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Edited Transcript of BCOR earnings conference call or presentation 6-Nov-19 1:30pm GMT

Q3 2019 Blucora Inc Earnings Call

BELLEVUE Nov 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Blucora Inc earnings conference call or presentation Wednesday, November 6, 2019 at 1:30:00pm 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

* 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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Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2019 Blucora Earnings Conference Call. (Operator Instructions) I would now like to hand the conference over to your speaker, Mr. Bill Michalek, Vice President of Investor Relations. Please go ahead, Sir.

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

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Thank you, and welcome, everyone, to Blucora's third quarter 2019 earnings conference call. By now, you should have had opportunity to review a copy of our earnings release and supplemental information. If you've not yet reviewed these documents, they are available on the Investor Relations section of our website at blucora.com.

In addition, this quarter, we'll be referencing a set of slides that are also on the website and will be displayed in the webcast viewer. I'm joined today by John Clendening, Chief Executive Officer; and Davinder Athwal, 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 our 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 the earnings release and supplemental information available on blucora.com include the full non-GAAP and GAAP reconciliations. 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, and good morning, everyone. I'm pleased to report that we continued our momentum in the third quarter and delivered strong results, achieving the high end of our targets, or better, on revenue, adjusted EBITDA, non-GAAP net income and non-GAAP EPS. In addition to the strong results, our integration of First Global is running ahead of schedule. Synergy capture is now running about $2 million ahead of plan, and we were able to consolidate both of our wealth management brands from a clearing platform perspective, which should allow for additional synergy capture over the long term. Overall, a good quarter for the business. Davinder will go into more detail on our Q3 results shortly.

About 2 years ago on this call or more than 1 year into my tenure with Blucora, I shared details about our multiyear transformation to that point. Our business model, core beliefs, market position, strategy and opportunities.

I'd like to take the opportunity today to look big picture at the business once again, albeit more briefly, in the context of where we were, where we are now and where we're going. Starting first with Wealth Management. Looking back to where we were at that time in late 2016, we were embarking on a plan to create a platform that would grow in scale while resetting the economics of the business. We were looking to exit a restrictive legacy clearing relationship and would soon announce the transition to a new trading partner, Fidelity, over the subsequent 12 months. We have since completed that transition, which has enabled us to have much greater participation in the economics with client cash, which has resulted in a step-function increase in the economic value of our business.

Taking a look at the left-hand side of Slide 4, you can see that, in the third quarter of 2019, we were earning quarterly sweep cash about 5x the level of the comparable quarter in 2016, and without the restrictions that completely capped our participation above a certain Fed funds rate. This past quarter, we saw 2 rate cuts with another last month in October, and we're now running at about a $6 million to $7 million quarterly run rate. Included in this benefit is additional cash from the First Global acquisition and resulting incremental benefit of merging the clearing agreement. While our profitability is enhanced with this new agreement at every Fed funds rate, our annualized sweep income run rate, as a percentage of our consolidated debt to EBITDA is only about 20%, significantly lower than some other players, as we are more diversified with 2 business segments.

Along with the improved clearing position economics, we have upgraded our capabilities and adviser tools. With the stack of Fidelity, eMoney and Envestnet, we believe we now have one of the best commercial-grade platforms in the industry, one that advisers will find attractive, supporting organic growth, and one that is scalable, enabling inorganic growth. And finally, we shifted to looking at production per adviser as a more meaningful metric, rather than the total number of advisers, to ensure that we recruit, retain and develop the advisers with the highest potential.

On the front end, we implemented predictive models in adviser recruitment to identify which tax pros are most likely to be successful as an adviser. Additionally, we proactively pruned our adviser base to remove advisers that were not engaged or productive and who accounted for virtually no assets. This positioned us to allocate more resources to remaining advisers. You can see from the chart on the right, we have almost doubled our productivity per adviser. You can see, looking at this next slide, how we have performed as it relates to some of the key wealth management metrics, including growth in total client assets, advisory assets, the proportion of advisory assets as well as revenue, segment income and revenue per adviser. Including First Global, our total client assets, advisory assets, total revenue and segment income were up, respectively, 76%, 158%, 82% and 78%. And our total revenue per adviser is now 97% higher than it was in 2016.

