Avantax Inc (AVTA) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2018 Blucora Earnings Conference Call. (Operator Instructions)

And I would now like to introduce your host for today's conference, Mr. Bill Michalek, Vice President of Investor Relations. Sir, you may begin.

Thank you, and welcome everyone to Blucora's Second Quarter 2018 Earnings Conference Call. By now, you should have had opportunity to review a copy of our earnings release and supplemental information. If you've not reviewed these documents, they are available on the Investor Relations section of our website at blucora.com. In addition, this quarter, we'll be referencing a set of slides that are also available on the website and will be on display in the webcast viewer. I'm joined today by John Clendening, Chief Executive Officer; and Davinder Athwal, Chief Financial Officer.

Before we begin, let me remind everyone that today's discussion contains forward-looking statements based on the environment as we currently see it and speak only as of the current date. As such, they include risks and uncertainties and actual events and results could differ materially from our current expectations. Please refer to our press release and other SEC filings, including our Forms 10-K, 10-Q and other reports, for more information on the specific risk factors. We assume no obligation to update our forward-looking statements. We will discuss both GAAP and non-GAAP financial measures today, and the earnings release available on blucora.com includes the full GAAP and non-GAAP reconciliations.

Finally, I'd like to call your attention to a change in our naming convention as it relates to assets at HD Vest. In the interest of clarity and to make the categories more intuitive, the term Total Client Assets has replaced the previous term of Total Assets Under Administration, or AUA. The term Advisory Assets has replaced the previous term Assets Under Management, or AUM. We've also introduced a new category, Brokerage Assets, which represents the difference between Total Client Assets and Advisory Assets, or in other words, all Non-advisory Assets. For those of you looking at the webcast slides, the table on Page 3 summarizes the changes.

With that, let me now hand it over to John.

Thanks, Bill, and good morning, everyone. Blucora has continued to demonstrate strong momentum in the second quarter, posting double-digit growth rates and exceeding the high end of our guidance range on all metrics. Compared to last year's second quarter, Blucora grew revenue by 13%, adjusted EBITDA by 24% and non-GAAP EPS by 39%. Strong cash flow generation allowed us to further strengthen our balance sheet and pay down another $40 million in debt. Our net leverage ratio exiting the quarter was a very comfortable 1.5x, which is down from 2.1x last quarter and 2.7x in the year-ago period. Overall, we continue to execute the plan and are very pleased with the results.

Moving to the business unit level, starting first with wealth management. HD Vest continued to demonstrate momentum, growing revenue by 8% year-over-year to $92 million. With continued investment in the clearing conversion project, segment income also grew 4% to $13 million. As Bill mentioned, we have updated our nomenclature for our asset categories. Advisory assets, previously referred to as AUM, were up 12% year-over-year to $12.9 billion. Total client assets, previously referred to as AUA, increased 9% year-over-year and crossed the $45 billion mark. The levels for both advisory assets and total client assets represent new records for the company.

Net inflows into advisory assets were about $90 million in the second quarter and advisory assets as a percentage of total client assets were 28.8%, representing an increase of about 90 basis points year-over-year, also hitting a record level. As advisory assets continue to grow faster than the total, it is one component, along with trailing commission and sweep revenue that further reduces our dependence on transactions and increases our recurring revenue rate. Our recurring revenue rate reached 82% in the second quarter, up 100 basis points year-over-year.

A few additional updates I'll add here for HD Vest. First, you may recall that in our Q4 call, we announced that in our effort to expand our available market to serve accounting firms with multiple partners and offices, we added our first 2 firms. In the second quarter, we added 2 more firms to the platform, with another 7 firms now in the licensing stage. The 9 new firms have about $23 million in cumulative accounting revenue, with total estimated client assets, using an industry rule of thumb, of about $2.3 billion that the advisers can look to serve once all are fully licensed.

Second, we recently completed the second phase of our adviser reductions. As you'll recall, the first phase of reductions was tied to those that had de minimis assets and a debit balance with us. The second phase included a mandate that advisers achieve a minimum level of client assets within certain intervals, specifically $1 million by May. While we do have one more interval requiring $2.5 million by January 2019, we expect that the bulk of the reductions are now behind us. We could still see another 300-or-so reductions by year-end, then we would expect to return to a normalized environment in 2019.

