Avantax Inc (AVTA) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Blucora fourth quarter and full-year 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now turn the floor over to Stacy Ybarra, Vice President of Investor Relations. Please go ahead.

Good morning and welcome to Blucora's investor conference call to discuss the fourth quarter and full-year 2016 earnings.

Before we begin, I would like to remind you that during the course of this call, Blucora representatives will make forward-looking statements, including but not limited to, statements regarding Blucora's expectations, about its products and services, outlooks for the future of our business and growth initiatives, and anticipated financial performance for the first quarter and tax season.

Other statements that refer to our beliefs, plans, expectations, or intentions, which may be made in a response to questions are also forward-looking statements for purposes of the Safe Harbor provided by the Private Securities Litigation Reform Act.

Because these statements pertain to future events, they are subject to various risks and uncertainties. And actual results could differ materially from our current expectations and beliefs. Factors that could cause or contribute to such differences, include but are not limited to, the risks and other factors assessed in Blucora's most recent Quarterly Report on Form 10-Q, on file with the Securities and Exchange Commission. Blucora assumes no obligation to update any forward-looking statements, which speak only as of the date the statement is made.

In addition, during our call, our Management will discuss GAAP and non-GAAP financial measures. In the press release, which has been posted on our website and filed with the SEC on Form 8-K, we present GAAP and non-GAAP results, along with the reconciliation table and the reasons for our presentation and non-GAAP information.

We've also provided supplemental information to our results in the Investor Relations section of our corporate website at www.blucora.com and filed with the SEC on Form 8-K.

Now I'll turn the call over to John Clendening. Following his comments, Eric Emans will review fourth-quarter and full-year results and first-quarter outlooks. Then we will open up the call to your questions.

Good morning everyone, and thank you for joining our call today. We're calling you from [earnings] for the first time. And while the Corporate Headquarters won't move here until the end of June, I've already moved my office to be closer to the HD Vest Team, as well as to shorten the flight to Cedar Rapids where most of the TaxAct Team works.

2016 was an important year for Blucora, as we made significant progress on our transformation into a simplified, streamlined and synergistic technology enabled financial solutions Company. When I joined the Team in April of last year, I spent a lot of time listening and learning. I confirmed that we have two good businesses well-positioned in attractive markets and with the potential to grow. I told you that we were focused on the four Ds: divest, delever, deliver, and drive. I'm pleased to say that we made strong progress on each of these, and exited 2016 even more convinced about the strength of our businesses and the opportunities that are ahead.

As you know, we divested Infospace in August and Monoprice in November for a total of $85 million. We continue to delever the business by paying down $172 million in debt, delivered strong cash flow performance, and began to drive synergies between HD Vest and TaxAct, while acting to improve the growth trajectory of each.

I'm particularly encouraged by HD Vest's performance in the fourth quarter, which shows momentum heading into this year. And while the digital DIY tax market is growing increasingly competitive, we have a solid platform and are embarking on a multi-year plan to reestablish TaxAct as a challenger brand in the space.

Big picture, we're beginning 2017 well-positioned to complete the final phase of our multi-stage transformation. With HD Vest and TaxAct as our operational foundation, we will focus on completing the organizational elements of the plan and growing our Businesses organically.

As we recently announced, we've added incredibly talented leaders to help us take these businesses to the next level. In the beginning of January, we now see the appointed Sanjay Baskaran as President of TaxAct. Sanjay joins us from Amazon, and brings more than 20 years of experience driving growth in technology and financial services businesses. We're confident that he can take that business forward in exciting ways. Working closely with the TaxAct Team, Sanjay will leverage his customer-centric focus and digital experience to execute on our growth objectives. While he's only been part of the Team for a couple of weeks, it's clear we have the right leader in Sanjay.

We also recently announced that Bob Oros was named CEO of HD Vest. Bob brings many years of sales and operational experience, and has served in leadership roles at leading brokerage and investment advisory firms, most recently, heading up Fidelity's RAA business. He has a strong track record of successfully recruiting and partnering with independent advisors to drive growth.

Bob succeeds Roger Oakes, who will be with the Company through the end of March to facilitate a seamless transition. I'm looking forward to Bob joining us at the end of the month and expect he will hit the ground running.

As I have shared, we intend to build the very best Team in the business. Bob and Sanjay are great additions to the Team. I'm sure there will be opportunities for analysts and owners to get to know Sanjay and Bob later this year.

With the go-forward operating companies now in place, new leaders to head them up, and clarity on what it takes to win, our Teams are energized to deliver for our shareholders and customers in 2017 and beyond. Now let's turn to the operational highlights for the quarter.

Starting with wealth management, fourth-quarter revenue performed ahead of expectations at $83.1 million, up slightly compared to the prior year. Segment income was strong at $13.8 million, up 13% over the fourth-quarter 2015.

We capped the year with positive results in all the primary drivers of value. Highlights include: assets under management and fee-based advisory [accounts grew at] $10.4 billion. The fourth quarter was the strongest in advisory net flows in seven quarters.

Much of this growth is a direct result of the efforts of our advisors to anchor their investment strategies and our goals-based planning tool, VestVision. We will continue to drive adoption of this tool as a goals-based plan puts our advisors in the best possible position to service clients and drive asset accumulation. And for Blucora, these represent attractive, annuatized assets.

[Sweet Brother] increased in the fourth quarter as we benefited from rising interest rates, which [wall] not at the level we built into our plan, are an important driver of profit growth.

Advisor recruitment remains a top priority as it helps drive long-term value for the firm. We recruited approximately 400 new advisors in 2016. It's important to point out that our model is different from other independent broker dealers, in that we recruit tax professionals and enable them to provide wealth management solutions to our clients.

With this approach, new advisors typically take a few years to build their business and begin making meaningful contributions to asset accumulation at HD Vest. This model is a source of advantage for us because it drives stronger loyalty among our advisors and better economics than those enjoyed by typical independent broker dealers.