So moving to where we are today. We're well underway in our efforts to integrate First Global, an acquisition that increased our size by 50%, enhances our growth opportunities and further strengthens our position as the largest and most capable player in our differentiated segment of the market. Synergies are running ahead of schedule by about $2 million due to revenue synergies, such as asset and adviser attrition running better than expected through Q3 as well as some additional headcount and other cost synergies. I'm also pleased to announce that we recently consolidated our 2 wealth management broker-dealers into 1 with respect to our clearing platform. This is important for a number of reasons, including that it, number one, positions us to capture certain cost synergies sooner than previously anticipated, which further enhances the long-term value of the acquisition. And two, getting this done ahead of tax season positions us to get it up and running at full production as one unified adviser base sooner. The alternative would have been to wait until after tax season to consolidate, then work to get up to speed many months later. This scenario would have also left a perceived obstacle ahead in advisers' minds.

While there are clear long-term benefits from getting this done earlier than planned, it also brings forward any modest disruption that you might see around these larger events, whether that is to service metrics, organic adviser growth, adviser retention and so on. So we're also pulling forward the timing of those risks as well, as Davinder will address in a moment.

Along with consolidating with respect to clearing, we also unified the 2 businesses under a new brand name, Avantax Wealth Management. The combination of avant, which means original and innovative, with tax reflects our unparalleled position in the industry. With the launch of the Avantax Wealth Management, we are creating a powerful brand for our business as we aim to redefine what tax smart wealth management means and provide superior results for our clients.

Our leadership in this business is strong. As you know, about 5 months ago, we brought in Enrique Vasquez, a veteran in the tax focused wealth management arena to lead this business, and he's making great progress. We have the right leadership in place with the capability and domain knowledge needed to drive the business forward and support and enable our advisers.

Finally, in wealth management, where we're going. Here, the focus is on finalizing the integration of First Global and driving organic growth. As I mentioned, the integration is running ahead of plan by about $2 million for 2019. Despite 3 cuts to the Fed funds rate since the acquisition closed, which affects our sweep revenue, our cost synergies are running well ahead of plan, and we continue to expect to exceed our original total synergy targets. As we get up to full synergy achievement and complete the integration, it will mark the close of the first chapter in the story of Avantax Wealth Management. Over the past 2 years, the vast majority of this organization has been focused on the clearing conversion and the subsequent combination of the 2 firms. There's a great deal of work involved in getting us to this point.

So I'd like to thank and congratulate the team for an incredible effort and results. And I'd especially like to share my personal appreciation to our incredible adviser community, which I view as the very best in the industry. This business has never been stronger and with more potential, and the stage is now set to turn our attention to organic growth. We have a great deal of opportunity to accelerate growth and an execution-focused team in place to begin to capture it. As we've shared in the past, at the end of the day in a business like this, efforts to drive value manifest in 2 key ways: first, growth in total client assets; and second, increased monetization of those assets as measured by revenue on client assets or ROCA.

We currently have about $68 billion in total client assets. However, our advisers' tax and wealth clients combined have an estimated $400 billion to $500 billion in investable assets. That means we could theoretically grow 7x to 8x our current size without our advisers having to introduce themselves to a single person they don't already do business with and without us having to bring on a single new adviser. So how do we intend to capture this? First is through better enabling adviser performance. Now that we have largely completed our pruning efforts and are bringing in more productive advisers through our enhanced screening and pruning process and putting them on a completely upgraded technology and infrastructure platform, we need to help them fully leverage these capabilities.

We're focused on the adviser and the client experience and are actively mapping and analyzing their journey and experience, identifying remaining pain points and opportunities to improve adviser and client experience. We're planning and implementing a number of improvements and implementing best practices across the business. For example, over the next few months, we're rolling out regional support teams supporting segmented groups of advisers with service and operational support. First Global had great success here with small dedicated teams for a more intimate service and support experience, and this will enhance what we've been doing with the chapter structure across what was the legacy HD Vest. Next year, we'll also be rolling out a new comprehensive training and support program for new advisers, Avantax University, to better enable advisers to get off to a strong start, providing a clear roadmap for success with regional consultants to keep them on track. We'll also have an office improvement and an administrative track to help the entire adviser office be even more effective. I should note as well that these things will be accomplished through better use of existing resources rather than incremental spend. Another potentially significant driver of adviser performance as well as adviser attraction and retention is our proprietary Tax-Smart Investing or TSI platform, which is now live and being rolled out to advisers. As we've discussed with to you in the past, research shows that investors unnecessarily give up 150 to 200 basis points of performance each year to taxes by not deploying tax-alpha strategies, such as tax-loss harvesting, optimizing asset location and intelligent asset drawdown.