Third, during the quarter, we announced our relationship with eMoney, which will provide our advisers with cutting-edge planning and collaboration technology. The platform, which we will pilot this month and launch concurrent with the clearing conversion, will make it easier for advisers to create and update holistic financial plans, aggregating household information in real-time and enable them to visually demonstrate projected benefits with clients through an interactive portal. Any time, you can improve the ability for advisers to provide a clear vision of a client's financial picture, it helps strengthen relationships and retention, and often drives additional client asset consolidation, along with interest in for-fee advisory services increasing total advisory assets.

Fourth, we will soon be launching 2 new advisory solutions for clients, including VestStrategist, a centrally managed solution for high net worth investors that boasts low fees, direct ownership of underlying securities and tax loss harvesting, while leveraging third-party investment managers, such as Putnam and Legg Mason as well as VestAccess, a low-fee, low account minimum managed solution that leverages automated investing or robo technology. We believe these will be attractive new offers for clients at both ends of the asset spectrum and may serve to further accelerate the shift of funds from brokerage into advisory solutions. Both solutions launch concurrent with the clearing conversion.

Finally, as we get closer to the clearing conversion date in late September, I'd like to provide a bit more detail on what to expect. To avoid a dual migration and duplicative paperwork, in June, we began to slow adviser and client transfers ahead of the conversion. As a result, we expect to see slower net inflows in Q3, followed by a stronger Q4 and possibly even overflow into Q1 of 2019.

Now that we've had 2 interest rate increases this year and have incremental guidance from the Fed on expectations for the remainder of this year and next, it seems like a good time to update our expectations for total clearing-related revenue benefits. As you'll recall, we've indicated that there are 3 primary ways in which we expect to benefit from the clearing conversion in terms of either increased revenue or decreased cost, including: number one, better capture of interest income on client cash or cash sweep in a rising rate cycle; number two, increased revenue share economics, including an opportunity to bring back on to platform assets currently held direct-to-fund or DTF; and number three, technology savings. As it relates to cash sweep, we indicated that each 25 basis point increase in the Fed Funds rate would equate to $2 million to $3 million in incremental segment income benefit that could either drop to the bottom line or enable acceleration in growth. Of course, as the Fed Funds rate increases, we'd expect also that client yields would move up, but at a far slower pace, in part to optimize balance retention.

Big picture, we'd expect the majority of the benefits of rising rates will result in increased segment income in year, with the bulk of the remainder focused on targeted investments to drive organic growth in the ensuing few years.

Looking at all the components in aggregate, for the fourth quarter of 2018, assuming the Fed increases the target range to 2.0% to 2.25% in September, we now expect a small net benefit of approximately $1 million, which compares to our previous expectation of breakeven. For 2019, assuming one additional increase in the target range to 2.25% to 2.50% by mid-2019, we now expect a benefit of between $10 million and $12 million, which compares to our previous expectation $6 million to $8 million. And for 2020, assuming no additional change in the Fed Funds rate, we now expect a benefit of between $12 million to $14 million, which compares to our previous expectation of $8 million to $10 million. The significant difference versus our previous expectation is primarily due to higher interest rate expectations as well as updated assumptions into the revenue share opportunity. We realize that the composite view of the Fed Funds rate is far more aggressive, with 2 or 3 more increases by the end of 2019. As we get through the transition, we expect to further update our assumptions and provide more detail.

As you can see, even annualizing the low end of our 2020 benefit assumption, we'd already be at a total incremental value over the 10-year contract of about $120 million in segment income. That's about $20 million above the top end of the estimated range we provided just a year ago and equates to more than 2 full additional years of segment income at our current run rate over that 10-year period.

I'd also point out that the incremental revenue sources from this agreement, cash sweep and mutual fund revenue share, will serve to further benefit our recurring revenue rate that I referenced earlier. Given the importance of this conversion and the sheer number of touchpoints across the business, we are dedicating an increasing number of resources across the organization to ensure a successful completion and mitigate any disruption to advisers in Q4. So overall, another strong quarter at HD Vest and with great opportunity ahead.