Given that our advisor model has a strong, competitive advantage, we continue to explore ways to improve our advisor recruiting and retention program. We're off to a very good start this year. We're also having strong results for the succession planning program, which helps retain the client assets of long-tenured advisors and drives value. Among those advisors who retired in 2016, we maintained 47% of their clients' assets through this program, allowing us to keep the assets in-house. By transitioning the clients to another HD Vest advisor. So, while advisor count is reduced, larger, healthier advisor practices are created.

We continue to invest in technology to drive growth. As mentioned last quarter, we're upgrading our advisory platform trading technology. In November, we announced that we are partnering with FolioDynamix to provide cloud-based solution for HD Vest advisors to manage the entire client life cycle. From proposal generation to account opening and management, including trading and rebalancing, to reporting.

This is an important investment in our capabilities. And the new platform will provide our advisors with enhanced insight into client portfolios, and will support the strong growth we continue to see in adoption of for-fee advisory solutions. The new platform will be operational this summer.

Even though the DOL rule is under review by the new administration, we are continuing to make investments that will enhance our ability to provide our advisors and their clients with best-of-class wealth management services. We will continue to express our support for an investment, [reduced-rate] standard of care, that is collaboratively developed by industry participants and our regulators. The majority of our advisors are already able to act as a fiduciary under the Investment Advisers Act. They advise on approximately 80% of our client assets under administration, and act as a fiduciary on $10.4 billion of advisory assets.

We know that when our advisors are at their best, they can advise clients better than far larger incumbents, because they can provide integrated tax and investment solutions; something these other firms are simply unable to do.

Now turning to our financial and operational results for tax preparation. As you know, tax season is underway, although at a slower than normal pace. And the market remains increasingly competitive with advertising spend and promotions up significantly thus far. The siren call of free, tax filing continues to dominate the marketplace. The large storefronts are more aggressive with their online offers and marketing spending. And there's a new entrance in the digital do-it-yourself space this year.

As we look at our position in the market, we see a real opportunity to differentiate TaxAct at the brand that stands for exceptional value, and is known as the most trustworthy.

Value. I'm pleased to report that TaxAct recently received PC Magazine's Editor's Choice for affordable tax preparation software, receiving one of two Editor's Choice Awards. As the magazine noted, if you're looking for an inexpensive service for doing your 2016 taxes, TaxAct is tops. We're proud of this accomplishment, and a dedicated TaxAct Team that is responsible for it. They don't intend to rest on their laurels. We are committed to continuously improving the user experience.

We help guide customers through their filing process while also offering a far better value than industry leaders with whom we are compared. To bring that better value in sharp relief, even with the pricing actions we have taken this year, today we offer customers as much as a 50% saving versus TurboTax and H&R Block. We're working to make this superior value clear to our target customers.

Branded consumer targeting. There are many online tax-prep solutions out there. But even those that say they are free, too often come at a price. Simply put, millions of customers enter the filing process thinking they will file for free, and instead are charged at the checkout. Along the way, they are charged for add-on services or are inundated with offers.

For our part, we have heard loud and clear from a segment of valuable customers that they didn't want to be lured by these promises of free filing, only to be charged for things they didn't expect to have to pay for, or to be bombarded with emails, pitching products they don't need or want. So TaxAct, we're focused on acquiring savvy customers who value great products at fair prices, and are fed up with the industry's games. We think transparency is the way to go, and that is our pledge to customers.

We just launched a new ad campaign; the system to beat the system, to highlight these industry practices and put an end to them. This season, we've taken steps to be transparent in our messaging and pricing. For example, customers know upfront what they will pay to file with TaxAct.

Though TaxAct is free for many filers, some pay for specific services. That's why this year in our advertising, we don't emphasize free offers in our marketing. We are clear and transparent about pricing so that customers know right from the start what they will pay for our service.

Our price lock guarantee ensures that customers pay the price listed on the product at the time they start the return, not when they finish their return. TaxAct is the only major online provider that offers a price lock guarantee.

We do not charge anyone for phone support. Customers can contact the TaxAct Team of trained tax professionals via phone, for tax and technical help at no additional charge. This is an added value, not included in free products from competitors. For the first time, all customers can access up to three years of prior TaxAct online returns for no additional charge.

We're committed to being the brand that delivers transparency, with a focus on paid filers. What leaves us to be confident that this is the right path, in stark contrast to all the other players?

First, a pivot towards paid filers creates superior economic returns. And as a result, we're willing to sacrifice total units in the form of fewer free filers. Second, there's clear consumer demand for a transparent approach. And third, we believe transparency leads to trust, and trust enables us to add more value and help more customers manage their financial well-being beyond the once-a-year transactional relationship that most tax-prep firms have with their customers.

A manifestation of helping more customers manage their financial well-being is our recent launch of [BluVest], an integrated platform that offers TaxAct customers the option to receive affordable and objective investment advice. The service is designed to provide our customers with the current year tax benefit, by investing in retirement accounts during the tax return filing process, and fund their investments directly with their tax refund into a robo-type offering.

While BluVest is not expected to materially impact our financial results this year, offering financial solutions that are relevant to our customers adds value. And begins to build a year-round relationship between customers and the TaxAct brand. And it's a great example of the synergy value between our two units.

As you know, the IRS opened four days later than last year. As a result, the industry, overall, is off to a slow start this year across all tax preparation methods. Instead of a typical early-season peak, we're seeing that peak spread out over a longer period. This change, in the time of consumers filing returns challenges comparisons to prior seasons. However, we continue to believe that the digital do-it-yourself category will demonstrate healthy growth again this year, and we expect the benefit from that growth over time. Eric will give you additional color on how we are trending season-to-date compared to the market.

Looking ahead. One of our shareholders commented that we are undertaking the largest transformation he's seen in any of his portfolio companies. It's a big undertaking and we have a busy 2017 ahead as we complete the final stages of our transformation. We'll finalize our go-forward Leadership Team. We built the Corporate Team in Irving, and execute our plans in each business.

We will also develop a clear path to capturing the synergy value we know exists. Some bumps in the road are to be expected. We are committed to taking the right steps to build shareholder value over time. With that, I will turn it over to Eric for more details on the financials.

Thanks, John. We have a lot to cover today, including fourth-quarter and full-year 2016 results, an update of the tax season expectations and first-quarter 2017 outlook.

