Avantax Inc (AVTA) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 2017 Blucora Earnings Conference Call.

(Operator Instructions)

As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Bill Michalek, Vice President, Investor Relations. Please go ahead.

Thank you, and welcome, everyone, to Blucora's Third Quarter 2017 Earnings Conference Call. By now, you should have the opportunity to review a copy of our earnings release, supplemental information, and prepared remarks. If you have not reviewed these documents, all 3 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 available on the website and will be displayed in the webcast viewer. These slides are a subset of the full investor relations presentation that was filed with our 8-K today. I'm joined today by John Clendening, Chief Executive Officer; and Eric Emans, Chief Financial Officer. In a moment, we'll hear brief remarks from both of them, followed by Q&A.

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 expectation. 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 available on blucora.com includes the full GAAP and non-GAAP reconciliations. With that, let me hand it over to John.

Thanks, Bill, and good morning, everyone. I'm pleased to report that we continue our positive momentum by delivering a strong third quarter. Growing revenue year-over-year in both business units and growing total Blucora revenue by 8%. We also continue to strengthen our balance sheet, reducing debt and lowering our net leverage ratio for the seventh consecutive quarter.

Both business units grew revenue nicely year-over-year. HD Vest continues to improve an important growth metrics with AUA and AUM both hitting new record levels. And TaxAct continues to use the off-season as an opportunity to enhance its offering and position itself for the upcoming season. Overall a good quarter for the business. Eric will go into more detail on our Q3 results shortly.

Taking a step back to look big picture, when I joined the company early last year, we had just completed the HD Vest acquisition and were in the midst of integrating that company, with plans to divest 2 others. In order to work through those execution challenges and share our progress with you, we established the 4Ds: Divest our legacy businesses in InfoSpace and Monoprice; delever and reduce our net leverage ratio from 6.3x to at least 3x; deliver on our financial commitments; and develop long-term business plans to drive growth and maximize value. I'm proud of what the team has accomplished having fully completed the first 2 Ds. Of course, deliver and drive were more evergreen in nature, and we made solid progress on both.

As we worked through those Ds, we made sure to attract strong, new leaders to run our business units. With Bob Oros, ex-Fidelity RIA Chief; and Sanjay Baskaran, ex-Amazon credit card business leader, both joining earlier this year. We've also attracted 4 new and very experienced board members, each of which brings terrific perspective and value to the firm.

Over the past several months, we've been working companywide to assess our business strengths and opportunities and develop our strategic initiatives for the near term. I'd like to give you a sense for some of what we see, but before I do, I'd like to quickly summarize where we've come from as a company and what we've done so far.

Turning to Page 5 of the deck, you can see that over the past few years, the company has been engaged in a significant transformation and repositioning. If you think back just a few years, it's fair to say that at least from an outside perspective, it was likely unclear what Blucora was or where it was going. We were selling consumer electronics and other goods through an online retailer. We had a web search business and a tax software business. It wasn't until last year when the vision started to take shape. We divested the non-core assets in InfoSpace and Monoprice and completed the integration of HD Vest, bringing 2 tax-focused businesses together into one company. You can see the benefit this had reducing our customer concentration, and at the bottom right, increasing our proportion of recurring revenue from 13% in 2014 to 77% for the last 12 months ending September 30. Taking stock of these exchanges as well as the metrics on the next page illustrates the dramatic nature of the transformation in Blucora.

On Page 6, you can see our consistent growth and improvement in key financial metrics, and how we have continued to reduce debt and strengthen our balance sheet, exceeding our goal of 3x net leverage ratio. Overall, the business is very strong and well-positioned as we move forward.

With line of sight to the completion of our transformation, we have now begun to turn our attention in earnest to more clearly laying out our vision for the future, with a focus on unlocking the substantial potential for sustained shareholder value creation that we see by better serving our targeted customers and advisors.

In order to give you a feel for what we see, my presentation today will be more in-depth than our typical call, and thus, a bit longer.

Like every effective growth strategy effort, we began by establishing our core beliefs, on Page 7. These set the frame for our long-term strategy. We believe that taxes are the absolute key to better outcome since they are such a large expense for Americans, and optimizing taxes is much more than once-a-year event. Yet, people today are seriously underserved at the peril of their financial futures. The tax preparation industry focuses consumers on maximizing the refund, an inherently reactive approach that ignores the first order goals of minimizing taxes, increasing cash flows and enabling better long-term after-tax outcomes so people can do more in their lives.

The brokerage and wealth management industries are co-conspirators, making the simplifying assumption that taxes don't exist because they deliberately avoid advising on taxes. Instead, they focus on the tired illusion of investment alpha.

Stuck between these 2 worlds is the consumer. Breaching these 2 worlds is only Blucora. We have an incredibly unique opportunity to disrupt these 2 outdated approaches. We can leverage the information naturally generated by filing your taxes to enable people over their financial lives to better achieve their goals, uncovering opportunities they and their advisors would otherwise miss.

The history of financial advice is like building a solid foundation for a home. It started with the building blocks of easily traded individual stocks. Modern portfolio theory introduced us to the value of diversification. Mutual funds and ETFs brought low-cost solutions for diversification and access to multiple asset classes. The endowment model taught us the importance of emphasizing investment in the asset classes with the best risk-adjusted returns, mindful of correlation. These represent remarkable evolution. But there is something very incomplete in that foundation. Conservation of taxes.