Our TSI platform is designed to help advisers systematically capture tax outlook for clients across multiple accounts. Our unique approach is designed to identify the top opportunities in an adviser's client base every day and help automate the capture of that opportunity in a fraction of the time. This is a big deal for investors. Over a 30 year period, it could mean as much as $800,000 in incremental assets at retirement for an average investor. As I'm sure all of you on the call would agree, this is an incredible amount of potential alpha generation. As you may recall, we launched the first module, the Tax-Loss Harvester, in June, making it available to 250 advisers. We've continued to add, and are now at more than 425 advisers or about 10% of our base that have been trained on the tool. Feedback from advisers has been very strong, with common comments like, "This will completely change the way I approach year-end conversations and enable me to have more effective conversations with more clients," and, "This enables us to really stand out in this business as the leader in tax-smart wealth management."

So we see this technology as being core to our strategy and particularly when in the hands of our tax-focused adviser base to be a key differentiator and productivity enhancer for advisers. Looking ahead, we expect to launch our next module here in the fourth quarter, the Capital Gains Analyzer, which captures and reports the annual capital gains estimates of mutual funds.

This module will allow our advisers to focus more on planning and client outcomes as opposed to data gathering. One of our top producers in the Northeast started beta testing our Capital Gains Analyzer module just within the last few weeks and noted one of the mutual funds he uses in advisory models has already announced an estimated capital gain that will impact over 200 of his client accounts. He can now identify losses to offset those gains for those clients in a fraction of the time that it took last year, using the Tax-Loss Harvester module. We'll also look to launch version 2.0 of the Tax-Loss Harvester and perhaps a third module, all while continuing to expand to additional advisers. By the end of this year, we expect to have more than 500 advisers using the platform. We will also enable this capability and begin rollout to our legacy branded First Global advisers along this same time frame. We will continue to invest in this technology in 2020 given its potential despite the headwinds a lower rate environment causes.

So overall in wealth management, we are very excited about what we've been able to accomplish in upgrading the foundations of technology, infrastructure and platform, while enhancing our adviser base, focusing on productivity and investing in proprietary software with incredible potential that is already exciting advisers. With this foundation and 7 to 8x growth potential within our existing client base, you can see why we're so excited about this business. We have significant visibility and runway to achieve growth through a good deal of blocking and tackling and execution as well as innovation. That said, our major near-term deliverable is to continue to execute on the integration.

Moving to Tax preparation, starting with where we were. Looking back, 3 years ago at TaxAct, we operated the product fully on a legacy software code using internal servers, which made it difficult and less efficient to drive innovation. We were also priced at a very sharp discount, up to 75%, to the volumetric leader in the market. This led to poor unit economics as well as a likely lower quality perception that goes along with anything with that type of hard-to-believe discount. So what did we do? We migrated successfully to a new cloud platform. We began to refactor our software code to make it more flexible, scalable and efficient, beginning with the back end. We've worked over a multiyear period to narrow the gap in our discount to the volumetric leader in order to create a more normalized discount while improving unit economics. While there is room for further price increases, we have clearly made substantial progress on unit economics. In online consumer software, our segment income per filer is nearly double the amount that it was in 2016, and thus, we now feature a much healthier economic profile. This is of crucial importance as, with a higher incremental segment income per filer, the ROI on marketing and technology investments improved markedly, and we still have a discount of 20% to 35% versus the volumetric leader as we head into tax year 2019.

We significantly enhanced the capability of our mobile app, while increasing the scope to enable essentially all users to fully complete their taxes on the app, up from single-digit percentages. We also enhanced our customer support capabilities, including expanded chat support with tax specialists helping completing the returns. We tested an assisted or live solution, and we tested a variety of ways to monetize our information advantage.

So moving to where we are today. We're finishing up our second of 3 years of code refactoring on our consumer software. The work now is at a stage where the focus is on improving the client experience. In fact, improving the client experience is the #1 focus of the team, which has been scouring every page and every word on the customer journey, making it easier and much more enjoyable, while removing friction points for filers at every level of complexity. This work will show up in a significantly improved customer experience and should help drive increases in conversion in season with less leakage in the customer funnel as well as better retention in subsequent seasons.

Unchanged is our focus on lifetime value, and also unchanged is our goal to offer the best overall value across the range of filers. This focus points to making some changes to our lineup and represents an investment in our value proposition. While we cannot reveal too many specifics about our plans for tax year 2019, I want to pause here and update you on a decision we've reached with regard to our SKU lineup. For background, we launched the basic SKU in the second peak of tax year 2017, and it was slotted in between free and our first typical paid SKU. It is designed to target the segment of the population that file a 1040A that were willing to pay for a low-cost product to get an improved experience and some additional features.