Turning to tax preparation. TaxACT completed a very strong tax season in the first half of the year, with first half revenue up 17% year-over-year, coming in a bit higher than our upwardly revised guidance from May of 15% growth, and almost double our original expectation going into tax season. This marks the 20th consecutive year of revenue growth for TaxACT.

First half segment margin came in at 57.3%, which was also above our previous expectation of 56.0%. We were pleased with our progress this season, which included a number of highlights, including: returning to growth in monetized filers; improving the customer experience with enhanced support and functionality, including a greatly enhanced mobile experience; improving paid customer retention; launching our BluPrint financial assessment to analyze tax returns and offer suggestions to improve customers' financial health, for which we received more than 2 million requests and identified average savings of $2,700; increasing professional e-files by 3%; and launching more than 10 new partnerships to improve customer acquisition and extend customer relationships, with new products and offers to serve them more holistically across their financial lives.

Now with tax year 2017 behind us, we are working hard to refine our plans to build on the success of this year and further improve our competitive position for next season. We'll share more detail on that later in the year, but a few areas of focus are around: providing more long-term value for our customers and clients with improved products and enhanced customer experience; in tax year 2018, our customers will find our products easier to use from start to e-file completion; incorporating our learnings on pricing, packaging and messaging; deepening and broadening our partner relationships; and expanding third-party offers through BluPrint and with a tax interview, to give customers more products, more value and more ways to improve their financial lives.

In closing, we had another strong quarter of continued execution across both businesses. We posted double-digit revenue growth, with strong operating leverage, strong cash flow and a strengthened balance sheet. HD Vest saw record levels of advisory assets and total client assets and our TaxACT business finished the first half with high-teens revenue growth and strong segment margin. And subsequent to the end of the quarter, we announced that we added 2 independent directors to our board, including Carol Hayles, the former CFO at CIT Group; and John MacIlwaine, the CTO at the Braintree subsidiary of PayPal. Overall, we continue to improve our business positioning and capabilities, and I remain very optimistic about the opportunities we have ahead.

With that, I'll turn the call over to Davinder.

Thanks, John, and good morning, everyone. I'll review our second quarter financial performance, our third quarter outlook and provide an update to our full year guidance. I'll also provide detail on our net leverage position at quarter end.

Comparing Blucora's current quarter results with the same quarter last year, our revenue was $157.8 million, up 13%; adjusted EBITDA was $52.8 million, up 24%; non-GAAP EPS was $0.97, up 39% on non-GAAP net income of $47.7 million, which is up 45%. GAAP net income attributable to Blucora was $34.9 million or $0.71 per share, representing improvements of 957% and 914%, respectively.

Looking at segment performance. Wealth management revenue for the quarter was $92 million and segment income was $13 million, both above the high end of our guidance range. Revenue for the quarter was 8% higher than prior year, primarily due to fee-based advisory revenue, which was up 12% versus prior year on higher advisory asset balances. As a reminder, advisory revenue represents fees earned in advisory accounts where HD Vest is the registered investment adviser. Commission revenue was up 6% year-over-year, primarily on higher trailing commissions reflecting higher asset values. Other revenue was up 3% year-over-year, primarily driven by higher cash sweep as well as increased mutual fund revenue share.

Net flows into advisory assets were $89 million during the quarter, bringing our year-to-date net flows to $408 million. Market appreciation during the quarter added approximately $140 million to advisory asset balances net of fees. We are pleased with our net flows performance, as this is an area of focus for us as we continue to convert brokerage assets to advisory assets as well as drive growth in new advisory assets. We ended the quarter with advisory assets of approximately $13 billion, which is up 12% year-on-year and up 2% sequentially. Advisory assets as a percentage of total client assets was 28.8%.

Total client assets for the quarter were $45 billion, up 9% versus prior year and 1% sequentially. As I previewed last quarter and as John mentioned in his remarks, we began to slow adviser transfers in June, ahead of the clearing conversion. The result of this slowing, combined with the departure of a large adviser and an unusually large end-client in Q2, caused net flows into total client assets to be slightly negative during the quarter, to the tune of about $45 million. However, we expect to see a corresponding pickup in net flows in Q4.