Everyone knows taxes matter in the real world. It is inescapable that you can only give great advice if you deal with taxes in regard to tax planning as well as wealth management, and critically, how these intersect. This is a missing element of the foundation, which when in place, will enable maximizing after-tax risk-adjusted financial returns, which is what all of us will live off in reality in our retirement. Because we fuse tax management and wealth management, Blucora is uniquely positioned to lead this next big innovation in financial management.

How will we get there? Through executing against 4 imperatives on Page 8. We call this our game plan and it replaces the 4 Ds. This happens to line up to ABCD.

Starting with A. Accelerate growth through the significant organic growth opportunities we have. Many of which I will share with you today while creating clear, competitive differentiation and value in each business, and capturing the synergies that exist between the 2.

B, build tax-smart leadership. As I mentioned, we believe we are the best-positioned company to deliver better outcomes through tax management and wealth management, along with how these intersect.

C, create one Blucora. We are no longer a holding company of unrelated businesses. So it makes sense that we look for ways to share expertise and gain efficiencies anchored in a common culture. We are on our way to building a high-performance organization as part of this culture.

D, deliver results. While we have evolved from the 4 Ds, we will retain focus on earning your trust by delivering on our commitments. Like any company that is moving through a similar degree of change, we'd expect to see some bumps on the way. But our focus and commitment are to deliver and to create a business that is constantly improving.

Now, with that as the big picture, let me dive deeper into our A element, accelerate growth by sharing perspective on each of HD Vest and TaxAct. HD Vest is a strong and structurally advantaged business. On Page 9, you can see our position in the market. We are a top 25 broker-dealer. While there are far larger players, we are the largest focused on tax-smart investing.

What makes us unique is our differentiated business model, on Page 10. HD Vest was the prime mover in creating a new type of advisor, tax professionals who expertly advise their clients on investing alongside tax planning. There are 4 key elements, and we'll move from left to right.

First, we have a grow-our-own-advisor approach, which we believe creates a strong cultural advantage along with a lower risk profile and better economics than what I'd call the rent-to-broker approach that typifies much of the brokerage world. In other models, the individual broker bids away all the economic rent. Our unique approach instead drives superior retained revenue and segment margin.

In the second column, when we add a new tax pro, they don't pull up the phone book; they already have a client base in their tax practice where they have a trusted relationship. So they are fishing in a stock pond, if you will, rather than having to cold call, like other channels are forced to do, in order to drive organic client growth.

Third, we all know that taxes matter. For many Americans, tax is our largest single expense. And for some, it's larger than our mortgage, groceries, and clothing combined. Given that, you would think that wealth management firms would advise on both taxes and investments in a way that creates a comprehensive plan. Instead, incumbents make the simplifying assumption that taxes do not exist.

We're different at HD Vest. Our advisors, since tax is second nature to them, embrace taxes and focus on leveraging that information into tax management alongside investing approaches that deliver tax alpha. This is important because it means when we're at our best, our advisors can give better advice than anyone out there.

And finally, HD Vest has cultivated a family-type environment. We have regional chapters, mentor relationships, support groups and a collegial atmosphere that not only helps advisors leverage each other and share best practices to get better, it also helps build additional loyalty to the company and their fellow advisors. When you put all these factors together, they turn into real and measurable advantages.

While we have a strong business and unique strengths -- turning to Slide 11 -- what makes us most excited is the sheer amount of organic opportunities we see to potentially further strengthen this business. It is unusual to come across a business like HD Vest that has been so successful and yet has this much visibility into organic growth opportunities. At the end of the day, in a business like this, all efforts to drive value manifest in 2 key ways: One, growth in total client assets, as measured by assets under administration, or AUA; two, increase monetization of those assets, as measured by return on client assets or ROCA. We see ample opportunities to grow each of these for years to come. Some of which will have high leverage in that they will drive both asset accumulation as well as monetization. Today, we'll discuss the top 4 of the organic opportunities we see for HD Vest.

Looking at box number one, over the past couple of quarters, we have talked about how we're shifting to looking at production per advisor as a more meaningful metric rather than a total number of advisors. Currently, our productivity per advisor ranks at the bottom of the top 25 independent broker-dealers. Part of this is due to the fact that most of our advisors also have a tax practice, but it represents an incredible opportunity for us to improve. We have 4 main focus areas: First is ensuring that we recruit, retain and develop the advisors with the highest potential. In June, we rolled out predictive models in advisor recruitment in order to identify which tax pros are most likely to be successful as an HD Vest wealth management advisor. We now have our first advisors on board using this methodology. Focusing on production per advisor also means not simply adding or retaining advisors that are not engaged or productive. While we don't set quotas for advisors, it's pretty clear when they're not engaged and just add unnecessary risk and distract our resources. We have begun a process to reduce advisors that are not engaged and who account for virtually no clients and assets. This process will likely continue over the next 12 months.

Second, we will significantly increase support for all of our advisors, focusing on those that are in the best position to grow. Some of whom are in the group we call the moveable middle with significant potential. By virtue of rolling off unproductive advisors, we'll be positioned to allocate more to remaining advisors. We're also upgrading our training development tools and resources and succession planning.