Let's start with a quick summary of our fourth-quarter results, which finished ahead of our expectations. Consolidated revenue of $86.8 million, adjusted EBITDA of $2.8 million, non-GAAP net loss of $7.5 million for an $0.18 loss per share, and GAAP net loss of $19.3 million, or a $0.46 loss per share, which includes a restructuring charge of $3.9 million or a $0.09 loss per share and losses from discontinued operations of $5.1 million, or a $0.12 loss per share.

This translates to the following full-year results and pro forma year-on-year growth. Consolidated revenue of $455.9 million, up 4%; adjusted EBITDA of $94.2 million, up 15%; non-GAAP net income of $45.1 million, up 22%, or $1.06 per diluted share, which is up 20%. And GAAP net loss of $65.2 million, or $1.57 loss per share, which again includes a restructuring charge of $3.9 million, or a $0.09 loss per share and losses from discontinued operations of $63.1 million, or $1.48 loss per share.

Turning to the balance sheet, we have cash, cash equivalents and short-term investments at $58.8 million. During the quarter, we paid down $38 million in debt, which brings our total debt pay-down for the year to $172 million.

We exit the year with net debt of $377.2 million and a net leverage ratio of four times. Quite a change from the greater than six times net leverage we entered the year with. And highlights our execution towards our stated goal of three times net leverage. To this end, we expect to utilize at least $30 million in cash from operations to pay down Term Loan B debt in the first-quarter 2017.

Shifting to segment performance beginning with wealth management. HD Vest's full year revenue was $316.5 million, down 1% versus prior year on a pro forma basis. Segment income was $46.3 million, and up about 8%. I think the best way to sum up this year is we started out with some challenges given the market conditions, including an S&P 500, 52-week low in February coupled with the typical integration challenges that are to be expected with a significant acquisition.

As we entered the second half of the year, we began to build momentum boosted by the market. As a reminder, a positive market helps us in a couple of ways. First, we are about 50% correlated to the S&P 500, so upward movement grows our AUA and AUM, benefiting fee-based and trailer revenue. And second, we typically see increased in-flows in times of S&P 500 growth.

Additionally, we benefit in an increasing interest rate environment to the tune of approximately $2 million in annualized sweep revenue and segment income for every 25 basis point increase.

For the fourth quarter, HD Vest revenue was $83 million, up 1% versus prior year, and above the high end of our guidance expectations for the quarter driven by other revenue, which resulted in a gross margin increase of 6%. Fourth-quarter segment income was $13.8 million, up 13% versus prior year pro forma and again, ahead of our expectation.

The [Beat's] expectations for segment income was driven by lower-than-expected costs and gross margin driven by revenue outperformance. The highlight in the quarter was net fee-based flows of $152 million. This came on the heels of third-quarter net fee-based flows of $132 million. It certainly feels like we have good momentum in early 2017.

Total fee-based AUM, as of the end of the year, was $10.4 billion, up 7% year on year and 2% sequentially. And represents 26.9% of total AUA, which is up 40 basis points versus last year. We're pleased to see that a continued mix shift towards fee-based AUM. We exit the year with AUA of $38.7 billion, up 6% year on year and flash sequentially.

Turning to the first-quarter 2017 outlook, we expect revenue between $80 million and $82.5 million, and segment income of $11 million to $12 million, for a segment margin range of 13.8% to 14.5%.

Transitioning to tax preparation. TaxAct full-year revenue was $139.4 million, up 18% versus prior year. And segment income was $66.9 million, up 17% year on year. Simply stated, last year was a great year financially for TaxAct in the face of a significant pivot of our price-packaging model. As we shared, we lean towards segment income given the focus on paying down debt.

For the fourth quarter, TaxAct revenue was $3.8 million, up 31% versus prior year. And segment loss was $6.1 million, which is up 35% over prior year. As our investment leading into tax season was increased primarily in marketing and a bit more back-end loaded versus the prior year.

Shifting to the first half and first-quarter 2017 outlook, let me echo John's comments. The season is off to a very slow start. DIY e-files are up 21% through February 3, for the IRS weekly filing statistics. And while the season was delayed for four days, there seems to be other factors at play, such as the PATH Act, which requires refunds involving the earned income tax credit, and additional child tax credit be held until the latter part of February.

Is also worth noting that we don't believe, or see any evidence that the slow start is suggesting of a shift toward tax professionals. We expect DIY to continue to grow at a rate that outpaces overall filer growth.

For the same period our e-files are down approximately 34% versus last year, which is not too surprising that we're lagging the market due to our focus on paid units that typically file later in the season. We did make up some ground on units in the second week based on the IRS statistics, and remain hopeful we can continue to do so as the season progresses. Even with these challenges presented by the slow unit start, we're confident that we'll meet or exceed the high end of our first half revenue outlook which calls for 8% to 10% revenue growth versus the first-half 2016.

Our confidence is bolstered in large part by early-season pricing action. This translates to first-half 2017 revenue outlook in the range of $144 million to $148 million. Additionally, we believe on an absolute-dollar basis, we will likely come in towards the low end of our first-half 2017 segment income outlook of $81.5 million to $84.5 million. This is largely driven by decrease marketing efficiency attributable to the season's slow start. In short, our early dollars have been less efficient, and we expect to need to deploy additional dollars through February.

Further, our first-half 2017 outlook reflects investments to reestablish TaxAct as the challenger brand in the space in order to strengthen our competitive position. We're proceeding on these investments and testing a lot this season. Additionally, we may decide to accelerate certain investments as we exit the tax season. More to come on that in future calls, as Sanjay and the Team assesses opportunities. But the message here is we're not going to pull back on investments to offset modest short-term margin compression.

As far as first-quarter outlook, we expect approximately 67% of first-half revenue to hit in the first quarter, which translates to a range of $96.3 million to $99 million. We expect segment income of $48 million $50 million or segment margin range of 49.8% to 50.5%.