The product did very well that season and was a good contributor this past season as well. But as the industry added more features to free, most notably prior year import, and also increased the number of filers that could file for free, it no longer has a logical position in the market. As this product primarily appealed to those that would otherwise file for free, we expect the removal of the product will result in a headwind or onetime resetting of revenue as we move into next season, but it also takes away a reason to not choose and return to TaxAct.

On another note, we also sold our Canadian software subsidiary, SimpleTax, for $9.6 million this quarter to focus on our core business. This will also be an adjustment to our revenue run rate. Similar to wealth management, I believe our leadership in this business is very strong. Curtis Campbell joined Blucora in October of 2018. So this upcoming season will be his first full cycle at the helm driving strategy, preparation and execution. He has continued to bring in strong talent and has focused the business in the right places, and we'll better positioned to participate in the tailwind in the digital DIY space than ever.

Finishing up on tax preparation and where we're going. Having stabilized monetized units over the past 2 seasons while raising prices to a fair degree, going forward, we're looking for more balanced growth across units and pricing with competitive SKUs at a normalized smaller discount in a differentiated position in the marketplace that will become apparent in 2020. In short, we aim to win and grow through a 4-part strategy: appealing to a large attitudinal segment that is looking for a forward-leaning approach to improve their financial position not just completing this year's taxes, leveraging our improved unit economics; delivering a superior client experience while also increasing this differentiated position; maintaining better value with moderate price increases; and increasing ARPU through new initiatives, which may include an assisted offering, which we'll more fully test and explore in tax year 2019.

For clarity, our focus on our new segmentation, along with investments in the client experience, is not in the least bit in conflict with an LTV approach to this business, in fact, the opposite is true. Our investments in the client experience will benefit all filers regardless of whether they're a paying customer in year 1 or not. Likewise, while we will not dedicate specific marketing spend to attract free year-1 filers, we believe our approach in messaging will position us to capture more of these filers at no incremental cost.

In addition, with this focus on the core of the tax preparation experience, we are deemphasizing, for the time being, partnership efforts unless they contribute directly to improving the tax filing experience. As a part of this, we will repurpose our Blueprint analysis to support our approach to optimizing the tax filers tax position, providing insights to all filers. Altogether, I continue to be more excited than ever about the prospects of this business. We'll share more down the road, but I'll close out tax preparation by noting the key drivers of our high level of confidence heading into the year.

First, we'll have improved branding and messaging, which our testing indicates can drive increased quality and quantity of traffic. Second, we'll have a significantly improved core product experience supported by analytics indicate we are focused on the key areas that can most increase conversion. Third, we'll be launching new brands and added product features, which our customer research tells us will have a strong appeal and differentiation. Fourth, while we'll still take some pricing, it will be more moderate, which will drive improvements in retention. Relatedly, we'll remove a SKU that is no longer relevant and has dampened conversion. And last but not least, we have brought in a seasoned team with strong industry and functional experience.

Moving to the corporate level. You can see our consistent growth in the key financial metrics as we reduced debt from what was 4x net leverage at the end of 2016 to 2.1x today and strengthened our balance sheet. In the second quarter of this year, we closed the acquisition of First Global, which is very much an on-strategy, accretive acquisition that advances our goals and improves our position. From a capital allocation perspective, in the near term, we'll be aggressively focused on integration and ensuring we achieve the full potential of this acquisition. And you should expect us to be disciplined about deleveraging, just like you saw after the HD Vest acquisition.

Overall, our capital allocation philosophy remains unchanged and it is to maximize shareholder value creation from the set of available opportunities. We've been focused on funding organic growth opportunities and debt reduction. As in the past, attractive M&A would be in our consideration set should it present itself along with continued opportunistic share repurchase. Our share repurchase program executed this last quarter, and Davinder will provide a few more details on that in a moment.

In summary, the company has demonstrated strong long-term financial performance while laying the groundwork for future growth. Our third quarter results were favorable, exceeding our targets and, with acquisition synergies, are running ahead of plan. Doubtless, there are additional headwinds with the recent cuts in the Fed funds rate and a less certain overall economic environment. However, with the favorable position that comes with a strong and well-positioned core business and a highly capable leadership team committed to long-term growth, I'm excited about the opportunities ahead of us and optimistic about our future.