The third is through technology and infrastructure upgrades. This includes leveraging third-party technologies in areas that are not differentiated, and in many cases, are just as good or better than our current solution. We will acquire some of these technologies as part of our clearing firm transition that I'll discuss in a moment, and we'll leverage our proprietary technology where we are differentiated.

This brings me to the fourth item in the first box, which is leveraging our proprietary tax-smart platform. HD Vest created the industry where tax professionals deliver wealth management advice concurrent with tax management. We have an opportunity to more fully leverage that experience and provide holistic tax mark strategies and better outcomes for customers. I won't go into too much detail here, but it will involve new tools, models, and investment solutions to name a few.

So these are a few of the ways we work to optimize advisor success and productivity, which will drive both AUA as well as monetization. The opportunity here is significant. For example, increasing the productivity of half of the second quartile of advisors to the average of the first quartile could represent up to a $25 million segment income opportunity.

Moving to box number two. The second opportunity is significant for us. Transitioning to a new clearing partner, which we announced last quarter and is planned for third quarter 2018. We expect this will be a big win for end clients, advisors and the company. We will better achieve captured interest income in a rising rate cycle. Once we're on the new platform, each 25 basis point increase will translate into roughly a $2.5 million to $3 million expected annual revenue benefit, important in that our current arrangement caps our participation in future rate increases.

So the monetization opportunity is significant, but we'll also capitalize on new capabilities like highly integrated business processing, data aggregation and a world-class client portal. We know that advisors will do more business when we make it easier to get their work done, growing AUA. And we'll have the opportunity to bring direct-to-fund, DTF, assets fully on our platform over time. For those of you not familiar with the jargon, DTF assets are client assets that are held directly with a mutual fund company, with the client receiving a separate statement from that company. Shifting these to our platform makes it more convenient for the client from both a reporting and trading perspective and provides the potential for better economics for us while being cost-neutral to clients. There are currently more than $14 billion of assets that fall into this DTF category. We expect the new clearing arrangement to be accretive to the tune of $60 million to $100 million in segment income over 10 years. Which can drop to the bottom line or enable acceleration in growth? This is the equivalent of up to 2 years of segment income over this period at our current run rate.

Moving to box three at the top right of this slide, you will see our current end client penetration rate. The pie on the left shows that our average advisor is only servicing about 30% of the tax client base with wealth management solutions. And of those that are being serviced, only 50% of the client's investable assets are with the advisors. Simple math would say that moving to 40% client penetration could be up to a $20 million segment income opportunity per year, which gives you a feel for the total opportunity.

At the bottom right in box four, you can see that 28% of our total assets are managed, or AUM. Managed assets are significantly more profitable and predictable than non-managed. The best-in-class for a traditional IBD is 54%. Across the industry, assets are shifting to the advisory. While we have continued to benefit from this trend by offering new tools and solutions and making the process easier for advisors, we believe that we can see that gap begin to close. Every 5 points of improvement, even with flat AUA, could represent an incremental $5 million of recurring segment income.

So this slide gives you an idea of the types and amounts of organic opportunity we see at HD Vest and why we're so excited about the business. We have significant visibility and runway to achieve growth through a good deal of blocking and tackling type execution as well as innovation. In short, it's a target-rich environment.

As I said, our major near-term deliverable is the clearing conversion, the 1 of the 4 where we have the firmest stake in the ground with regard to economic impact. I share the others just to give you an illustration of the opportunities that we see long-term.

Turning to tax preparation. On Page 12, a quick look at where we've come from in the TaxAct business with 19 consecutive years of revenue growth. On the right-hand side, you can see that while units have been down the past 2 seasons, in part, due to our shift to higher-value customers, our segment income has continued to improve.

Looking at the market on Page 13, the digital do-it-yourself, or DDIY market, has been the fastest-growing segment and accounts for 40% of the unit volume as shown in the first bar. However, it only accounts for 12% of industry revenue as seen in the second bar, so there is substantial growth opportunity ahead. The industry volumetric leader is focused on growing the digital category with a particular focus on converting those that are paying $200 or more at the storefront, and likely don't need to. These are positive trends and we expect to see a continued shift away from manual or paper filing and storefronts, led by the volumetric leader. And we believe that any likely tax reform to simplify the tax code would only act as an incremental benefit to the DDIY space as people feel more comfortable doing it on their own, and as DDIY players like TaxAct offer customer support when and how they want to receive it. These market dynamics, along with industry structure, also create a significant pricing umbrella for TaxAct, which can be priced nearly 6% less than our digital competitors despite our price increases over the past few seasons.

Page 14 shows our increasingly differentiated model for TaxAct. The entire industry seems to be focused on targeting filers looking to file for free, or trying to attract customers on the promise of filing for free, knowing all the while many are likely to pay. While new entrants and others are chasing free and the market leaders target stores and free, we're targeting high-potential DDIY subsegments and those that pay year 1 and thus have higher lifetime value.