Let's close out 2016 with unallocated corporate operating expenses. For the full year, unallocated corporate operating expense came in at $19 million or up 7% versus prior year on a pro forma basis and included approximately $3.5 million in nonrecurring costs. Fourth quarter was $4.9 million of which approximately $900,000 were nonrecurring. As a reminder, a nonrecurring cost represents costs associated with our Company's strategic transformation. Which includes the integration of HD Vest and the divestiture of non-core assets, as well as costs associated with leadership transitions and the costs associated with the move of our Corporate Headquarters that did not qualify for classification within restructuring.

Excluding nonrecurring costs and annualizing the fourth quarter, we're at a run rate of $16 million, so making good progress against our stated objective to materially reduce our unallocated corporate operating expense. In previous calls, we have stated our goal is to achieve $12 million in expenses annually. But as we have gone through the budget process, as well as thought through our operating model, we expect that we will settle in the $13 million to $13.5 million range which still represents mid-to-high 20% reduction when compared to 2015 pro forma.

Obviously, with the Headquarters moving to Irving, Texas, and the leadership change at HD Vest, we have significant nonrecurring costs in 2017 that will primarily hit in the first half of the year. As such, we expect first-quarter unallocated corporate operating expense of $8 million to $7.5 million of which approximately $4 million is nonrecurring, and includes $1.6 million associated with the HD Vest leadership transition.

With that, let's turn to first-quarter 2017 consolidated outlook. For the first quarter, we expect revenue between $176.3 million and $181.5 million. Adjusted EBITDA between $51 million and $54.5 million, non-GAAP net income of $40.2 million to $43.9 million, or a $0.90 to $0.98 per diluted share, and GAAP income from continuing operations of up to $14.5 million to $15.2 million, or $0.32 to $0.34 per diluted share. As a reminder, GAAP income from continuing operations outlook includes a first-quarter restructuring charge estimate of approximately $600,000 and excludes any impact to tax expense for discrete items.

Before I turn the call back over to John, let me comment our guidance approach for 2017. At this time, we're not providing full-year outlook. This is primarily driven by uncertainty that still remains around the DOL rule.

In addition, with the new leadership at both of our business units, we're going to provide these leaders an opportunity to come in, assess their respective organizations and opportunities to drive long-term value. This may involve some added investments in the second half. You can expect us to provide additional clarity over the next couple of earnings calls. However, it's important to note that we have provided first-half 2017 outlook for TaxAct which represents the lion's share of the segment's full-year earnings.

Let me emphasize that does not change our view that these businesses will continue to grow top line consistently in the mid-to-upper single digits and may grow faster depending on market conditions and/or the success of our synergy growth initiatives. John?

Before we open for questions, I want to thank our employees for the strong performance this quarter. I'm proud of our achievements. We beat fourth-quarter expectations; our end of the year with increased momentum at HD Vest; and despite a slow start to the tax season, we are reiterating our guidance. With that, I'll open it up for your questions.

(Operator Instructions)

Dan Kurnos, The Benchmark Company.

Great, thanks, good morning. Congrats on the solid quarter and the outlook here. Let's start, John, with HD Vest.

I'll surprise you. I figure you figure, I'll start with tax. You kind of talked historically about improving the advisor conversion process efficiency. Can you give us any update there and just how we should think about the general pace or tenor of advisor growth this year?

Dan, Good morning. Thank you so much for the question. Yes, as we've shared a little bit in a prior call, we're looking to retool the advisor recruiting process. We see a ton of opportunities there.

The pipeline is actually quite healthy getting out of the gates this year. But look, what we're trying to accomplish are some very basic things. First, is we want to make sure that we are deploying our resources against advisor prospects and at the highest potential to come in and not only get licensed to get up and running, but also become really strong producers for us over time.

A lot of the degradation, if you will, and total advisor count that we sometimes have seen over the past couple of years, that associate with people really start getting lift off. So we're picking apart the process. We're looking to do things like add some incremental screening and whatnot upfront so that we can get a better sense of those that can come in, go through the process, get trained up and again become a strong producing advisor over time.

In the past year, as you know as well, the DOL has been some headwinds for us around part of our recruiting efforts. Where folks that have already been licensed have largely sat on the sidelines waiting to see what's going to happen to DOL. We feel like, to some degree has played out, but now with the additional uncertainty that maybe some may cross back up into the situation we faced this year.

The big picture, as far as the advisor recruiting process itself, ideas put a far sharper lens, the type of advisor that we recruit, so we get the right type of advisor comes in and gets up that learning curve far more quickly that on average in the past. As you know, this is how we grow, right?

We like the fact that grow through new advisors. It gives us some really sharp economic advantages versus other independent broker dealers. But then it puts the pressure in a different spot which is we've got to do a better job of recruiting, getting people up to speed.

Great. That's helpful. And then, since you specifically mentioned VestVision in your prepared remarks, I was wondering if you'd be willing to at least directionally give us a sense of what portion of assets are in that product and just how you feel about the quality of the product overall and how you might expand on your goals-based tools?

A couple of things on VestVision, for the group calling in here, is the way we've put to our goals-based planning process. We've placed a lot of emphasis on this process over the past couple of years and even moreso in the last half of last year. We think that explains, in large part, the uptick we're seeing in for-fee advisory solutions.

We see that the adoption, by the way, is up both in terms of -- the number of advisors are doing more than just one plan because you really have to do a couple to get into a habit around using a planning process. But in terms of total plans, we're delighted that we are up at low double digits, quarter on quarter, in terms of the number of plans that we've done. And it's crucial that we keep building on that momentum because it's the right way to create a strategic relation with the client.

It gets the client focused on the right spot, i.e. what are the goals? It better enables the advisor to meet those goals with the client and it also tends to lead toward asset accumulation and greater assets under management.

As far as the percentage of our assets that have a plan, we don't share that. But I've got to tell you, it's more white space you'll get than it is people that have a plan. So then what that means is there's a lot of upsides still to drive and play out in terms of planned adoption.

Great. And then last one on HD Vest just, John, on DOL. Given the regulatory uncertainties you called out with the understanding that you are still making improvements to the platform, have you changed some of the product offering considerations? Or has the overall layer approach into potential DOL impact changed?

In terms of the basic approach, there are really just a couple of swim lanes that we've been pursuing.