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

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Thanks, John, and good morning, everyone. I'd like to provide some additional detail on our third quarter results an updated outlook for the full year 2019, as well as a preliminary outlook for the upcoming tax season. Consolidated third quarter results, which include First Global for the full period were: total revenue of $149 million, which is at the high end of our guidance range; adjusted EBITDA of $2.1 million, above the high end of our target range; non-GAAP net loss of $9.6 million or $0.20 per share, both at the high end of the range; and GAAP net loss of $62.4 million or $1.28 per share, which includes a $51 million noncash impairment charge related to the HD Vest trade name partially offset by the gain from sale of SimpleTax.

In terms of segment performance and beginning with Wealth Management. Revenue was $145.4 million and segment income was $20.6 million, both of which were toward the high end of our target ranges. A portion of the favorability relative to the midpoint of our guidance range was due to better-than-expected adviser and asset retention through Q3. On a pro forma basis, wealth management revenue was up 8% year-over-year driven by sweep revenue, which is up by about 90%, as well as advisory and transactional and mutual fund revenue, which were all up in the 8% to 9% range. Net inflows into advisory assets in the third quarter were about $225 million, and we ended the quarter with $26.3 billion in advisory assets. Total client assets were approximately flat versus last quarter, and we ended the third quarter with a combined $67.7 billion. Advisory assets as a proportion of total client assets ended the quarter at 38.9%.

Recruiting performed well in Q3. Our platform recruited about 40 new tech professionals into wealth management. In addition, we also attracted a handful of established adviser transfers with a combined $150 million in client assets that will soon begin to move over to our platform. Similar to last quarter, one transfer was from an RIA. While RIA transfers are not an everyday occurrence, our strong compliance support and product offerings that enable advisers to scale and grow is compelling.

Last but not least, we also added another large accounting firm, which has an estimated $1.2 billion in client asset prospecting opportunities.

Switching gears for a moment to the integration of our wealth management businesses. And as John noted, we are pleased to report that we're currently running significantly ahead of plan. As part of our modeling of the acquisition, we assumed about $3 million of synergy realization in 2019. But we now expect to be around $2 million above that goal at about $5 million. Similarly, we had originally modeled synergy realization of $8 million in 2020. We now believe synergies will exceed $10 million next year, even after taking into account the 3 cuts in the Fed funds rate since the acquisition which, as you know, has an adverse effect on sweep income. The better-than-expected synergy performance is due to the identification and capture of additional cost savings opportunities as we execute our integration plan as well as the acceleration of clearing conversion into 2019.

Moving on to Tax Prep. TaxAct revenue for the third quarter was $3.6 million, up 2.6% versus the prior year. Segment loss was $12.1 million, up by about $5 million versus the prior year driven primarily by the code refactor and related product investment work that we discussed last quarter. One note to add here, in the third quarter, we reclassified $960,000 of third quarter professional Tax Prep revenue into deferred revenue for presales related to the tax year 2019, which has been recorded as revenue in the second quarter. This adjustment reduces FY '19 revenue and transfers it to the first quarter of 2020. However, there is no impact on FY '19 segment income, as we have been able to mitigate the impact of the deferred revenue through OpEx management.

Finishing up on third quarter performance. Unallocated corporate expenses were $6.5 million, which is wider than we expected due to the timing of certain items between quarters. Moving on to liquidity. We ended the quarter with cash and cash equivalents of $97.5 million, and our net debt was $292.5 million, resulting in a net leverage ratio of 2.1x at the end of September. During the quarter, we began putting some of this balance sheet strength to work by initiating repurchases of common stock. In total, we repurchased approximately 560,000 shares at an average price of approximately $22.50 per share for a total of about $12.7 million in repurchases, representing about 1% of our shares outstanding. As a reminder, we have authorization to repurchase up to $100 million.

Finally, as it relates to integration costs, and in the third quarter, we recorded $6.8 million. These costs are broken out on a separate line in our supplemental so you can track them, and they are added back for purposes of reporting adjusted EBITDA. We had previously indicated that we expect a total of $28 million in integration expense for First Global, with roughly $10 million in 2019 and the balance in 2020. And we also indicated our goal is to accelerate as much of the integration activities into 2019 as possible to maximize the long-term benefit and that, if we were successful in doing that, more of the cost would pull into 2019 as well. As I mentioned earlier, we were, in fact, able to pull more into 2019, and more specifically, the clearing conversion, we now expect the breakdown on the corporate of $17 million in 2019 for the balance in 2020. With that, let's turn to our full year outlook for 2019. For the full year, we expect TaxAct revenue of between $209.5 million and $210.5 million and segment income of $93 million to $94.5 million.