Pricing is an area I'd like to highlight. Those that say that there are a lot of bait and switch tactics in the industry are likely right in many ways. How many customers click on a competitor's ad and website for free and get to the end of the process and realize they need to pay over $100 to complete the filing? Or if they're lucky enough to file for free, find out that they need to pay $30 to get a copy of last year's filing. While there are inherent risks to the industry's forms-based pricing, with people not knowing what forms they need until they're in the process, we aim to be fully transparent with our customers. This has helped contribute to our 70% customer retention rate, and we believe positions us well to be successful in offering them additional products and services like BluVest, our automated investment offering.

Customer obsession is one of our core values and one that others have espoused as well. To us, it's more than product; it's how you treat people, with transparency and respect. Making people pay $30 to access their own information doesn't seem consistent with being customer-obsessed, at least not in the most positive way.

Technology and support vary widely across the industry, with technology ranging from clunky to very good, and support ranging from virtually nonexistent to good. Our offering is consistently recognized for its ease-of-use and reliability. We have several options for customer support and are getting even stronger on this front with enhancements for next season.

Finally, on this page, opportunities to deepen and monetize relationships. Our approach is backed by a true tax-smart insight and thousands of experts, who can advise on tax and investing simultaneously. And with home office capabilities serving over $42 billion in assets and $12 billion in for-fee advisory AUM. Examples include our BluPrint financial assessment, BluVest, tax-optimized robo offering and our ability to refer to HD Vest advisors for support or 360-degree tax-smart wealth management. There is much more to come including some new partnerships expected in the upcoming tax season.

Turning to Slide 15, business opportunities. As you might imagine, given the nature of the industry, we're more guarded on strategy for TaxAct. But in general terms, we are focused on the most attractive segments of the filer population based on new custom research and offer testing. Our goal is to drive the highest lifetime value customers, which begins with customers that are willing to pay year one. We are investing in our capabilities to provide more long-term value for our clients and customers with improved products and an enhanced customer experience. We're enabling speed, efficiency, and growth through investing in our technology, infrastructure and people including transition to the cloud, which is nearly complete and will be ready for tax season; upgrading our operations and support technology; growing investments in data-driven technologies, tools, and platforms to personalize and optimize as well as being vigilant around cybersecurity; enhancing our data analytics while improving marketing effectiveness. These are investments we're making in the business in the near term that we believe will pay off over the long term.

Our customer retention, we are at 70% paid retention but have room to improve that and win back former customers, including based on improved marketing effectiveness and learnings from last tax year.

Finally, we also see opportunities to diversify our sources of acquisition and revenue through broader distribution of our offerings and partnerships as well as opportunities like BluVest and referrals to HD Vest.

Hopefully, that gives you some insight into the opportunities we see and how we look to approach them as we move ahead. In closing on tax preparation, let me share some important context.

As we've have indicated in the past, tax year '16 was a test and learning year. We conducted multiple prices and offer tests and custom target market research. We explored changes in the marketing mix, message, and weights. We began investing even before tax '16 was completed in infrastructure and capabilities to improve our position and the customer experience. So we anticipate in the first half of 2018, strong revenue growth, backed upon deploying our learnings with a focus on LTV, as well as solid segment income growth, but at a lesser rate as we absorb our reinvestment into this business.

In summary, the company has completed a significant multiyear transformation, including executing on our 4 Ds initiatives. Our third quarter results demonstrated continued momentum, with upper single-digit revenue growth, a strengthened balance sheet, growth in key metrics with HD Vest and continued off-season preparation and progress at TaxAct. With that foundation and the strength of the team, we've assessed our business and laid out our strategic near-term objectives to leverage our differentiated business model to capitalize on significant organic growth opportunities ahead. Simply put, I remain very optimistic about our future.

Finally, one housekeeping item, leadership update before I turn it over to Eric. As you know, when we announced the HQ transition to Texas at this time last year, Eric indicated that he did not intend to make the move due to family reasons, but that he was committed to remaining completely involved in the management of the company well into late 2017 to ensure a smooth transition. As we approach November, and this being our last earnings call in 2017, Eric and I have agreed that his last day in his current capacity will be November 1. That said, I'm pleased to announce that Eric has agreed to stay on for at least another 4-month term in a consulting capacity, while we search for his successor.

Eric, is there anything you'd like to add?

Yes, John. Just let me add that I remain fully committed to the company and to ensure that we have a smooth transition. So in our 10-Q that we filed this morning, you will see both my resignation, which ends my tenure as an official employee, as planned; but also, a new consulting agreement. While there will be changes to the scope of my responsibility, there will be no change in my effort and dedication to assist John and the executive leadership team to meet near-term objectives.

So with that, let's dive into my prepared remarks, which will cover the third quarter results, fourth quarter and full year outlook for 2017, and color on our tax season revenue and segment margin expectations for the first half of 2018.

Starting with the third quarter results, including year-on-year growth, consolidated revenue was $90.2 million, up 8%; adjusted EBITDA of $1.6 million, down 32%, which is due to incremental investments in our tax business and the law of small numbers. Non-GAAP net loss of $5.5 million, or a loss per share of $0.12, which improved by 45% and 50% respectively versus the prior year. And GAAP net loss attributable to Blucora of $16.9 million or a loss per share of $0.37, which improved by 69% and 72%, respectively versus the prior year, which included discontinued operations.