You mentioned the technology front. And the main thing here is recognizing that the for-fee advisory business being so crucial us, strategic and just so powerful economically to the firm, also great for clients and advisors. As we've shared, we're going to continue to make those investments around the advisory trading platform. It's the fully dynamics platform.

Relative to product, we've continued to work around what does the offering look like over time? As you know, there's a two-phase adoption of DOL if it does remain intact. The industry has a part of it, for example, mutual funds creating new share classes. It could be a lot more DOL-friendly. And look, there's been some positive momentum that's happened there based on the conventional wisdom that there will be some form of delay in the DOL rules.

But for us, we're proceeding where we need to, to be ready at those two phases. Our view is that while a delay is likely, we also believe that down the road, there will be some form and we support the some form of standard of care. And as a consequence, we want to make sure we see through the right investments to be ready and the end of eventuality.

And at the end of that process, when we look back in, I don't know, three or four years, I think what we're going to see is a lot more consumers having chosen to be in a for-fee advisory solution. That's terrific, everybody wins there.

I also see some consolidation in the industry, depending on what form an eventual rule takes place. We feel like we will be well-positioned to participate in that eventual consolidation positively as well.

All right, so let's switch over to the fun topic du jour. So on tax, let's just talk about the big issue of filer growth versus revenue growth. I know you guys talked about taking price this year. You still got a 50% positive delta from a competitive perspective.

You gained grounds even as February progressed, which I'm sure contributed to the confidence in the effective guidance raised. You also confirmed your long-term mid- to high-single digit revenue guidance. So just if you could dig any deeper down into the pacing of unit versus pricing balance longer term, and any other insight you could give us.

Maybe like taking share from competitor funnels, particularly the aggressive new free channels that would be helpful.

Let me start, Dan, with some thoughts there. And I'll turn it over to Eric for some additional wisdom, I'm quite sure.

As we've shared, we're very resolutely focused on paid filers, and we're focused there for the reasons that we've discussed, so I won't repeat those.

It does make share comparisons a little more difficult, right? Because what's going to be published and whatnot is total share. We're after paid filers, given our focus on monetizable clients. But we're also focused on a segment of the market that's interested in high-value services, interested in quality, and are wholly disinterested in getting sucked into a process only to find out as they finished that they've turned what they thought was going to be a zero dollar cost into something that's $50, $60, $80, over $100.

Our research tells us that there's a substantial market that has become quite jaded with the process of filing taxes. There is a group that would say things like, well, we know there's no free lunch and I'd sort of kick myself for getting duped in one more time as I went to a different provider thinking I'd pay nothing.

So we're focused there and look, it's -- changing our competitive position is not a two-week process is not a first peek process, it's a couple of year process. But we are taking steps necessary, we think, to move us in that position.

To get more specific though, around pricing units. Look, over time we realize that to grow value around the TaxACT business, we've got to do both. Specifically first, over time, we've got to be growing the right type of paid filers, process not tricking people into paying for something that they don't need. I want the right type of paid filers and being a brand that is worthy of people's trust will allow us, then, to extend into other services like Invest.

The second thing is the pricing lever. We did pull the pricing lever again this year. We've been pretty aggressive on a relative basis compared to our own price points over the past couple of years. Is there further room there?

I'm sure is the heart of your question and the answer is yes, there's room. When you look at the percentages, right? When you're even now 50%, maybe in a few days, we believe we will probably be 60% less in a number of different spots in this business.

There still is room. Is it the same type of leverage to revenue growth that we had last year and will probably end up with this year? No, it begins to diminish.

But there's still room there. And interestingly, from a consumer behavior point of view, if you look at brand A and brand B, and brand B is saying, hey, we're as good as those guys. You don't give up anything to come to us, but you're 80% less, or a number like that, it stretches credibility and people actually believe you're probably low quality.

And so it's important, actually, to continue to narrow that gap to a point where people look at us and say that's a good value, but I'm probably going to get a good experience. As we noted, we are proud about the product. Independent observers like PC Mag would say it's a great experience. So there's room there, there's less than has been in the last couple of years. But we've got to be really clear that while existing users definitely are not happy when prices go up, we're also focused on growing new users over time. And what I mean at that sort of price/value balance built into our brand.

I would obviously echo what John is saying. I think some of the other things, just to keep in mind, is we're off to a very historic start, slow start and certainly it was helpful to see the IRS statistics, so we could adjust in the early part of the season. When you're just looking at your numbers and how you're executing against your plan, having the market context is very important.

And so that did play out a little bit into market inefficiency in the beginning because as I said, the start was pretty historically low. John hit on the right point.

We're going to have to balance out volume growth over time with ARPU increases. And in fact, ARPU increases over time, we'd like to see those shift more towards value-added services, as well as people finding more value in our products and upgrading to products to better serve them. So that's really where we're focused.

Maybe to put it a little bit into context of -- and I'm not going to get into too much detail here, Dan, because it's early in the season and we are pretty much in uncharted ground as far as how late the season has started. But where we are seeing a lot of the softness is where we expected to. It's in new free folks and we deemphasize that this year.

So what that would also tell you is we're doing a little bit better in areas like paid mix thus far versus our internal projection. So any time you adopt a new strategy and you head down this route, obviously you hope it plays out to the best it can.

We went into it and have entered into a pretty challenging, slow start to the season. But I don't think we're too surprised that we have the ability to hit our financial projections. And very early on and can balance volume growth over time to get to those right filers that are actually going to see the value that TaxACT brings.

Okay great. I guess I will ask one more and going to jump back in the queue. So just to follow up on that last question, you kind of touched on this. We have started to see some more visible advertising for TaxACT which you did call out in your prepared remarks. So can you just maybe talk about which channels you are seeing success in, and any goals you have in terms of achieving a certain level of brand awareness aided or otherwise?

And do you think that some of the prior spend, which you highlighted is less effective due to the slow start to the tax season, could eventually monetize? Or given the competitive landscape is it really about remaining top-of-mind at exactly the right time when the consumer decides to proceed with filing?

