it will be accretive to both EPS and free cash flow enhancing shareholder value.

Since the acquisition closed in May 6, we'll include First Global results from that forward. But thinking about the scale of our combined businesses, at the end of the first quarter, First Global had total client assets of $20.2 billion, of which $9.8 billion were advisory assets and adviser account of about 820.

Combined with HD Vest, Q1 ending metrics that would've resulted in total client assets of $66 billion, of which $24 billion are on advisory assets. And an adviser account of approximately 4,400.

As we relate to the transaction closing on May 6 to pay $55 million of in-cash and borrowed $125 million as an add-on to our term loan BED 2024 at the existing interest rate of LIBOR plus 300 basis points.

This brings our current debt level to around $390 million. Priorities for our cash flow in 2019 will continue to be pay down of our debt, investing in the growth of the business and supporting our growth initiatives.

As we announced in March, we now have a $100 million share repurchase authorization that provides additional flexibility and an alternative cash redeployment through optimistic buyback. Also, as a reminder, the noncontrolling interest in HD Vest became redeemable last quarter, and we'll see in our associated cash outlay of approximately $25 million in the second quarter with no P&L impact. All told, we expect to end the second quarter at approximately 2x leverage based on pro forma trailing 12-month EBITDA.

Turning next to our outlook for the second quarter. For TaxAct, we've already provided our outlook for the first half of 2019. That outlook translated to the second quarter for TaxAct on expected revenue between $67.5 million to $68 million, and segment income of $39 million to $40 million.

Our outlook for wealth management in the second quarter, excluding First Global is for revenue of $95.5 million to $98.5 million, and segment income of $13 million to $14.5 million.

We expect First Global for the partial quarter to add $25.5 million to $27 million in revenue and $1 million to $1.5 million in segment income.

On a consolidated basis for the second quarter, excluding First Global, we expect total group core revenue of $163 million to $166.5 million, adjusted EBITDA of $44 million to $47 million, non-GAAP net income of $35.5 million to $38.5 million, or splitting $0.71 and $0.77 per diluted share, and GAAP net income attributable to Blucora of $23 million to $26 million or between $0.46 and $0.52 per diluted share.

This assumes corporate unallocated expenses of $7.5 million to $8 million and exclude the acquisition and integration cost.

For the full year, we expect TaxAct revenue growth of 12.7% to 13.7%, and segment margin of 43.6% to 44.6%. This margin rate reflects accelerated technology investment that John referenced and is of course a sign of the confidence we have in the potential of this business.

For wealth management, excluding portfolio, we expect revenue to grow approximately 3% to 6% with a segment margin of 14.7% to 15.8%.

We expect First Global from the period of May 6 to year-end to add between $108.5 million to $115.5 million in revenue, and between $9 million to $11 million in segment income.

On a consolidated basis for the full year, excluding First Global, we expect revenue of $595.5 million to $608.5 million, adjusted EBITDA of $119 million to $129 million, non-GAAP net income of $91 million to $101.5 million or $1.80 to $2.01 per diluted share, and GAAP net income attributable to Blucora of $41 million to $51.5 million, or $0.81 to $1.02 per diluted share, with $28.5 million to $29.5 million in corporate unallocated expenses.

Our outlook concludes the following assumptions. A broad range for transactional revenue (inaudible) variability, an effective tax rate of 6% to 8% for GAAP net income attributable to Blucora, and our guidance for GAAP net income or loss attributable to Blucora exclude any impact to tax expense of discrete items and variable stock-based compensation related to nonemployee advisers.

This outlook hopefully excludes integration costs related to First Global acquisition. We continue to anticipate total integration cost of approximately $28 million and estimate that roughly $10 million would come in 2019, with the remaining $18 million coming in 2020.

That said, the specific timing between periods may shift somewhat based on the timing of conversion as well as our ability to accelerate certain items. Even integration cost will be reflected in our reported GAAP results, and we added back to non-GAAP triggers.

Finally, we continue to expect the acquisition to generate $23 million to $24 million of run rate EBITDA accretion by the end of 2019.

With that, I will turn the call back over to Catherine, and we'll take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Brad Berning with Craig-Hallum.

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Bradley Allen Berning, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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I wanted to touch base. John, you mentioned in your remarks about new distribution partners and kind of hinted at you're excited about next year.