For our wealth management business, we expect full year revenue, which includes First Global for the period of May 6 through the year-end of $505 million to $510 million and segment income of $67 million to $69.5 million. This translates to consolidated full year outlook, again, including First Global for the partial year, of revenue between $714.5 million and $720.5 million, adjusted EBITDA of $130.5 million to $135.5 million, non-GAAP net income of $93.5 million to $99.5 million or $1.88 to $2.01 per diluted share and GAAP net loss attributable to Blucora of $0.4 million to $5.4 million or $0.01 to $0.11 per diluted share, with 28.5% to 29.5% in corporate unallocated expenses. So as you can see, while third quarter results were ahead of our target, we are not rolling that through to the full year guidance. There are a few factors that are driving that. First, as you know, there was an additional rate cut to the Fed funds rate in October that was not contemplated in our guidance, which will impact our sweep revenue. Second, as John noted, while we were able to accelerate the timing of the current consolidation related to the integration of First Global, which is a long-term net positive, it has also pulled forward the timing of any moderate churn or disruption that we may see in the nearer term. As a result, we're taking a more conservative view to things like integration-related transactional revenue, asset flows, retention and payout. Third, while the fourth quarter tends to be seasonally strong, the current economic climate also points to a more conservative view to transactional revenue and flows across the business.

And finally, we have continued to see relatively stronger growth from our higher-paid advisers, which has led average payout to be higher in the near term. Finally, as we look ahead to next tax season and its contribution to the strategy for maximizing the segment's long-term growth prospects, as outlined by John, we have incorporated a number of factors into our preliminary outlook for the first half of 2020. Specifically, while TaxAct is consistently growing revenue well above market rates for a number of years now, our recent growth has been driven largely by pricing as we sought to improve our unit economics and the lifetime value of our customers. Because of this pricing work that we have been executing over the last few years, we are now in a strong position to derive growth from both volume and price and, as a result, return to overall unit growth. We are making the right investments to greatly improve an already strong product experience with updated branding and marketing to improve conversion and retention. To be more competitive in the market, we will remove our basic SKU to make a few other adjustments that will result in a 1-year reset or a headwind of about $17 million in 2020.

The sale of SimpleTax has also been reflected in our growth rate assumption. Incorporating these factors and taking a more conservative view in this transition year, for the first half of 2020, we are targeting, at TaxAct, segment margin in the range of 56.7% to 57.7%, which is consistent with the prior year, but revenue growth to be more in line with the market in the 3% to 5% range versus the comparable prior year period. Normalizing for the removal of basic and the sale of SimpleTax will result in an equivalent year-over-year growth of about 11% in revenue and 15% in segment income. This concludes our prepared remarks, and we will now turn the call over to the operator for Q&A. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) 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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Good progress on the asset management business. I just wanted to follow up a little bit further and make sure to clarify with it we understand the last commentary on the tax season. So the revenue guide for 3% to 5% revenue growth for first half tax season -- first half of next year with tax season, that is after the $17 million headwind from removing the basic SKU? Or is that prior to removing that? I just want to make sure that that's clear.

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Davinder S. Athwal, Blucora, Inc. - CFO [3]

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Thank you, Brad. Good morning, this is Davinder. Yes, that is actually prior to that -- I'm sorry, that's after the headwind.

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John S. Clendening, Blucora, Inc. - President, CEO & Director [4]

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It includes the absorbing of the headwind.

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Bradley Allen Berning, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [5]

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Yes. Okay. I just wanted to make sure that, that was really clear. You also talked about synergies on the asset management business going forward and I wanted to just make sure we understand. Is that the items that you've already clarified and it's mostly to do with the cost and timing of synergies? Or are you talking about additional potential revenue synergies that you're identifying? And I just want to talk about what you're seeing for the opportunities from a synergistic standpoint, both costs and revenues.

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John S. Clendening, Blucora, Inc. - President, CEO & Director [6]

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Brad, John here. Thanks for this question as well. It's really more the former that the team's been working tirelessly to bring forward the positive benefits of having acquired First Global, around cost structure, bringing teams together, repointing, if you will, around the clearing partner. So it's really most of those opportunities. And having said that, we have identified some opportunities around each of the ways the different businesses go to market, which we're looking to capitalize on. But suffice to say that the implications for how we've talked about synergies is really around having brought forward those advantages. And of course, we've had to absorb now a third rate cut and still are over-making what we thought we'd -- where we thought we'd be at this point as well as for next year.