The clearing transition is on schedule for late September. Non-recurring, clearing-related expenses incurred in the second quarter were approximately $800,000 and we expect to incur another $700,000 in third quarter and about $300,000 in the fourth quarter. Although, as John mentioned, we expect to see a benefit in the fourth quarter that will more than offset these expenses and result in a full year net benefit of approximately $1 million.

Turning next to our wealth management outlook for third quarter and full year 2018. We expect third quarter revenue of $89.5 million to $92.5 million and segment income of $10 million to $11.5 million. For the full year, we expect revenue of $369 million to $377 million and segment income of $53 million to $55.5 million.

Moving on to tax preparation. TaxACT revenue for the second quarter was $65.8 million, up 22% versus prior year and segment income of $44.1 million, up 21% year-on-year. Both revenue and segment income exceeded the high end of our guidance expectations, in part driven by better-than-expected collection rates on our refund transfer products as well as higher product sales. First half revenue was up approximately 17%, with segment income up 15%, marking another good year of growth for TaxACT.

As John mentioned, we are working hard to build on what we learned from this tax season and further improve our competitive positioning for next tax season. As part of this, we plan to use incremental segment income relative to the plan to increase our investment in the business in the second half of this year. For the full year, we are expecting revenue for TaxACT of $184.5 million to $186 million and segment income of $82.5 million to $84 million, or a segment margin of approximately 45%. We look forward to sharing more of our strategy and 2019 expectations over the next couple of calls.

Finishing up on second quarter performance. Unallocated corporate operating expenses were $4.2 million, a bit lighter than we expected, due to the timing of certain items between quarters. For the third quarter, we expect unallocated operating expenses of $5 million to $5.5 million.

Moving on to liquidity. We ended the quarter with cash and cash equivalents of $89.8 million and our net debt was $175.2 million, which reflects another $40 million paydown during the quarter. This brings our total debt reduction year-to-date to $80 million, in line with our stated goal and demonstrating the strong cash flow generation of our businesses.

With that, let's turn to the consolidated outlook for the third quarter and an update for the full year. For the third quarter, we expect revenue between $92 million to $95.5 million, an adjusted EBITDA loss of between $2 million to $5 million, a non-GAAP net loss of $8 million to $11 million or $0.17 to $0.23 per share and a GAAP net loss attributable to Blucora of $18.5 million to $22.5 million or $0.39 to $0.47 per share.

For the full year, we expect consolidated revenue of $553.5 million to $563 million, adjusted EBITDA of $114.5 million to $119.5 million, non-GAAP net income of $89 million to $94.5 million or $1.80 to $1.92 per diluted share and GAAP net income attributable to Blucora of $42.5 million to $46 million or $0.86 to $0.93 per diluted share.

As a reminder, our outlook includes the following assumptions: a broad range for transactional revenue due to its variability; impact of clearing firm transition-related expenses; market volatility, including impact to net flows and cash sweep balances; an effective tax rate of 2% to 6% from GAAP net income attributable to Blucora; and our guidance for GAAP net income or loss attributable to Blucora excludes any impact to tax expense for discrete items and variable stock-based compensation granted to non-employee advisers.

Consistent with our previous messaging, we will continue to run the business to optimize for adjusted EBITDA. As such, we will refine our investments into each segment, along with our corporate operating expenses for the second half of the year. This concludes our prepared remarks. We will now turn the call over to the operator for Q&A. Sandra?

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

Couple of questions for you. First, maybe you can expand a little bit upon, I know you don't want to get too deep into next tax season stuff, but as far as new types of products, new partnerships or whether it's expanding most of the partnerships you've got. And if you could talk a little bit about how do you think about monetization of those partnerships over time? Is it a portion of the revenues of this business over time or does it become a more dominant piece of the revenues versus what you charge to customers, curious how you think about that allocation of revenues over time? And then one other follow-up. Can you just, kind of -- was a little quick on reading through some of the adjustments for second half here a little bit. Can you kind of just refocus on what are the key items for the extra expenses in the second half and the timing issues, just kind of re-go through those in a little bit slower format?