Can you talk a little bit more about lessons learned this tax season? And what you think the opportunities at. I don't usually hear you use words like phenomenal a lot, so I wanted to give an opportunity to kind of expand on that. And then one follow-up and reconciliation for accounting on the guidance.

Well, you guys talked about a $10 million deal cost in the press release. But in the non-GAAP reconciliation, you don't put that item in there. And I was just wondering if you could kind of expand upon that to make sure we understand if that's in the GAAP, not in the GAAP. And if it's in the non-GAAP, not in the non-GAAP for -- how you kind of release that?

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John S. Clendening, Blucora, Inc. - President, CEO & Director [3]

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Brad, John here. Thanks so much for the questions, and good morning. With regard to the distribution partnerships, you'd ask, hey, what are some of key learnings there that you're acting on, and I think it's really kind of a theme for the whole season. This last season is the season of terrific learning, part of which was sponsored by bringing in new talents and new capability that really about a deeper understanding of what does it to take to win and win organically here.

The specific answer, I just caught 2 things. One is the engagement of the consumer along the way and post the end of the filing process is just absolutely key. I don't think that kind of surprise you, but where everyone reminded of is the importance of how we introduce, when we introduce opportunities to take better control of your finances.

And so that's my views around that. And one sort of double-click on that would be the idea we've done just so much more research based on the experiences that we've put out there and sort of pilot and test, and it's really clear that many, many consumers -- and this cuts across demographics -- are we really looking for bite-size first steps to take to put themselves in a better financial position. It's one thing to think about. And it's an important thing to think about is where do you want to be in 30 years. That's sort of [take] the more consumers we can convince, the better. But taking the first initial steps that build the habit for thinking more carefully and more about one financial situation, again that concept of bite size is something that we're really intrigued with as you head into the next season. Davinder, you want to add? Restate the second question there, Brad.

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Bradley Allen Berning, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [4]

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Yes. So you guys talking to press release about $10 million was the integration cost this year, but you don't put it in your non-GAAP reconciliation. But you said in your prepared remarks that it would be excluded from GAAP for your non-GAAP, but you don't have it in the actual reconciliation that I can see, and if I miss it, I apologize.

But I just want to make sure we're clear on the non-GAAP versus GAAP guidance? And whether that the deal integration cost for this year have been included in those numbers in some way, shape or form?

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Davinder S. Athwal, Blucora, Inc. - CFO [5]

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Brad, this is Davinder. Yes. You're right. So we do expect that to be $10 million for 2019. It will be a non-GAAP number, as we've said. And it will be added back into adjusted. So that's all accurate. So that's what you'll expect to see is, no impact in adjusted EBITDA or segment income, but in the GAAP net income is where you'll see that, $10 million in 2019, and the same thing for '20 next year by the way.

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Bradley Allen Berning, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [6]

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And one real quick follow-up. First Global, you didn't provide EBITDA guidance, is there a way you can give that number rather than just the operating segment income number at all as well?

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Davinder S. Athwal, Blucora, Inc. - CFO [7]

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Well, Brad, the way that we construct our financial, so segment income in the business units is -- here is really a good proxy for EBITDA. Yes. So I'd look at that as kind of a proxy for what you're looking at.

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Operator [8]

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And our next question comes from Dan Kurnos with the Benchmark Company.

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Daniel Louis Kurnos, The Benchmark Company, LLC, Research Division - MD [9]

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John, just first on the tax side of the ledger. So good times getting back into free here, I kind of want to get a little bit more into that topic, if you can just – look obviously historically for those of us that have been around forever, it's been quite the cycle, and you guys have done a good job, growing paid units. Obviously, you feel like pricing is at a good point where you're still competitive, and can drive value in the team. There's been some kind of a lot of noise obviously with the volumetric leaders, as you put it, spending a bunch to try to drive DDIY. What gives you the confidence that you can kind of go back into that channel, be competitive and then drive people up in 3-year chain? And that the new products that you've laid out now will be stickier over time as prices have come up and that there won't be more sort of price differentiation given how much free is available in the market right now?