Shifting to the balance sheet, we have cash and cash equivalents of $78.6 million, which reflects a $10 million paydown of our debt. Exiting the quarter, we had net debt of $274.6 million, and our net leverage ratio was 2.6x. As a reminder, our capital allocation focus is organic investment and debt pay down, so expect further deleveraging into 2018.

Let's turn to our segment performance, beginning with wealth management. HD Vest third quarter revenue was $86.8 million, up 8% when compared to the prior year and in line with the midpoint of our guidance range. Segment income was $12.4 million, up 7% and a bit above the midpoint of our guidance range. Third quarter revenue was highlighted by fee-based revenue, which was up 15% year-on-year, driven by strong net flows and a favorable market tailwind in the first half of the year, that also benefited our trailer performance which was up 8%. Transactional revenue was a bit soft in the third quarter and was down 8% versus the prior year, primarily driven by variable and fixed annuities, which were down 15%. The predominance of transactional revenue softness was in July and August, and I'm pleased to say, we bounced back in September and into October.

Finishing up on advisor-driven revenue, I wanted to touch on advisor production, which for the third quarter, was up 11% year-on-year and up 5% sequentially. This is a metric we are going to focus on as we go forward and has been included in our quarterly supplemental information release and our 10-Q filing. This metric is important given our stated focused on advisor quality over total counts.

Closing on revenue retained revenue was up 16%, driven by cash sweep, which was up 48% versus last year. We added $94 million in fee-based net flows during the quarter, which brings our year-to-date net flows to $614 million. We continue to be pleased with our fee-based net flows as this is an area of focus for us, as we continue to convert existing AUA to fee-based AUM as well as drive new fee-based assets. We ended the quarter with fee-based AUM of approximately $12 billion, which is up 17% year-on-year and up 4% sequentially. Fee-based AUM as a percentage of total firm AUA is 28%. Total AUA for the quarter was $42.7 billion, up 11% versus prior year and 3% sequentially.

Segment income growth was primarily driven by revenue and gross margin growth, partially offset by increased operating expenses as we continue to make investments in the business.

Turning to HD Vest fourth quarter and full year outlook. We expect fourth-quarter revenue of $86.5 million to $89.5 million and segment income of $11.5 million to $13.3 million. This translates to full-year revenue outlook of $341.3 million to $344.3 million and segment income of $48.2 million to $50 million.

In determining our fourth quarter and full year ranges, we considered several factors, including, but not limited to the following. A broad range of transactional revenue due to its inherent variability, significantly reduced the impact of DOL-related expenses as we expect a delay in the implementation, impact of clearing firm transition-related expenses in the range of $600,000 to $800,000, incremental operating expenses related to the additional -- related to additional investments identified during our strategic planning process, and market volatility, including the impact of net flows and cash sweep balances.

Transitioning to our tax prep segment. TaxAct revenue for the third quarter was $3.4 million, up 7% versus prior year and in line with the high end of our guidance range, segment loss was $6.2 million, up 42% versus prior year, but came in well above the high end of our guidance, in large part, driven by shifting costs to fourth quarter.

Turning to the fourth quarter, we expect revenue of $3.5 million to $3.7 million and a segment loss of $11 million to $10.5 million. For the year, we expect revenue of $160.4 million to $160.6 million, and segment income of $72.4 million to $72.9 million, or segment margin of approximately 45%.

Looking forward to next tax season or the first half of 2018, we expect revenue growth of 7.5% to 10% over the comparable prior-year period and a segment margin in the range of 55.5% to 57%. Our revenue growth and margin expectations include the impact of our adoption of ASC 606 revenue from contracts with customers, which eliminates deferred revenue for past digital archive service, or DAS sales as of the end of this year. For context, DAS revenue for the first half of 2017 was $2.3 million and projected to be $3.7 million for the full year of 2017, and flows through at a 100% margin. Normalizing our first half 2018 tax preparation outlook for this adjustment translates to 10% revenue growth at the midpoint.

Finishing up on our third quarter performance, unallocated corporate operating expense was $4.6 million, of which approximately $500,000 was transition-related costs that are not classified as restructuring expenses for accounting purposes. We expect fourth quarter unallocated operating expenses of $5 million to $4.7 million, which includes approximately $400,000 to $300,000 of transition-related cost.

With that, let's turn to consolidated outlook for the fourth quarter and full year. For the fourth quarter, we expect revenue between $90 million and $93.2 million; adjusted EBITDA between a loss of $4.5 million and $1.9 million; non-GAAP net loss of $12.6 million to $9.1 million, or $0.27 to a $0.20 (Sic-see press release "$0.26 to $0.19") loss per share; and GAAP net loss attributable to Blucora of $17.2 million to $15 million, or a $0.37 to $0.32 (Sic-see press release "$0.35 to $0.31") loss per share. This translates to full-year expectations of revenue between $501.7 million to $504.9 million; adjusted EBITDA between $97.8 million to $100.4 million; non-GAAP net income of $62.7 million to $66.1 billion or $1.32 to $1.40 per diluted share; and GAAP net income attributable to Blucora of breakeven to $2.2 million, or up to $0.05 per diluted share.