Brad, thank you for the questions. John here. I'll start with the first couple of questions there that you have posed and then turn it over to Davinder. I think the big picture thing around learnings from last year are these. Clearly, as I think back on last year, we hit a number of strides in a lot of areas. You're touching on some elements of that, but the client experience is far better. I'm particularly proud with the headway that we made on mobile. As you know, and I think this gets to the second element of your question, we launched BluPrint, we had a handful of new partnerships all around that. And so that is an area that we're going to continue to focus on in the coming tax season. I'll come back and double-click on that in a second. We also had a lot of learnings around packaging and the power of packaging. And that wasn't lost on us going into the season, it's just that as we looked at consumer behaviors, we had a chance to do some readjusting during the course of the year. And we're looking to fine-tune that as well heading into next year. As far as BluPrint and the partnerships and what that means for the long term, our goal was to launch, get some learning last tax season and see how fast we can grow it. We have not baked in much in terms of contribution, but we are excited about the long-term possibilities. We noted in the last call that we had 2 million of our filers essentially give us -- in fact, give us permission to look at their tax information to share offers with them. And yet we've really got to get through the balance of this year before we even know the uptick that we get on that, because while it's great to capture people in the moment in the tax season as they're filling out their -- and filing their taxes, we've got an opportunity now to market to folks that -- in different ways than we were before. Over time, could it become a more material contributor? Absolutely, that's our hope around it. I don't know that it would ever overtake. That may be a horizon too far out for us to be talking on this call, but we are optimistic about it. And one of the things that we think about too is now that we do have BluPrint, with a way to monetize otherwise free tax filers, is that caused us to think a little bit about our messaging and our go-to-market approach, yes, it might. We'll have more to say about that in our overall plans for next year later down the road. Davinder, would you mind filling in the second part?

Sure. Brad, so a couple of things. First of all, on the, on unallocated corporate expenses, I think there, the story is for the full year, we expect to be where we thought we would be. There were some timing shifts from Q3 to Q4 for things like [hiring expense] and things like that. Looking at the operating businesses, what we have is we have some expenses in Q3 related to TaxACT around initiatives that were not as called out before in the back half of the year or specifically in Q3. So I think that's probably what you're seeing there, Brad.

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

So let me just start with wealth management. John, I just want to kind of parse out some of the moving pieces here as you near the clearing conversion. Look, obviously, there's always some moving parts on the adviser stuff, and I know that obviously, you guys are going through your own kind of weeding out process, which clearly, you're seeing the improvement in revenue per adviser. But could you just talk about the impact that the transition, or the pending transition, is having on both sort of the existing adviser base, how they're preparing for it, and your ability to win new business? Obviously, you had a lot of -- some large client -- some large advisers come to you, and that seemed to be the trend. It sounded like you lost one this quarter. So is that having an impact now? And is that part of the reason why, once you get past this, the inflows pick up in Q4, maybe some guys are tabling coming over until you get past the conversion. Can you just give me some color on that?

You bet, Dan. Thanks for the question. I appreciate it. As far as the clearing conversion, as you might imagine, we're applying sort of full force around getting that done, getting it done properly. And a big part of that is clearly around educating and training our advisers so that they're ready. And it does have an implication for where people spend their time. It's just, it's unavoidable that people are going to have -- going to be spending some time in that training and to some degree, talking to clients about it. All of this is very sort of low-intensity efforts to the extent that most of our conversion -- most of the conversion work here isn't going to require any action at all by the end client. And that's a really important point here. The other strategically important point here is that our advisers are, on balance, really excited. They're excited about the conversion. They see what the enhancements are going to be for them in the adviser experience and the customer experience, that's around essentially taking some time off their plate, as working with us will become far easier, they'll have access to the eMoney platform and also all that comes with Envestnet. So different than a lot of conversions, you've got advisers here who have essentially been clamoring for us to make some improvements and changes and so that sets us up well. And as I note, but it's worth repeating without being garrulous about it, that we want to make this as smooth as possible for the client. And again, the vast majority of accounts will transfer over with no action at all required by the client. My second point upfront though was yes, there is some time that advisers spend in getting trained up on this, and we also have to be mindful ourselves around when we bring in new advisers into the platform. And as you might imagine, we don't want to have people come in and then immediately convert them. And so we have pushed some new clients, especially larger clients, to come in after we've concluded the conversion. And as noted, we have slowed some client transfers as well -- while advisers have slowed some of their client transfers as well, awaiting the conversion. And again, we pushed out some of our larger advisers as well. We expect that to come back. We expect that fourth quarter will be a good quarter for us and we might even push some of this adviser and end-client formation into the first quarter of next year. It remains to be seen, but we do have that distraction factor that does show up short term. But big picture, boy, we are really excited about where we're at. We're excited about what the capabilities are, on top of the economics, which is, as you know, are phenomenal on this new contract.