Thanks, Dan. Definitely a lot in that question so let me know if Eric and I don't cover all the aspects of it.

As far as the effectiveness of varying channels, it was clearly --one of the opportunities is to understand how the channels work together and drive folks into the site, into the experience. And we've made a major step forward in the analytics we have around understanding the effectiveness of channel mix. It's not where we all want it, but it's certainly a big leap up from last year.

And so we're seeing good ROI in nearly every channel that we've been deploying this year. We're digging deep as the first peek comes down, to see what sort of fine-tuning we might continue to do.

We've also improved on our test and learn capabilities. So we've done a lot of testing around even price points, around messaging, around channels. And I think we're going to enter the second peak pretty well armed, with an understanding of how to continue to deploy the marking values most effectively. As you know, unaided awareness in offer TaxACT and for some of the players in the space is pretty low. Brand loyalty is also quite low. TurboTax turns, what? 5 million filers?

Greater.

Greater, says Eric. More than 5 million filers every year. And so there's some pretty big brand opportunities. And so, how do we address that being the third largest player?

Well, one thing we do is look to establish a far sharper, differentiated message so that when we are talking about the brand, people stand up and notice. You've probably seen that in the marketing and the PR.

The second thing is we need to get really good, and are getting far better, at optimizing channel mix and driving to completes. Once someone is in the process, we find that the transparency message, by the way, that we've gone to on the homepage and the landing pages is actually working far better than would a -- you know, start from a free message then sort of dupe people into paying more later, which has been the industry practice so that process element is working.

We also have an opportunity to -- on top of those efforts being more aggressive in PR, we've begun to do those sorts of things, so we get others carrying some of the weight for us. And we continue to focus on driving improvements and client loyalty as measured by [NPS] -- so we get a strong referral business.

So there's a number of tactics we are deploying to deal with the fact that hey, as a number three player, you're going to have lower awareness than others. There's one more. And I don't want to telegraph too much in the future strategy, but it's really playing from words that we've shared previously that we're looking to try to extend the tax relationship from being a sort of one and done, once a year event, into more of an ongoing relationship.

That will give us a leg up as we enter into the next year. If you've got a brand that you interact with exactly one time and you forget about 51.5 weeks, you're almost starting from zero from a brand point of view. So, you want to pull through and more engaged relationship across the year as a way of dealing with some of the brand challenges that really anybody faces in the category but we, in particular face, as being a relatively small player. Did that --

Let me just add one thing to your question on marketing efficiency.

I think that one of the key things that we are always looking at is, who has started but not finished? We kind of prefer that as our backlog. And always looking at the quality of our backlog. And to your marketing efficiency question, I'm not going to into the channels and where we're seeing it. But I will tell you, I think our backlog is healthier at this point than it was last year.

So I do think that there will be some throughput and I think it's on the pay side, that will finish a little later in the season and prove that some of that market inefficiency will actually pull through to be efficient marketing spend later on in the season.

Got it. Yes, that's super helpful. I have more questions, but I'll jump back into the queue if anyone else wants to ask anything. Thanks for the colors so far, guys.

(Operator instructions)

Alex Paris, Barrington Research.

Good morning.

Good morning Alex.

I have a -- first of all, thank you for the thorough overview. I have a few specifics, essentially follow-ups, starting with the balance sheet. Obviously, you've reduced debt nicely from the peak a year ago. You're roughly, if I heard correctly, roughly 4 times net debt to EBITDA.

Any changes to your goal for the balance sheet? The leverage ratio and the timing of that? And then, once you get there, what are your priorities for capital beyond that point? I think it was 3 times?

Alex, this is Eric. Absolutely 3 times is our target. I think we'll be in shouting distance of that mid year. I think we've had some things when we originally gave that estimate that we thought we'd be at 3 times mid year that have changed.

And largely, that's just transformational in nature. We are moving the Headquarters. That's got to weigh on EBITDA for the things that don't qualify for restructuring, but I think will be in shouting distance of 3 times mid year and that will be the time that we start to look at other capital allocation opportunities.

With that being said, I think debt will continue to be a priority, and that we can continue to pay down, and for a couple of reasons. One, 3 times net is still a healthy leverage ratio, or maybe more than healthy leverage ratio for a small-cap company. And so, I'd like to see that maybe get down another turn over time and so it remain a priority. But with that being said, I think what we've done over this period of time is executed and shown the cash flow ability of the business. In fact, you know, our number of free cash flow for this year is $83 million, and it shows that we can handle debt like that.

You couple that on top of the fact that we're not a cash taxpayer with our NOL, that we -- at that time -- at 3 times net, we can look at other things. And if the right MA opportunity that's in line with our strategy for TaxACT and HD Vest, and how we're trying to synergize those businesses, we'll take more of an active look at those types of things. But I guess the main takeaway is debt will continue to be part -- debt pay-down will continue to be a priority for us at that time.

And then lastly, the other thing I think, just to keep in the back -- that we can always keep in the back of our minds is just our interest carry. And so those dollars are things that stand in front of you utilization of our NOL.

So we're always cognizant of that and want to take every opportunity to lessen that interest carry when we can. And so you can expect at this time, we are continuing to look at refinancing opportunities and looking for opportunities to get that interest carry down as well.

Great. Two related questions. What's the NOL balance at the end of 2016?

$500 million.

All right. Then, what are your thoughts with regard to returning cash to shareholders at some point when you achieve your goals? Dividends, share repurchases. You know, at one time, you had talked about a philosophy in that regard. I'm wondering if we have any updates there?

I think once we get to that 3 times net, that will be one of the items we put on the table. I think given where we are, what would make the most sense is stock repurchases. But obviously, we will look at all the options and what we think ultimately is best for shareholders given the current strategy we have at the time.

I would say that if we go down that path -- in the past, we've tended to be opportunistic in those buybacks. We will also look at an opportunity maybe do something a little more structured so shareholders will have more visibility. But yes, that will certainly be on the table.

Moreso on the table when we get to that 3 times net, but I still think that we will lean towards debt as the prioritization initially. Debt pay down, that is.

Great.