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John S. Clendening, Blucora, Inc. - President, CEO & Director [10]

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Thanks for the question. With regard to the key elements there to most focus on, I would call out these as the things that we point to that give us confidence. The first is, and as you've acknowledged, you've been around historic for a long time. You know that we've been beating this drum around the need to increase our prices, one of which have a more appropriate discount, and that not chase away people who would perhaps be fearful that our experience wasn't on par. But also because if you are in a situation, we've got a market like this where a lot of folks can file for free and also the major players are sort of constantly doubting come here for free, even though folks when their paying, you've really got to make sure you get your unit economics on those that do pay into proper shape, healthy position on the part of the business, the barbell, if you will, the other part of barbell where folks who are expecting to pay and do pay, and so we've been on this couple year journey to make sure that we've sort of appropriately build out our unit economics on all those dues that do have a price tag on them, a list price tag on them.

I'm very happy with our progress there. What it does is: a, it lifts our overall economics; and b, it makes us feel that if someone does come in for free and ends up selecting or upgrading themselves or their situation becomes such that they end up paying, it will then worth their while and -- from an LTV point of view for them to start it for free. That's a very important point to hang on here. That we would not have been the case 3, 4 seasons ago. In fact, we were not even close to that last season. But now we are in that range where the overall economics and the payoff of starting someone with free and having them end up choosing what we offer makes sense economically.

Second thing is we continue to be optimistic about our ability to build an ongoing relationship that would then result in better economics for us over time. There's monetization opportunities. We can help people get in their financial situation better for them. Also as revenue on it as well. We're encouraged by some of our partnership successes, most recently as a related point.

And lastly, and this is also crucial to our confidence level, is the clarity that we have in our opportunities to increase conversion rate, to increase retention rate, is at very high level.

So we're going be further than that to avoid any sort of competitive telegraphing, but we were all over this experience more so than we've had the ability to do so in the past on a martech or market technology point of view, from a client experience (inaudible) the product and the analytics we have point us directly to investment that we're going to make that will better enable organic growth.

So things are coming together in a way that sequencing that we let it internally a few years ago had indicated that it would. (inaudible) unit economics where they need to get to, begin reinvestment technology for better capabilities, have the right team around this business, and then look to begin shifting to organic growth as a driver as opposed to pricing, which as noted amply here has improved the unit economics.

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Daniel Louis Kurnos, The Benchmark Company, LLC, Research Division - MD [11]

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Yes. If I could just kind of pick on one of the points that you made, John -- or not pick on, but at least highlight. I just -- I guess I want to ask we know how much you have improved the platform from a tech perspective over the last several years. How much of that is just simply now you have the tools to kind of up-sell or automatically insert the people in the right buckets as they kind of filter through the system, which should drive improved conversion rates versus kind of historical levels? Like how much has tech really impacted your ability to go after this segment of the market because it seems to me, based on your history like it's kind of a big piece.

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John S. Clendening, Blucora, Inc. - President, CEO & Director [12]

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Yes, I appreciate that question as well, Dan. The way I would encourage you to think about it is that we've certainly been investing more in this business, right? And some of that investment has been in technology.

The investments made in the prior 2 seasons have primarily been the enablers necessary at the very base level to then allow further technology improvements, actually more directly impacting of the client experience. And so the -- so far, it's been mostly enablement. And on top of that analytics investments understand where people may be stuck in the following process where they make it stuck even in terms of the sign-up part of the process. That sort of thing.

We're not poised to invest more towards those outcomes but based on the foundation built around updating some of the big-core technology, getting to the cloud, things like those that won't necessary be directly noticeable to the client, that were shifting to more client-impacting technology investments going forward.

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Daniel Louis Kurnos, The Benchmark Company, LLC, Research Division - MD [13]

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Great. And just one on the wealth management side if I could, John. Just -- ever since you've now closed the transaction and you've had it for such an extended period of time here, just any kind of delta and sort of the reception. Have you had to do anything on the retention side for advisers coming over? Is there any kind of noise that we should expect during the transition over the next kind of -- let's call it, 3 months -- 3 to 6 months or the back half for the year that would impact, which should be the trajectory even if you end the year, kind of where you said you would from a run rate EBITDA perspective?

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John S. Clendening, Blucora, Inc. - President, CEO & Director [14]

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Thanks for the question there as well. I think the first thing I'd emphasize and I sure have alluded to this in the comments, but it's great to have the First Global advisers on board added to the newly strengthened HD Vest advisory community that we've been focused on for the past few years. And as a part of that, it's the [incrementality] that their advisers bring to us. Since First Global would have a greater focus around multi-partner, multilocation, CPA firms, so it's been terrific to meet these advisers. And the hypothesis that we had previously around -- their passion around Tax-Smart investing is awesome. It is just terrific, similar to what we see on HD Vest's advisors side. And so the thesis around better enabling advisers to win through better investing, which we believe can come through Tax-Smart investing. Certainly have been validated so far as you've point out it's their day -- day +2 now. But having met a bunch of advisers, I feel very confident about what we've acquired in this company. We've had the chance to learn more about some of the offerings that they have that I think are going to be a net positive on the HD Vest side as well. So I'm encouraged about our growth prospects as it combines with new wealth management division. On the -- could you mind restating the second question, Dan, so we're sure have it? The second question...