Got it. That's really helpful. And then one on tax before a balance sheet question. I kind of want to, again, not going into your game plan for next year, but maybe if you can give us some, now that you're past, kind of, again, even sort of the stragglers, the extensions, just your thoughts on marketing and some of the marketing channels. I know that it helped that your competitors took price this year, that allowed you to take price as well. And I'm sure you reinvested that in some of the unit growth that you saw -- paid unit growth, I should clarify, which is nice. But as you go into, as you start formulating your plan for next year, do you think it makes sense to work more -- branding, obviously, has been an opportunity for you guys. It's kind of a dead period, out of sight, out of mind. How early do you think you need to come back to market? How early do you think you need to stay in front of these people to make sure that you can improve your retention rates? And just any other general thoughts on sort of your early initial learnings from last year's marketing game plan and how you might apply it, heading into the balance of this year, getting prepped for the beginning of next?

Terrific, Dan, thanks. I mean, a couple of things here. As you note, it's too early for us to give you a whole lot of detail here, but when I think about learnings from a marketing point of view, I tend to break it down into mix, where we continue to refine the marketing channels where we're most present, and when. That when point is crucial in the tax business. There are certain moments of decision that people are making heading into and into each of the 2 peaks. And I think we've got a better understanding of the when factor as well as how to fine-tune our messaging to the different populations that are most paying attention during each of those 2 peaks. And the second thing is around that -- well, the second big point is around messaging. We're doing a very deep exploratory this year on what's the best way to connect to the top couple of segments that we tend to go after and continue to go after. Since it's such a broad universe, it's important that we focus on the (inaudible) of the market where we can be most relevant. And so that's the normal course, but I'm really pleased with what the team's doing this year to sort of redouble our efforts around creativity so that we can cut through, given the other players have so much more to spend than we do. The why has got to be focused on what the (inaudible) is, how do we break through and have our message heard? As we shared previously, another element of that marketing mix is gaining distribution outside of consumer marketing, and we've made some good progress with Fidelity and KeyBank last year. We look to more capitalize on those sorts of partnerships going forward so that we can drive growth outside of the hand-to-hand combat that market can also, can sometimes be like. And so we see opportunity, again, on both messaging and on the mix elements as well. One of the things I want to come back to is, in terms of that first question we had earlier from Brad, and that is, the fact that we can now market to a couple million prospects in TaxACT gives us a couple of touchpoints, 2, 3, 4 touchpoints, during the course of now to -- to tax season, to reach out. And we'll see if that has a benefit in terms of awareness and retention going into next year. I've got to believe it would, we have to prove that out. It's a different message than, "Get your taxes done," right? It's a different message, but at least we'll get our brand out in front of folks, and so we're cautiously optimistic that, that will serve us well over time.

Our next question comes from the line of Will Cuddy with JPMorgan.

So the SEC -- the SEC has a best interest proposal, the comment period is ending on that next week. And so recognizing there are a number of moving pieces, how are you thinking broadly about the proposal? And more specifically, how are you thinking about the changes on the usage of the word 'adviser' when you think about your adviser base?