Lastly, there are a few things to be aware of for our GAAP net income and loss attributable to Blucora guidance. First, it includes the impact of restructuring expense. Second, GAAP net income, or loss attributable to Blucora, will be greatly impacted by variability in our tax rate, which can be volatile, especially on an intra-period basis. As we expect full year book income before taxes to be just north of breakeven. Given current estimates, our effective tax rate for the year is approximately 25%. But again, will likely vary as estimates are adjusted throughout the year. Finally, our GAAP net income or loss attributable to Blucora guidance exclude the impact of tax expense for discrete items and variable stock-based compensations granted to nonemployee advisors.

In closing, we are looking to finish up the year strong and carrying that momentum into 2018. We are focused on executing our strategies that we believe will lead to near-term success while enabling long-term growth.

With that, I will turn the call over to the operator and we will take your questions.

(Operator Instructions) And our first question comes from the line of Dan Kurnos of Benchmark.

I'm sorry, I'm kind of chimed into the question a little bit late here. Trying to listen to earnings calls at the same time is always fun. I'm a little bit floored on the tax guide. Eric, if I heard you right, and I didn't quite get to the bottom of the prepared remarks on that one, you're talking 10% of the midpoint app once you back out the ASC 606 adoption rules with a segment margin of 55.5% to 57%?

That's correct.

So with kind of what we've seen historically, obviously, you're going to lap the cloud migration costs in the second half of next year. Can you guys just talk about what gives you confidence in that forecast? I know you mentioned it a bit in your prepared remarks. But everybody moving to free, clearly, you guys are focusing paid units. Maybe some of your assumptions behind how you can achieve those results in a marketplace that is becoming, I think, increasingly frothy and competitive at the low end.

Hey, Dan, it's John here. Good to know you're a multitasker over there. I think you've probably done a pretty good job at that. So as far as the big picture here and what gives us confidence is this, as I mentioned in my opening remarks, last year -- and I've said this for a couple of quarters here, last year was a really critical -- last tax season -- test and learn opportunity for us. Whether it was pricing, offer, messaging, mix, I mean, there is a long list of tests that we conduct, that we explored every opportunity to figure out what can cause us to be able to optimize this business going forward. With an undercurrent of wanting to better moderate price increases. The umbrella is still a huge umbrella that the volumetric leader creates for us. But the level of our rigor that we had into this year with, from an analytical point of view, is what gives us the confidence that we've got sort of big picture around delivering those results. I've observed a couple of things. First is we had a chance to optimize the marketing mix. Look, we got to get into the season and see what happens, and we're going to stay nimble when we do it. But all those tests that suppressed, to some degree, paid unit impact tax year '16, is all going to be used to better optimize tax year '17. So that's point one. Point two, we're investing more in the customer experience than we've ever invested. And look, it's a business that is on the move. It's a competitive business, as you well know. Our preference is to keep it simple for the customer versus having dozens of bells and whistles. We get high marks from that when people review us versus some of the other players. And yet at the same time, we've not kept pace with adding value to the experience as we have taken our prices up. And we think that's probably hurting us a little bit with regard to retention, especially year-2 retention. And so we've got to focus on that. We've got a real clear picture of what we're going to get done. A big part of that will be enhancements to the mobile experience, which have been way behind and it's so crucial in that front end of the -- the top end of the funnel moving to a closed tip if you will. And then lastly, with regard to what gives us optimism for next year is the level of insight we have into these spots we're picking into the filer base. Also, and in some ways, it was a greenfield opportunity for us, frankly, and we've made a lot of progress in identifying where we want to go. And our belief is that our conviction is, we're going to have an offering that's second to none against some of those target segments. And so you combine those factors together with a moderation over time, that we expect to see in expenses since a lot of the work that we did, starting last year, even in tax year '16, would begin to ramp up. It's going to be some -- around areas that are more infrastructural in nature, catch up in nature, longer life cycle. So we'll start to see those expense areas, the growth of those update as well. So I got to say, look, given that was a test and learn year, given the plans that we've developed, our conviction for a positive future has not been stronger. Now everybody on the call knows that we've been declining in units over time. We've shared before that our goal is to look back in the not too distant future and see a U. The first part of getting to the upward part of the U is to be at that bottom part, that flat part. And we're looking to, again, big picture, grow units over time with a focus on paid units to get to the upper part of U-shape. And we expect to be in that sort of that flat area of the U-shape in the coming year based on our analytics.

Got it. That's really helpful John. And just I know that you didn't really talk about -- you didn't want to go into too much detail, as you've mentioned, regarded about sort of the tax strategy to an extent. Talk about some upcoming partnerships. Just sticking with sort of the tax theme. Just as we think about contributions to your outlook, some things like robo, from the cloud migration, from all the learning, how do you sort of benchmark that against just sort of the organic business shifts? What's being added from SMB versus sort of -- and robo, versus what's being added from just from improvement in paid filer retention and sort of the organic business?