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Daniel Louis Kurnos, The Benchmark Company, LLC, Research Division - MD [15]

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I was just curious about if there are any retention issues? And just if there's any noise in the back half for the year?

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John S. Clendening, Blucora, Inc. - President, CEO & Director [16]

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Look. The -- we've sort of talked about kind of retention over time is not being something that's been an issue for HD Vest. I do not foresee it as an issue at First Global simply because of the value proposition that's underway here that exists already in that model.

I want to make sure we're -- frankly, we're kind of putting our arms around all advisers at First Global and HD Vest as well. And I think you'll recall and others in the call will recall as well that for highest-performing advisers, we do have an equity program. Something that we believe has been really well received as a great positive around being part of a publicly held company.

Now having said all of that, and we're taking all the right steps we think around creating a highly motivated, committed, sense of partnerships with advisers. Certainly within our modeling around an acquisition like this, you'd expect us to add a little bit of appropriate conservatism, such that we're not unmindful of the idea that in acquisitions you often see a little bit of adviser fallout, so we've incorporated some that into our model.

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Operator [17]

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And our next question comes from Chris Shutler with William Blair.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [18]

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So starting on TaxAct, John, can you give just a little more color on how you plan to monetize free units? Is it more about kind of BluPrint and new distribution partnerships? Or is it more about up-selling these free units midstream into higher priced SKUs?

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John S. Clendening, Blucora, Inc. - President, CEO & Director [19]

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Hey, Chris. Good morning, and thank you for the question. So at this stage, as you would imagine, I can't be -- overly disclose ever on specific plans around monetizing where we haven't been able to do so. I haven't really -- better said focused on doing so in the past. But I would call out a couple of things to help establish the thought process around that, building on the comments that were made earlier. One of those comments is that in the optimization work we've done in the last couple of tax seasons, the last 3 tax seasons in -- primarily around the online digital sort of advertising and marketing we do, but also in some of the messaging that we've focused on predominantly. We've been explicitly optimizing all of those around people who we're predicting campaign in year 1. So you can imagine the segmentation work or microsegmentation work, the predictive modeling that one can do in particular in a digitize marketing world, we've completely optimized for those that we believe compare to year 1. So it sounded like we shut the door to people who were free and would expect to be free and close them out. But we've been focused on attracting, and then optimizing our marketing spend for those who are likely to pay. So we're in a model where we can sort of take off some of those filters, if you will, and be more open minded and welcoming, if you will, people that would start for free.

The second element is around those couple of things that you put out there. We have some experience now and what does it take to attract someone who can pay for free, but has a need to give a little bit more assistance. And on top that, we've gotten more comfortable with the opportunities are around distribution partnerships and monetization outside of the strict ARPU, this will be with the tax filing.

And if there's one other element, I think it would be worth pointing out is that the success that we've seen this tax season. And there's a real bright spot around the numbers themselves, if you pick them apart, and I alluded to this a bit in my prepared remarks, but when you look at our higher end SKUs, so those SKUs that are the top 3, let's say, price points, we've seen really strong growth in those.

And that also was indicative to us around, if we focus in the right way around helping people through the entire process, we are going to increase the overall sort of entryway through our front or through the conversion process, and there are some areas around free where we weren't in market. We were a bit out of the market that we think shapes the way some folks that would've ultimately chosen to pay us or would've been an SKU that would quite naturally resulted in revenue. And so there was a little bit of a chase-away factor that we've observed this year, a little sharper than other years that we want to make sure we don't have the sort of barrier to those who were likely to pay, but in that starting now with the concept around free. We're not going to oppose that any longer because we think it will lift monetized units to be more welcoming to free.

So that's -- that'll be sort of the round-out of the -- of that -- your questions -- well, some of the things that came out in the first question.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [20]

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Okay. And John, just a follow-up on that. When you said strong growth and some of the top price points with the higher-priced SKUs, are you talking unit growth this past season? Or what are you talking about, revenue growth?