Will, thanks for the question, John here. I really appreciate it. So we've been paying close attention, as you might imagine. However, given that we're still in the comment period, we don't have a whole lot to say. We know that things can really change a lot between the initial sort of proposal and what ends up happening. And so if there are some changes that come through around things like nomenclature, we'll have to, in all likelihood, change what we call our advisers. I'm not terribly worried about it. In fact, I'm not worried at all about what may come out of the proposal. If there are changes, we can adapt to them. And the thing that we see in -- in sizing this thing up is that we believe the SEC will come up with something's that practical and that's in the best interest of clients and I've got every belief that we can adapt to it as necessary. One other point is we work primarily with tax professionals, they're registered tax pros, they're CPAs. These are people who are familiar in working in a manner with their clients in which they put their interest first. There is a, in essence, a fiduciary type of relationship on the tax side, and so it won't be lost on our advisers how to behave properly. That's really sort of the fabric of who they are as advisers. And whenever it comes to change like this, it gives us a real sense of confidence that, even more so than maybe other firms, that we can adapt to it because of the nature of our channel, if you will.

Okay, that makes sense. So John, you had mentioned updated assumptions on the revenue share opportunity after the Fidelity conversion. Can you elaborate on some of those updates from the revenue share?

Sure, so by way of background, the opportunity that you're raising here is around all those billions of dollars of assets that are held off-platform. Not uncommon at all in IBD world. And for us, it is a big number. It's one of the things that enthuses us around the Fidelity national financial contracts, because we've got an opportunity to bring a lot of those now on-platform. And it's [attachable] planning that we're doing right now to -- and develop processes, procedures and encouragement of our advisers to go ahead and bring some of those off-platform mutual funds onto platform. And when we do that, we get an immediate benefit associated with the depth and breadth of the platform that Fidelity has and also due to the nature of the contract that we signed with them. And so we've got an economic incentive to move those assets onto platform. And large -- to be really clear about it, and also by way of making it more tangible, there is a large chunk of those assets that are with a large fund complex that's on the Fidelity platform. So that should make it, the first bite of the apple relatively straightforward in bringing those assets onto platform. And the second thing I wanted to mention on this topic is that you may have noted in the prepared remarks, we've got a new small-balance, diversified automated investment product that we'll be launching with the conversion. It's something made available through us by Fidelity. And there's a possibility that now would be the right time, given the low balance minimum on this, that for advisers who've got -- and clients who've got a couple of mutual funds held off-platform, now is the time to bring them on into a well-diversified portfolio that makes sense for the client and makes sense for the other constituents, so we see that as a big opportunity as well. Timing-wise, we anticipate that the majority of DTF benefit will be captured in the first few years as we sort of prosecute the opportunities there. We're advising and guiding our advisers on how to best approach that. And yet again, here we have go and do the work and make it so. Big picture, the overall economic benefit of the clearing conversion is associated with the change in our participation on the economics of client cash DTF material. It's not the lion's share of the opportunity, just, again, just for clarity.

(Operator Instructions) And our next question comes from the line of Chris Shutler with William Blair.

So John, I wanted to first touch on, I think the names you gave were VestStrategist and VestAccess. Can you just review again what those 2 offerings are and what the pricing will look like?