And then switching subjects: guidance. We have guidance for first quarter. Your explanation for not giving 2017 a guidance is reasonable. You have new leaders, they ought to have a chance to look at the business and make their own budgets, but also that can be concerning to investors. Not having that full-year guidance. What could revenues -- revenues or little bit easier I think -- but what could earnings be, given investment plans and things like that?

Now, I know you had addressed it, but when should we expect more information with regard to full-year expectations?

Look, obviously Sanjay has been on the job for about three weeks now, and Bob will soon be on the job starting in late February, and so I think we can probably get some directional color of where our head's at next call and then really try to lock it down in our second quarter call.

Look, this is more of how much cost that we think we need to invest, but we're always going to be cognizant of what the return period is on that investment and we're not going -- I don't think you should read these conferences -- we're looking to change our margin profile materially, but we also don't want to have folks walk in and feel like they're handcuffed.

So I think in the past, we've shown pretty good discipline around our margin profiles of our business. I think you should continue to believe that we're going to show discipline, but with that being said, we also need to get these guys some room to run. A lot more clarity, really definitive clarity at the end of second quarter, but I think we should be able to give additional color at the end of the first quarter call.

That's right I just want to add that I certainly agree with everything that Eric said, and I just want to amplify that we are disciplined.

It's one of the things that we committed to and recommitted to as a Leadership Team back in the first call I was on. We're focused on driving shareholder value.

We know that, that has to happen consistently over time. And discipline will continue to characterize the decisions that we make, and there's quite clearly no sense of hey, here's a blank check. Go and figure out what you want, but rather, we do want to make sure these guys feel like, Eric mentioned, they can make some fresh eyes in these businesses and they're going to see some opportunities to do some things that we probably haven't seen before.

But the whole process here is going to be around discipline and creating value for shareholders, no doubt about it.

And maybe one last point on that, Alex, let's get a little bit on the HD Vest. I think also the encouraging thing is we're walking into a year that thus far, the market has been a tailwind. The other thing that we could get is another interest rate raise.

We're certainly not banking on it, but things like that provide opportunity for reinvestment. And I think that's another point as we think about coming back, is we have more clarity on the market. I think those reinvestments become easier for people to wrap their heads around is if we're getting that market tailwind and putting that back into the business, whether it be in HD Vest or in TaxACT.

Great. I really appreciate that color.

One last clarifying question, and I don't know if you'll want to answer it, but I agree: Shareholder value is driven by consistency. Stock prices are highly correlated to earnings. Given the latitude that you're going to provide your new leaders within the divisions, are you at a -- on a consolidated business level, committed to full-year revenue and adjusted earnings and adjusted EPS growth?

Let me make sure I understand the question, so it's from an internal projection standpoint?

Yes, essentially, I am asking for guidance when you chose not to give guidance.

Yes I know. (Laughter) (Multiple speakers) We are dancing now, aren't we?

That's why I said you might not answer it, but obviously there's some requirement or opportunity for investment on both sides of the business. You just reported the $1.06 in non-GAAP earnings per share. I understand the need to not want to give specific guidance, but given the latitude you expect to give to these new leaders, do you still expect to have growth without asking for specific numbers?

The non-GAAP level, absolutely. And I think a lot of that goes into, as well as how we think about capital allocation, which is another lever. We can execute on a few things there to drive some opportunity to put cash back in the business.

But yes, look, this isn't a signal that we don't believe we're growing this year, absolutely not. It's more of a -- we may see some modest compression in our margins to take advantage of it investment. But I don't think you should read the comments to believe that on the bottom line, that we're going to sacrifice growth this year.

That's what I was looking for. Thanks, guys. Good luck.

You bet. Thank you.

Thank you. Dan Kurnos, The Benchmark Company.

Thanks. Just quickly just one more on tax. John, if there's any way you could dig a -- it's probably too early to ask this. But if you go a little bit deeper than just your prepared remarks on any initial earnings from robo and how you think the entry of Credit Karma to the free space could disrupt the overall filing funnel?

And then for either of you, but probably maybe more for Eric, just of the corporate unallocated. I would've thought that you would have gotten maybe benefits from moving from Seattle to Dallas. I don't know if you're just being conservative right now, but if you could just walk us through the puts and takes as you have kind of worked through the budgeting process and sort of coming up with your new number? That would be helpful. Thanks.

Hey Dan, thanks for the question.

In terms of us going in order on those. On robo it is so early. I mean, we literally opened our first account within the past couple of days as the process has gotten up and running on the website.

The idea though, is it looks compelling. The simplest use case around someone that doesn't have an IRA, we know that because we've got the information. They've given us consent to use that information.

They're getting a refund. And in just a few clicks you can set up a robo account, and ultimately have that refund funded directly into that account. In this, we feel like it's timely because we're talking to people when they worry about their money.

It's relevant because we're making a specific offer to somebody, in the case I mentioned as a good example. It's easy, and it's coming from someone that they trust. So when all those elements are in place, like in most offerings like this, the key is probably going to end up being around making that user experience as simplified and as streamlined as possible, and we're working on that.

But it's quite early, literally days for when we have the -- days ago was the first account opening. We've seen a lot of interest on the site though. A lot of interest, people kicking the tires, getting the blueprint financial assessment done, and so we'll have some work to do around driving adoption. But the pipes are working, if you will, and we're getting some good initial interest.

On Credit Karma, also early to tell, right? Given the nature of their approach and launch, some observers have raised some questions around tax expertise, the sort of support that they can provide, those sorts of things. I would just direct your attention to some recent reviews on that.

Longer term, I think the big question is to what degree are consumers going to be willing to have their data used by parties that they don't know, to be hawked credit cards and key locks, and who knows what all?

Certainly, will there be some people interested in that? Yes, there will be. But our research tells us there's a whole cadre, a whole large multi-million filer segment that's going to have complete disinterest in opening oneself up to getting pitched offers. So we do not, as a competitor in this space -- but from a strategic point of view, they're one more player who's coming into the already-very-crowded free space, and simply put, that's not where we're focused.

We're focused on acquiring those savvy customers we referred to earlier. Those who value great products and great prices, and are kind of fed up with some of the industry games, of which Credit Karma is one more version.