So the way to think about it is that for tax year '17, the -- by far away, the impact we'll be seeing in the financials is on that core consumer business. We are optimistic and have a really high confidence level on the professional side, but the focus is really on consumer, and for a good reason, given the kind of the epicenter of our economics are all around the consumer business. It's more the out years, Dan, where we'll see some of those extension efforts begin to pay off and show up in the numbers. So near term, not a heck of a lot given what it takes to get rolling on some of those initiatives. The good news though is once we get the right processes established around extending our offer, that's going to be something that sort of has a bit of like a flywheel effect where we get the benefit, we get it on a recurring basis and it's additive over time. And so as we think about, and as you know from the comments, it's really our first 3-year strategy plan here. And we believe that we'll see in year 3, some material additive impact on some of those initiatives. But not so much in next year.

Got it. And then if we could just kind of ask sort of the same question on the wealth management side just in terms of your outlook. Obviously, you were pretty clear about the strategy, the goal and relative to where the near-term opportunity is, really centered around the clearing conversion. But just maybe sort of your thoughts in terms of time horizon. Obviously, you're going through a bit of a transition period as you really start implementing some of the tools you've invested on in this year. Just how we think about when we start to think marginal and then significant impacts from some of the advancements that you guys are sort of forecasting with your multi-year strategy.

Sure, Dan. Thanks for that as well. And I think the way to think about it big picture is this, then I'll do a double-click. When you look at this business, we see the sorts of opportunities that any broker-dealer would see with regard to driving metrics and metrics growth over time. And as I pointed out in the opening remarks, that's going to manifest itself 2 ways: AUA growth, organic growth and also monetization. On top of that, from a framework point of view, we also have a really special company here in HD Vest that has a strong source of differentiation for the consumer and also a business model that just generates better economics than others, and we see ample opportunities there as well. And so you can sort of think about this as sort of a shotgun with two barrels. One is capturing all that you can typically capture out of broker-dealer, and we see whitespace in every single sub-metric, if you will, in that regard. Then on top of that, truly differentiating and driving deeper on the source of differentiation in this business. Having a step back, your question's more around timing, but I wanted you to have that sort of framework in mind. Our biggest focus right now is on the clearing conversion, not only because of the size of the opportunity but because it clears the way for a number of other improvements for the advisor and client experience. On top of that, we're going to see impacts in AUA and AUM. We're going to see a better advisor experience. So taking time off of their plate so they can then deploy into business development. We can see a better experience for the consumer as well. And so the leverage in getting the current conversion right is huge. That said, we're not sort of sitting on our hands. A lot of the activity in upcoming 2018 and has also been the case this year is, how do we get more productive out of the resources that we have already? And that's around segmentation, in large part, around the advisor base. We expect to see some benefits from that in the coming year. Now look, we laid out what we call sort of an envelope exercise, how far can we push the envelope on some of these other metrics, just to give you a sense for the long-term future. We're not at that stage right now where we're are going to put some specific timeframes to those or metrics impact. So just know that as we get down the road here, as we make progress on those initiatives, we will be updating you. We've got a very robust operating plan process with a series of key initiatives heading into next year. Are we going to chip away at all of them? And again, as we get further into, we can be more disclosive on what we specifically see -- believe we're going to see over time. But look, everything's manifest into the guide -- will be manifested in the guidance when we get to that point around the full business.

Got it. And can I just ask one around the clearing conversion, John? I just -- I want to make sure -- look, obviously, you have familiarity with the clearing partner and the shifts. As you kind of going through this, you talked about optimizing the process. Do you have -- like as of right now, do you have complete visibility into products you'll be able to offer and just the way that you expect this thing to play out, kind of what will be kosher, not kosher with the new relationship and exactly how you plan to attack it once you get totally onboard. And I'm assuming that you're kind of planning right now to be able to hit the ground running once you're fully migrated over there to go after some of those low-hanging fruit which could manifest itself as early as the back half of next year.

Yes. So Dan, look, we had an incredibly thorough process to land where we landed with regards to the [green park] because it's so important to us. And we're working hard right now on the finer points on how we'll do the execution. That said, we have a ton of experience in conversions like this. We've got focus on the team who have done these conversions. In fact, there's a time in the not too distant past where our clearing partner was, in fact, Fidelity. So we've got that experience as well. And so we're charting up the specifics. But it's important to note that this is one of those conversions where, A, the advisor has been demand-pulling it as opposed to us pushing it on them. And then B, as we look at end-client impacts, the way we're going to be able to conduct this conversion is going to be one that does not create client risk. Sometimes, that's the case; that won't be the case here because we're not going to have to go back and re-paper all of our clients. That's the thing you look for if I think your question might be is their risk around a conversion. If you've got like an acquisition or something like that where -- in this business where you go and re-paper everybody, yes, that's a challenge because it's prompt for people to reconsider. In this case, the lion's share of the conversions from a client point of view will not involve re-papering whatsoever.

Yes. I, once upon a time, John, worked in wealth management. And yes, you are very good at reading between the lines, so I appreciate your thoughts on that. And then just lastly from me, obviously, you guys are doing a great job of paying down debt. I know that it helps maximizes NOL. It helps kind of underlying leverage story. I think you guys have talked sort of about a couple of things, sort of thought process sockets going forward. Clearly, you've got a lot on your plate right now with all of the moving pieces. John, you have talked historically about maybe looking at some of the other players in the space aggregating. I don't know if that's more a -- if that's been pushed out to a longer-term thought process, or you feel like you still have enough organic platform now where that's not a necessity. Clearly, debt paydown remain a priority for you guys. I think maybe 2x lever, you said, historically, Eric, would be -- might be the new target. And then just how you think about returning capital to shareholders once you to get the platform set up to a point where it's moving in a very positive direction from free cash flow generation, even more so than you already did?