Sure. So in terms of the offerings themselves -- pardon me -- VestStrategist -- losing my voice, here, sorry -- VestStrategist is unified managed account. So it's a UMA program and therefore, it's a SMA essentially where our team over here at HD Vest has gone through what you'd expect, a rigorous due diligence process to identify the right managers that can be a part of the program. This is a first for us and so we've got the opportunity, as advisers have conversations with clients, to talk about not only here is a great set of mutual funds, mutual funds that you can use to create a diversified portfolio. On top of that, we've got strategy-specific managed accounts. And look, I recognize that these have been launched some years ago at other brokerage firms. I think you can go back, probably 8, 9, 10 years, when some of the traditional online brokers began launching these. And they do a nice job of providing additional opportunities for advisers to talk to clients on top of the additional opportunities for the client that ends up creating the benefits that you tend to see in accounts like this. In other words, the sense of direct control of the investments. There is the inherent tax loss and tax [work] harvesting opportunities inside that managed account, very different, right, than a mutual fund. As far as the price points on it, the way these typically work is you've got a platform fee, you've got what the fund manager charges and in models like ours, we advise we'll also have an overlay. And so the pricing is going, to some degree, depend on how those play out, where there is some flexibility, again, in a model like ours and some variability around the platform fee. But you can think about it as low as 70 basis points would be the sort of thing I'd tend to see. The marketplace could be higher than that. But when you think about an actively managed mutual fund and the typical OERs on those, you're going to tend to see this pretty well in range. Now the other program that we mentioned is also a neat opportunity for us. It's a chance to broaden our reach, but in the other direction, right? So managed accounts will tend to be more relevant to folks that have larger account sizes, a feeling of a need for more touch and feel and that sort of thing in their relationship. And so VestAccess, is the one that plays towards the other end of the spectrum. And real simple here, it's a robo offering that has a low account minimum sort of solution, where if you have $5,000 or more, you can put your money there. And I think we'll see some smaller accounts go there. I think we might see some people also just try it out, that hear about robo, maybe a bit attracted to it. And so that's the gist of that program. It's also going to be priced more in line with actively managed sorts of mutual funds. We'll -- we have to finalize the pricing on that one, but it's not going to be free, it's not going to be a couple of bps. It's going to be more in line with a typical advisory solution and the reason for that is twofold. Number one, it stretches way down in terms of asset minimum. And second, we have an adviser relationship as part of that offering that's a real relationship, with access to all the things that adviser can do, aligned with the tax preparation business. And so you've got to think about that as sort of an all-in solution that happens to be deployed in one of these portfolio types but with the right component of human touch in it. Quite different than an online-only sort of robo offering.

Okay. And then, John, in the TaxACT business, I just wanted to get your latest thoughts on the significant increase in the standard deduction the IRS is putting through and any thoughts on how you think that's going to play out for Blucora and the industry, both in terms of volumes and pricing next tax season?

Excellent. Thank you for the question there. So for us, we've had a lot of time to think about what to do and how to react to what was then hypothetical and then became the new tax law. And big picture, we have seen estimates that as many as 20% or so of 1040 filers would be eligible to file with a 1040A or a 1040EZ next year. And we'd shared that we've estimated a potential headwind of like 2% or so in terms of paid units, which we think is very manageable through both pricing and packaging. As a part of that, the introduction, one of the learnings from last year, the introduction success of the basic SKU proved to us just pointblank that people are willing to pay a value price for a quality experience with a guarantee. And so we expect packages in the industry to change a bit, pricing probably will change a bit to account for tax reform. We are -- the way we look at it is we're going to be able to easily overcome the impact of tax law changes. We are not concerned about it, given that in our learnings from last year, and the opportunity that this industry seems to have uniquely around pricing power and the ability to adjust pricing and packaging to react to changes like that. So also, the simplified form and that sort of thing really isn't going to have any implications on us. It's simply pushed into different schedules, but essentially the same content that would have previously been in the base form itself, if that makes sense. So big picture, very manageable. We're on it. We've got some flexibility. We're building flexibility into our go-to-market packaging, far more so than ever before, so that we can be nimble. And that's really a key strategic ability in the market, is to be nimble depending on what you're seeing in the marketplace and what you're seeing from competitors.

Great, and then lastly, just can you talk about capital allocation priorities from here, given that you're at 1.5x net leverage?

It's Davinder. I can take that one. So as we said in the past, we -- well, a couple of things. Number one, we said that we would pay between $80 million to $100 million this year. We've actually done that by the end of the second quarter. We typically pay first half and not second half because of the way the cash flows come in. We've also said that when we get to that sub-2.0 net leverage level, that we'll begin to think about other things that we might want to do. We're at that point right now. And nothing imminent, but I would say at this point, there are things that we can begin to look at, whether it's M&A, whether it's internal investment or even some kind of a return of capital to shareholders. Haven't really landed on any of those at this point, but it's something that we're looking at as we go into the back half of the year and begin to think about next year.

And we do have a follow-up question from the line of Dan Kurnos with Benchmark Company. And I'm showing no further questions at this time. So I'd like to return the call to management for any closing remarks.

Thank you, and thanks, everybody, for joining us today. We sure appreciate it. In closing, I'd simply like to thank our employees, advisers and customers that are at the heart of our success and make our business so enjoyable. We're pleased to report another strong quarter and look forward to speaking with you all next quarter. Take care.

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.