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John S. Clendening, Blucora, Inc. - President, CEO & Director [21]

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So yes, so we've been sort of looking to see if it's not right? So we saw stability in monetized overall, just for context. And yet as, of course, we get the numbers on this, and we don't share them for competitive reasons.

But we think about our comments in the last call and what I've just announced that and clearly we've got a couple of lower in SKUs that are not performing where we would like them to perform. And yet when you look at the top few SKUs, we've actually seen growth in the upper part of those SKUs and not small growth, not -- in other words, modest would not be used in describing that we've seen. Really strong growth in those SKUs above the very low-price point and they're excited about that. You've seen that begin to emerge in the first peak and then follow through in the second peak. I can't get any further specifics there but collectively, those top SKUs were up in an attractive way -- units.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [22]

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Okay. Yes. Good to hear. And just to be clear when you talk about monetized units overall being flat, you're talking about the consumer side of the business, right? That does not include professional. Is that correct?

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John S. Clendening, Blucora, Inc. - President, CEO & Director [23]

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Yes, we haven't included professional. At one point we might begin to combine this because we're predominantly, as you know, a consumer business. Although, we're very happy with what happened on the professional side, with regard to growth there and with the 4% roughly increase in unit volume, and it's (inaudible) that over time as we get more into our growth strategy on consumer, we'll be able to invest some more and continue to invest more in professional side. We're really happy with the offering there. There's been some substantial improvements that we've been able to make around the experience itself, and we're now appealing to a broader set of advisers as a consequence. I wouldn't call out that as a major growth driver in the next year or so. It will be accretive. No doubt about it. But in the not-too-distant future, I'd love to see that business being able to grow even more quickly. There's a lot of dissatisfaction out there around other offerings -- particular on the [budget] that we target.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [24]

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All right. Great. Last one, guys. The -- I want to dig a little deeper on the BluPrint financial assessment then maybe just provide a little more color on how that performed this tax season in terms of uptake. I think you've commented a bit in your prepared remarks, but -- so what was your utilization like, and what do you feel like needs to improve? What's the plan to get there?

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John S. Clendening, Blucora, Inc. - President, CEO & Director [25]

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Okay. Thanks to that as well. So BluPrint did get a late start this season as we were working on improving the customer experience. So we'll have to see how it goes -- it outperforms in the off-season. As you know a lot of the in-season work is actually around obtaining consent. So if I sort of had a ledger on this one, the plus has a ledge would be -- we are close to 2 million more consent this year. And so we've got about 4 million people has indicated that their interest in having them help us improve their financial situation, whether it's in the season or outside the season is really strong.

That's good news. It's of course the top of the funnel. Last year was the last year, right? The year before was our first year. We tested a lot of different test agreements, partner structures, the use of learnings to improve our plan this year. We tested some additional setup this year as well. And so we do have to grow quite a bit to start to have a material impact given the size and the total overall revenue to the consumer channel, but we hope to make the progress each year.

What we learned came up a little bit the previous sort of filled back the end of little bit. It is around the concept of kind of what's the how of engaging? How do we make sure that for the earlier comment, we're sharing the easiest, most bite-size opportunities because it's getting -- started developing a habit of looking at your financial opportunities is the important thing because you're overcoming inertia. So many Americans ignore their financial situations, who can't even think about.

And so that's the part of it, it's coming back with kind of a sequenced, bite-sized, if you will, set of opportunities to get people drawn into how easy it is to improve your financial situation. There's some other insights that I don't want share at the moment that are going to guiding our development that we'll be getting into for the balance of this part of the year that we think has really unnerved some thematic opportunities to get that engagement level higher, right? So people are saying, yes, I want some help, our opportunity is to convert them into actually much more adoption than what's available. In a way, we're fulfilling that met need for help. We have some good ideas on how we might do that on next season.

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Operator [26]

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Our next question comes from Will Cuddy with JPMorgan.

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William V. Cuddy, JP Morgan Chase & Co, Research Division - Analyst [27]

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So on the pivot to more free focus, how are you thinking about the time frame for that increased focus on free filings to translate into monetized unit growth? And during this time frame of pivot and transition, how should we be thinking about the outlook for monetized unit growth, now that pricing has stabilized?