So look some perspective there Dan. As you -- I want to hang on one comment you made there around needing to go inorganic. We see remarkable organic opportunities in both of these businesses. And so we can ride both these businesses and the synergy between them for the foreseeable future. That said, sure, we do want to be looking at the appropriate time inorganic opportunities so long as they make sense for shareholders and fits strategically. As we've said before, those will be focused around these 2 businesses and additive to them, but we've taken a very disciplined approach in running this business. And that's been around -- let's focus on first things first. And when you think about making the acquisition, what you want to have in place is the right leadership team, the right infrastructure/chassis, and you also want to have a healthy-enough balance sheet to be able to go do it. And so we'll be in a position in the not-too-distant future where that's a possibility. And I'd expect, over the course of the next year, I will be getting more clear internally and do the work internally around those opportunities, as well as taking a relook at overall capital allocation strategy. We'll have earned the right to go do that, especially as we get into the bulk of next year. Eric, how about you?

Yes, I would just say like, look, the target is to get under 2x. I think, 1.5x to 2x is where we'd like to find out ourselves, so you can imagine a world that we're not going to do too much other than pay down debt. But as John said, look, if something comes to market that makes sense for us and what we think our shareholder would expect us to look at, I think we've earned the opportunity to go and take a look at those opportunities. But John, I think, did a good job of summarizing and saying like we also got to be ready to do that acquisition. So priority #1 is organic investment. Priority #2 is delevering down. And I think the 1.5x to 2x target is where you'd expect us to get before we consider any kind of return on capital to shareholders.

(Operator Instructions) And our next question comes from Matthew Galinko of Sidoti.

You touched on the mass converting half of the sort of second quartile advisors up to first quartile performers. Can you talk a little bit more about levers for achieving that? Is it just mix shifting? New advisors in and kind of existing advisors down and out? Or -- and I guess just generally timeline on that and how investors should kind of put probability on those numbers being achievable.

So as I mentioned -- actually, thanks for the question. As I begin to lay down the last answer, the important part of this is around establishing the right foundation for advisors in working with us, and a lot of that is around the clearing conversion. The second key aspect is around segmentation, right? You want to line up your best resources against the biggest opportunities in terms of the advisor base, and it's a first for us. We've been much more the spread-like-peanut-butter-type company, and look, there's always that sort of unicorn, I suppose, out there where you find an advisor that's been dormant for years and suddenly becomes active. But the fact of the matter is we've not aligned our resources to the biggest opportunity. What will enable that is, in fact, reducing some of the advisor counts where we spent time with some advisors trying like heck to get them engaged, and it just doesn't pan out. You're going to know within a couple of years, even sooner, sometimes, if that does pay out. So Bob and his team, and Bob's been through this sort of segmentation approach by the way. And as our deep experience in moving from a peanut butter approach to one that's much more targeted. And it seems that impact comes from that. And so we will begin to see that impact in the coming year. But that said, a lot of '18 is around that foundation on clearing. It's around more reduction probably than addition. So we cannot do a big clearing conversion with hundreds of advisors or a couple hundred, whatever, advisors that we won't see being with us past that, to want to get that tidied up. And it's the outer years that we see more and more of this [fake] route as we get to experience in doing it. So we're on it. We're chipping away at it. It is the first year of going down this path, and a lot of it's going to be foundational in 2018. And we're not big fans of hockey sticks around here, so it's not like we're going to expect anybody to have some sort of big hockey stick in the out years ourselves, but we see serious opportunity there. And it's target-rich, right? There's opportunity at every single lever, and you can count on us to be optimizing across those, not only this year, next year, but in the years to come.

John, if I could add to that. I think the way to think about what we laid out there Matt is you want to know that your strategies are in line with big opportunities. And essentially, we've identified big opportunities for organic growth across our business, and that's what the -- the point of that was, is to say -- the strategies that we're going after as far as focusing on quality and narrowing our focus on what we believe can be high-performing advisors, is that a big opportunity? And the answer to that question is yes, it is a big opportunity. Next year, it's really about getting that foundation in place. Building upon that, there's a big opportunity that we can -- we'll start moving incrementally towards that in 2018. But what I hate to have happened is you go out there and you say, we got the less strategies and we don't think there's a big opportunity. The point of that slide is to say there are big opportunities, and that's what our strategy is going after.

(Operator Instructions) And I'm showing no further questions at this time. I'd like to turn the conference back over to management for any further remarks.

So thanks, everybody, for joining us today. I hope the deeper dive was helpful for you all in understanding our business and opportunities. We look forward to continuing to update you on our progress. And last but not least, while I know that he'll still be around in a consulting capacity, I'd like to sincerely thank Eric for his incredible contributions to Blucora over the years in his official employee capacity. Many of you know that Eric rejoined the company back in 2006, has been CFO since 2011. He's been a great partner and a leader in the organization, and his contributions have been significant. I look forward to continuing to work with him in a new capacity in the months ahead. Thanks, everyone.

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