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Bradley Allen Berning, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [7]

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Understood.

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Operator [8]

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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 [9]

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Just first, on wealth management. So a nice healthy uptick in adviser productivity, but the adviser -- number of advisers continues to fall. Could you speak a little bit about -- more about what's driving the decrease in advisers? Is this primarily legacy HD Vest or First Global? I mean, how long will the platform consolidation remain an overhang on adviser growth?

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

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Well, good morning. Thank you for that question as well, John here. So with regard to the status on counts. As you noted, we were down a bit. The change is almost entirely on the HD Vest side. And consistent with our prior commentary on this, this is associated with advisers with minimal productivity and production that left. I think many, frankly, have left the industry as well. There would be some, a small number there, that just didn't complete their required [add] or whatever, retired, that sort of thing. But the headline there is it's around unproductive advisers, the vast majority of which would be, just to put a number on it, folks below less than like $5,000 in production, so really a de minimis impact with regard to overall revenue and things along those lines.

Now to the salient point you raised as well around, well, how long can we expect some disruption on the on the business based on the conversion. In our experience, this is a far less impactful conversion from the -- kind of the -- than the clearing conversion from the standpoint of, gosh, I do my business very differently. It's not as impactful there. There are some impacts there, but the other element here, of course, is that, as we bring together 2 teams and stay consistent with the principle we've shared with you guys with advisers and employees around choosing the very best leadership team, relationship managers and those sorts of things, there will be some change in connectivity with some of the people that you've grown quite familiar with and were very good contributors for us. And so we're essentially rebuilding relationships is what that means, in some cases. In a business like this, advisers really like the TLC that we want to give them. And some of that's been disrupted. So having said that, we are rebuilding relationships. We will come out in February with a firmer sense of -- obviously, we'll do guidance for the year on that business, and I'll talk further about it. But I'd expect it to be a quarter or so, probably as the -- sort of the initial and probably the most difficult sort of wind to -- sort of headwind to fight against.

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William V. Cuddy, JP Morgan Chase & Co, Research Division - Analyst [11]

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Great. Following up on that. Do you have a rough idea of how many more unproductive advisers are still remaining in the 4,000 on the platform?

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

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I guess the way to characterize it, right, because, of course, we've got a broad range of advisers that go from just beginning the business who are working really hard at getting sure they get liftoff, those that have been at it for a couple years. So we kind of take a vintage look at the business. And all the way up to folks that are producing at a level that you'd see at some of the biggest producers at some other firms. And so there's going to always be a little bit of a number of advisers who opt out or we may steer them to actually sell their business to another adviser, things along those lines. But it's important to share, too, that we've completed the bulk of the proactive nudging, if you will, of advisers. We still have some very low minimums around production and that sort of thing, but it's important to take away that we, at this stage, have completed the bulk of the programmatic let's proactively try to get people to get in or move on. And so it will be more of a steady state of folks that retire, maybe pass away, sell their practice internally, hopefully, and that sort of thing. So the largest part of that is behind us now. As you know, our orientation for the comments also is around driving growth and driving productivity, and we feel like, the sooner we get more and more advisers to adopt tax for investing, hopefully, this $500 million number at the end of the year will make it even easier for people to see how they can quickly add value, which gets over a little bit of the hump that we always face with the CPA type community because they're pretty conservative in nature, which is good, right? They're not swinging for the fences, but they want to be able to sell practical solutions with clear value. PSI will be something that helps enable advisers to do that, and we think be successful.

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William V. Cuddy, JP Morgan Chase & Co, Research Division - Analyst [13]

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Okay, great.

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Operator [14]

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(Operator Instructions) Our next question will come from Chris Shutler with William Blair.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [15]

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On TaxAct, how confident are you that you can return to positive unit growth in 2020?

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

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So Chris, thanks for the question. As you know, we don't guide to unit volume, but clearly, our goal is to get back to overall unit growth each year. We spoke about that, I think, 2 calls ago for the first time. And with the removal of basic, let's be clear about it, since that was a monetized unit, we likely won't be forecasting growth in monetized units as we do the onetime reset on that. However, we are very confident in the idea of seeing terrific progress in all the indicators of a long-term growth business here in TaxAct. I shared a lot already upfront, but to amplify it, as we picked apart the experience, literally, as I commented page by page, whereby we're looking for ways to simplify and make it easier, we see large opportunities in improving the conversion rate and we really think we're on to something with regard to the segmentation work that we've done that's turned both into -- well tested by the way, that's turning into new ways to communicate our brand and our value proposition, along with real value to consumers that they're going to see in the filing experience itself.