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John S. Clendening, Blucora, Inc. - President, CEO & Director [28]

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Thank you for the question. So a couple of elements there to focus on. The first is you get to think about it as sort of opening up some elements of our marketing funnel that we've previously purposely closed. So it's not now and a strategy says, well, now we're not focused on monetized. We're now only focused on trade. Think about it as broadening the marketing message and the marketing techniques that more fully open that door, if you will, to free, so it's not an or, it's an and.

So we'd view it as an and strategy and not a what looks like zigzag back over to free because we're okay over here, we get monetized. So I've been very clear (inaudible) including each other is, look, as we look to begin restoring overall organic growth and having a larger overall pool to work with, to help to monetize, we want to grow monetized to monetize units and want to go premium. That's why I want to grow the whole total tie. And so the investments that we're making in client experience are going to be beneficial to both those that can go through the process of not paying as well as those that do. I mentioned earlier that we've got a very clear road map. It's certainly a couple of year road map with very specific improvements we're going to make to the client experience. And that's going to benefit both the consumers here. So really important to take away that we are not getting off the gas on monetized. We are accelerating on monetized and along the way, we're also kind of removing some of those elements that may have -- and certainly were meant to -- try to more attract those that were paying out of the gate.

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William V. Cuddy, JP Morgan Chase & Co, Research Division - Analyst [29]

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Okay. Got it. Switching gears little bit on Tax-Smart investing. So it's great to hear that launch is coming up. Could you just talk about the trajectory for that launch and one of the phases like how should we think about this rolling -- being rolled out and the time frame there as well?

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John S. Clendening, Blucora, Inc. - President, CEO & Director [30]

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Will, thank you for that as well. We are super excited about this. As I mentioned earlier, advisers are anxious for us to continue to invest in this opportunity. I would say it's under-folding -- unfolding for me like this. But first, by way of context, think about a matrix, I'll go super quick here. But a matrix, we're on the top, you've got, let's say, 10 or 12 top there. At the column head is 10 to 12 tax outlook accretion strategy. For the rows, so on the other side, you've got all the accounts inside a consumer's portfolio, so the household. Over a couple of year period, I would envision that we've rebuilt all those strategies and they're applied across all of the accounts that make up the taxpayer household. The reason for that is we try to work holistically.

On top of that, where we felt the practice management layer that make sure that the software is telling the adviser where to focus, not the adviser [finding] the opportunity. So with that as a sense of what's the vision over a couple year period, in just a few months, we'll be launching the first strategy on this. So we're filling out that, what's called a checkerboard. By the time we get to the what's a second quarter roughly next year, we'll have 3 or 4 more strategies and we'll make headway around when you look across the full -- we'll begin doing in fashion in the initial launch, but we'll make more progress in incorporating all the accounts that are relevant to the consumer, and I'm sure by that period, we will -- have been able to open this up to our newly welcomed First Global advisers, as new technology were to make that happen.

But you can think about the very first commercial-grade version 1.0 heading here in a couple of months, big version 2.0, the 2 (inaudible) hitting sometime likely just after tax season next year, and then over again a couple year period. So we have that entire offer set again software that automates than currently cumbersome, time-consuming and error-prone process by which advisers looked to save people money on their tax that generate their investment. It's a big idea, 1% to 2% a year. It's huge for investors. We are keen to get this build out. We build it with advisers, which dictates the pacing as well, I should point out. We do that way so we make sure we're hitting the mark.

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Operator [31]

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Our next question comes from [Alex Paris] with Barrington Research.

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Huang Howe, Barrington Research Associates, Inc., Research Division - Senior Investment Analyst & Research Analyst [32]

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This is Chris Howe sitting in for Alex. Just following up on some of commentary you already made. It's been very helpful. And going on for your BluPrints, adding distribution partners and some of the product extensions that you're making, as we look at a lifetime value to cost of customer acquisition, how should we think about the balance of this ratio? Will the improvement come more from the marketing utilization or should we see it more from price increases? And going on for lifetime value, you mentioned conversion and some of the retention metrics that are showing improvement. How much potential upside is there in these metrics as we look further out, should conversion remain same or and retention continue to improve? And any change in the client profile that you're seeing underlying the business that's leading to the success that you're seeing within conversion and retention?