And then, Dan, closing on corporate OpEx, I tried to give as much color as I could. I know that we're trying to trim that number down, so let me just -- to throw some numbers out just to make sure that folks understand we are going in the right direction here. Coming off of 2015, where we were $17 million-plus, exiting this year at, you know, call it just around a $16 million run rate if you take the fourth quarter and back off the nonrecurring stuff there.

Also my last call, I did call out that while the move long-term will save us dollars, in the short term, there will be some costs, and some costs that won't qualify for restructuring. And we guided those to $3 million to $4 million in the first half of the year. And I would say, look, right now we're looking into coming in towards the lower end of that range, which is good.

And then lastly, I think -- and I mention in the comments, is we had a transition of leadership at HD Vest, which actually was some additional dollars that weren't planned for when I talked at the third quarter, which is really a wane on that. Call it $1.6 million that wasn't expected going into the year. So I kind of look at this on a recurring and nonrecurring basis.

I get, we've had a lot of nonrecurring costs throughout 2016. And even back in 2015, getting the HD Vest done, there was a significant lift in doing that as well. But I do think, when we get through the first half of this year, and we do have our move done and we got all the in-play transition, and we got all the butts in seats, if you will, there is opportunity to get down to the to $13.5 million that I discussed.

And to put that in context, when we started, we were targeting a 30% reduction. I think now, given through the transformation, working with John to understand the operating model that he needs in place to be successful, we're settling in around $13 million, $13.5 million which is a high -- a 20% reduction. And I think execution wise, hitting the mark on where we wanted to be. It's just, the transition is -- look, it's taken some time and certainly the Headquarter move was something that was contemplated when we thought about it.

But timing is everything, and that decision was made in the fourth quarter last year. So we're going to have some costs to then come through 2017. But I think folks will get a really clear picture and you'll start to be able to see the scale into 2018, once we get through the first half of this year.

Yes, I will bug you little bit more about it off-line. I don't care about the nonrecurring stuff. I guess it's just more of a trade-off of Seattle for Dallas and the underlying run rate. But I know the call has run long, which is probably my fault, but if I could just ask one last question here.

Hey, Dan, just one thing on that -- we talked about it in the third quarter. I don't think you can chalk up everything here to a hard cost benefit.

There are some hard cost benefits, but there are many soft-cost benefits of John having his Team and the operating model that he wants to run. And really turning the Corporate Team into something -- you know, not to say we weren't valuable to the Business in the past, but make us more valuable to the Business.

You should see that in execution in the business units as well. So I understand that you want to see the hard-cost savings and there is some there, but there is also an important soft-cost element.

Look, I mean Eric, I think at the end of the day everybody understands that John has done a great job creating efficiencies both revenue and costs throughout the business segments, that it's coming through from an execution perspective. I guess that was embedded in getting to that [12] number that we thought initially. I was just trying to understand if there was any leeway on the hard cost just from the delta and the location shift. That's all.

I hear you on that. Let me just ask one last question because just a follow-up on something Alex kind of pointed out. Look, you guys -- your low end of guidance clearly points to growth. I don't think that's an issue.

The math from tax alone tells you that you're going to grow this year from both the top and bottom line perspective given how the contribution, just the bottom line unless HD Vest blows up. So let me ask you, John, clearly you guys have a very strong ROI focus.

So maybe the question to ask would be, kind of what are your ROI expectations on these new investments in terms of period and pay back?

Thanks, Dan.

So, I think you have to look at investments in any business over a portfolio and over a timeframe. And what you're going to want to have is a sense of diversification where a number of your investments can have a relatively quick payback. Both Bob, myself, Sanjay, Eric, we see those opportunities to create some of the benefit you get from what those call low hanging fruit, right?

We see that in the tax business. This is my first full season going through this business and we've already identified at least 10 things that we view as low hanging fruit ideas that don't take a ton of investment, but do take bit of investment to better capitalize on. Eric hinted at one around the backlog, where we can be far more systematic in how we touch those potential filers who were piling up in the backlog. There's a little bit of capability, we need to go get there.

Search engine optimization: We do a pretty good job of that today. Boy, there's some serious volume, and doing a better job. I just mentioned those as examples. But the way I look at things is look, every investment needs to have a solid ROI.

We can look at it and say within a bound of risk and execution, we feel good that this is a good investment. But we'll range those over investments that take more than one year versus those that can be in year accretive to results and make sure it got a good mix of those. Does that help on the question?

Yes, I guess just to pressure on that a little bit. We know, as you think about it, your investment in the back half of the year, when they come on board. I'm not trying to speak for the new segment heads.

Those are great hires for you guys, by the way -- just how you think about, kind of the balance of -- you know, do you have more low-hanging fruit opportunities near term? Or is it really just going to be hey -- I can go after this now, but I'm also going to 50/50 -- here's low-hanging fruit and I'm going to go after these long-term initiatives which is going to depress margins. And I'll get payback in 36 months, or something like that.

Okay, yes. The leaning will be far more toward low-hanging fruit and -- let's take TaxACT, right? One of the things that we need to have in place so that we hit tax year 2017 with a pretty big leap forward, in terms of competitive position.

So in the TaxACT business, again, just to illustrate: If we're talking to you guys in three months or six months around hey, we're doing some things to reposition the business and to make it far more competitive. And by the way, we all know on this call, it's off a very, very strong economic base, by the way. The vast majority of those are going to be around setting up tax year 2017 versus plans around tax year 2019, 2020, 2021, something like that.

All right. Perfect, that super helpful. Thanks for all your color on this.

I will shut up for everyone's sake now. Thank you.

Thanks for the questions.

Thank you. And that concludes our question-and-answer session for today. I'd like to turn things back over to John for any closing comments.

Thank you, there. Thanks for the questions. I really appreciate it. I just want to close by expressing my gratitude to our shareholders, clients, customers, advisors and employees. We feel extremely deep accountability to each of you. And the Team and I are focused on and quite optimistic about, by the way, driving to position the Company for long-term growth. Which will benefit each of our constituents. Again, thanks so much. I look forward to the next call.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a good day.