So our confidence level that we're on the right track here has actually never been higher than it is right now. And certainly, some of that goes with the sort of team that have now had the chance to essentially lap one year. If you will, from the kind of reload on leadership in this business and all the folks that have come with it. So one way of saying we're clearly looking for more balanced growth, we think we've got a really well grounded approach to get us there. And now it's the time to be in shifting in that direction. And we believe that we can fight through the economic impact, as the first caller had sort of clarified, and still drive revenue instead of income growth here, while dealing with a onetime sort of hole created by the SKU cleanup.

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Christopher Charles Shutler, William Blair & Company L.L.C., Research Division - Research Analyst [17]

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Okay. And I wanted to dig into this a little bit more. I think Davinder said that the tax guidance, I think, correct me if I'm wrong, that you said it was potentially a conservative view, Given all the changes in play this coming season, maybe just walk us through the process of how you actually build the guidance? Is it your expectation that the basic SKU folks will basically move into free and that you'll have an opportunity to monetize them either in season or in future seasons? And then what are you thinking about, from a pricing standpoint, that the magnitude of price increase relative to past seasons?

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Davinder S. Athwal, Blucora, Inc. - CFO [18]

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Chris, this is Davinder, happy to take that question. So let me kind of maybe just start off by saying a lot of changes taking place this year, right? So we're kind of in a transition here, which makes it somewhat harder to predict than being in more of a steady state scenario. So that's really why we're being more conservative. We don't want to get ahead of ourselves thinking we know more than we actually do. And in terms of pricing, as we've said in the past, we're at a 25% to 30% discount against other competitors' SKUs. We think that's kind of where we're going to go into this year with. But as you think about some of the other things that are happening and you're trying to move from purely being a price-based grower to more of a balanced grower between volume and price, I just think it's kind of hard to predict given that we haven't had as much of that in the last few years. So again, just to reiterate the point where that's what's causing us to be more conservative on the tax-side play than we may be ordinarily.

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

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And the only thing to amplify there as well is we have a well modeled view of this business. We have a very detailed way of thinking about every aspect of conversion from traffic down through hitting the file button. And it's been that those analytics, which, as we've shared before, we've only been rapidly building the last 1.5 years or so. And so while we have that sort of detailed understanding and know more so than ever where we're going to be during the course of the year as it unfolds, as you noted and Davinder echoed, there's a lot of change here, that's for sure. But we feel like the modeling and the consumer research that we've done all points to the sort of guidance that we've shared. The thing I'd share on pricing, too, is, as we've shared for a couple of quarters and has been on our minds for some time now, we're looking forward to getting it to a point where -- and it's not this season, clearly. But we're looking forward to getting to a point where we only grow pricing with the market and take away some of the kind of retention challenges that above-market increases in pricing drives. So we head into the year with a point of view on where we feel like the largest gaps are that we can continue to close maybe a little bit more aggressively than some of the other SKUs, and we'll stay nimble in the season as well. But we think that we've got the math right as we think about LTV on this business where -- and that's, as you know, that's how we focus everything here is we've got the LTV right and the analytics around that, so that as we increase price less over a few seasons at the same time and add value right back with regard to some of the filers, that the increases in folks that start and close will produce value for shareholders over time.

One other thing, you mentioned free and how we think about free, another opportunity to be super clear here. Very true that -- and important to note that our economic situation is vastly different. The slides probably made that abundantly clear. When you're in a business where you have a competitor many, many times your size and also your unit economics pale in comparison, you've got to address that. And we chose to address unit economics first. Now we're looking to address volume and growth and scale and those sorts of things. But the way the math has changed has made it so that, if we can bring in folks that don't file for free in year 1 at no incremental cost due to the strength of our message, that's a good thing. It hasn't cost us anything incrementally, and we've got the opportunities that those percentage of folks that year 2, 3, 4, whatever it might be, end up being a paying customer that, that math now works. A few years ago, if you like, well gosh, there's just no -- the rate of that doesn't work because the prize at the end of it, i.e. ARPU and segment income per filer was just too small. We are not going out and looking for free filers. We're looking to increase the interest with which everybody has in our brand. And in so doing, we'll increase LTV.

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Operator [20]

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Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to management for any closing remarks.

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

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Well, thank you all for joining us today. I hope the deeper dive was helpful for you in understanding our business, our growth and opportunities. Look forward to continuing to update you all on our progress. Thanks, everybody. Have a good rest of the day.

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Operator [22]

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Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.