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John S. Clendening, Blucora, Inc. - President, CEO & Director [33]

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So Chris, thank you for the questions. Let me speak to the second of those, and then I'll it to Davinder probably on the first of those. So the lead on the second part, I believe, was around what's the magnitude of the opportunity that you're seeing? And I would characterize it as we see it as a significant magnitude around the client experience, sort of imagine -- right, filing your taxes has always been complex. We -- it would be great to be the point where it's so simple that (inaudible) in the eye has sort of made it like a couple of clicks and you're done. I don't know if that's ever going to be in the future given the tax for itself. But it's somewhere to get through. And the team this year was able to take it apart completely, start to finish, side to side, up and down, using consumer sort of prototypes that one can observe going through the process itself. Suffice to say though that we come away thinking there's a lot of opportunity, not on the edges. A lot of opportunity to improve the experience that would then lead to higher conversion that would then lead to higher retention rates. And so that's really crucial to us.

Regarding the demographics, given the size of the business, you don't tend to see large swings. However, it's certainly fair to say that given our focus on monetized filers that we've been if so resolute on in the last 2 seasons that we've had clearly a shift applied to those that are going to be more complex in the following situation. And as a consequence (inaudible) more tuned into some of the ancillary offers that we've been building along the way. But it is a by-product that's having had a more monetized approach so you see that increase in complexity. There's a bit of an income correlation to that within that and not necessarily. But it is such a big business that these end up becoming more glacial (inaudible). Davin, how about -- (inaudible) taking the first on around how we think about LTV? And what you see sort of the drivers of that wing -- of its cost of acquisition?

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Davinder S. Athwal, Blucora, Inc. - CFO [34]

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Yes, absolutely. Thanks for the question. There's 3 key drivers when we think about LTV in this business. The first is around retention. The more we can retain our customers obviously the better off we are in terms of overall economics into the business that experiences quite a bit of churn industry-wide. So if we can attack that part of it, we believe that's the first step to helping (inaudible) economic overall. And then other thing or the other one that you mentioned, Chris, [that probably they can] convert from free to paid at the right time and the right way, that's another valuable driver of getting the (inaudible) itself. And the third one would be the higher price point (inaudible) we continue to take up through up overall that ought to impact our LTV. So what you think about is a pretty combination of those 3 things. Not really sure that we broke that out between what percentage that role should contribute. But we do think it's those 3 in the high court -- for most the part, excuse me, that ought to kind of help us get our LTV to lower where we think it's possible to go.

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Operator [35]

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And we have a follow-up from Brad Berning with Craig-Hallum.

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Bradley Allen Berning, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [36]

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Sorry, just a couple of follow-ups here at the end. On the gross margin improvement in tax, how much of that was ARPU driven and how much of that was cost-of-acquisition driven, given that you've got some different distribution partners that have probably a little bit different models. I want to make sure we understand kind of the gross margin opportunity, as you push forward from here?

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Davinder S. Athwal, Blucora, Inc. - CFO [37]

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Brad, this is Davinder. I can that. It's actually both of those 2 factors that it gets noted. For the ARPU is a big factor but also there is the other aspect of well, so the combination of those 2 would have resulted in that better economics.

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Bradley Allen Berning, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [38]

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Any idea on the magnitude if one was more important than the other this season?

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Davinder S. Athwal, Blucora, Inc. - CFO [39]

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No, but we typically not really talk about that, Brad. I don't think the call one or the other, this quarter, I guess.

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Bradley Allen Berning, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [40]

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Understood. And then the final question on the First Global guidance for the accretion at the run rate at the end of this year. Is that strictly contractual cost saves element to that? And are not asking for guidance in 2020, but are there other operational opportunities as the platforms get put together that are beyond just the platform contractual opportunity sets?

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Davinder S. Athwal, Blucora, Inc. - CFO [41]

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Yes. Brad, this is Davinder. I can take that also. The way I think about it for 2019 is that most of it is contractual but not all of it. There is some other OpEx savings that will come in this year relating to head count and things like that. But the vast majority that you should think about is really contractual for this year.

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Operator [42]

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And I'm showing no further questions at this time. I'd like to turn the call back to management for closing remarks.

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John S. Clendening, Blucora, Inc. - President, CEO & Director [43]

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Thank you all for joining us today. In closing, I'd like to welcome again the First Global advisers and employees to Blucora. And to thank all of our employees, advisers and customers that make our business so strong and enjoyable.

We're pleased to report another strong quarter and tax season. We look forward to continue to update you as we progress through the integration and continue to grow our business. Again, thanks all.

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Operator [44]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.