Q2 2020 Blucora Inc Earnings Call

[music].

Welcome to the Q2 2020 <unk> core earnings Conference call. My name is carried out will be operator for today's call. At this time all participants are in listen only mode. Later, we'll conduct a question and answer session. During the question answer session. If you have a question. Please press Star then one I know touchtone phone.

We're not no call over 2 billion Shalleck VP of Investor Relations they'll you may begin.

Thank you and welcome everyone to Blucora second quarter 2020 earnings Conference call.

By now you should have had the opportunity to review a copy of our earnings release and supplemental information.

He did not reviewed these documents they are available on the Investor Relations section on our website, Florida I'm joined today by Cristbal, Theres, Chief Executive Officer, and Mark Newman 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 guaranteed as such they include risks and uncertainties and actual results and events could differ materially from our current expectations.

Please refer to our press release, and our other SEC filings, including our forms 10-K, and Q and other reports for more information on a specific risk factors.

We assume no obligation to update our forward looking statements, except as required by law.

Well discuss both GAAP and non-GAAP financial measures today, any further and presentation for today's call are available in Florida.

And include full reconciliations of each non-GAAP financial measure.

The nearest applicable GAAP measure with that let me hand, it over to Chris.

Thanks, Bill and good morning, everyone I.

I Hope you all think seat in the midst of all that was going on at this time.

Good core continues to operate effectively during the unprecedented times and our team remains focused on delivering on our mission to empower people to improve their financial well.

The challenges, we outlined last quarter stemming from a pandemic, including the extended tax season and reduction in interest rate.

Combined with the workplace shutdown for financial professionals did create headwinds for business I was expecting.

While these challenges of impacted our financial performance in the short term. We've also made meaningful progress in a short period of time to improve key business metrics strengthen our team and advance our strategic priority to position ourselves well for future growth.

Before I turn to results I'd note.

But given the seasonality of our tax business and then usual expansion of pack season.

To the third quarter, our financial results for pack Black and Blue core overall do not provide for consistent comparison prior period.

We therefore have included more information to make it easier to draw compare.

Starting first with tax preparation.

We embark on a shift in strategy for tax act during the taxi.

For a number of your growth has been driven.

Largely by price increases coupled with stable marketing spend deployed without the benefit of the most sophisticated direct marketing approaches.

More recently, there was a realization that additional investment in the product was needed.

We're pleased to report that we've seen the benefits of these initial investments in the recently completed tax season with customer satisfaction.

Version and retention all improving.

Going forward, our strategy will focus on a few things.

Continue to enhance investment and a winning product experience.

Deploying marketing spend in a sophisticated data driven men are connected to performance outcome.

Which may result in more spend when we see opportunities generated strong return on investment.

Engaging customers throughout the year to maintain relationships and bring it higher share of returning customers back at a lower cost.

And careful utilizing price to support growth.

The scaling up of our assisted offering being the primary driver.

Average revenue per user.

Unfortunately, the timing of our increase in marketing spend occurred just prior to the expense move taxi.

Causing customers to whom we have marketed to focus on things other than tax.

And therefore resulted in a lower return than expected.

That said there were several important learnings from this challenging pack season, upon which we will build in the coming years.

With that in mind, let's jump into performance for this discussion I will be speaking to the main taxis.

Which is through tax day, plus one fourth of July 16th.

Taxact improved on a number of important business metrics amid.

The coven 19 environment, However, our financial results were below our expectations.

Part of the lower than expected results stem from the covert.

And part related to tax act starting season out a position for marketing perspective.

To quantify this approximately $20 million of incremental cost was due to the effects of the coven 19 extended taxis.

Which included increased marketing spend.

Call Center.

Staff extension as well as incremental costs due to.

Executing it finished to this current season simultaneous with planning for next year.

Beyond these cobot impacts we increased marketing spend to address the weak performance through the first.

As we will discuss the good news is that we saw a clear signs of progress that we believe will position us for next season and beyond.

I will walk you through some of the highlights which include significantly increasing the volume of potential customers visiting our website.

Growing new filers for the first time since tax year 2012.

Increasing conversion rates, increasing retention rates, increasing NPS scores and strong operational performance among others.

So let's get into a bit of the detail.

The tax season started off as one might have expected with the beady eye wise segment of the industry showing about 3.6% year over year growth through March Twentyth.

Prior to the IRS announcing a delay in the funding.

Following that announcement industry volume dropped precipitously.

For slowly recovering and we estimate ultimately finished the season up 10.5% and unit volume excluding stimulus filings.

Overall, we estimate Iris filings increased 4% with a pro market declined by about half a person.

Hi joined the CEO on January Threerd, and a quickly became clear that tax act had started the season out a position from a marketing perspective.

A portion of this was driven by messaging that didnt resonate with early Susan filers, who tend to focus much more on free filing auctions.

There were additional challenges, including limited investment in top of funnel marketing activities, a lack of search engine optimization.

Insufficient measurement tools to support time, we spend optimization.

All of which generally done months in advance to prepare for the taxi.

We believe this led to a double digit percentage decrease in a number of potential customers visiting our sites.

Critical time season.

To address these issues, we course corrected made changes to the marketing leadership and altered our approach.

Beginning in March we invested meaningful incremental dollars and marketing to catch up and we're seeing positive results. Just ahead of the iris announcing the tax season delay.

The tax filing date extension negated, what we believe would have been a positive marketing impact.

The extension of the filing date also required additional investment over the extended period.

Well this is unfortunate and will depress our segment margin for this year. It is important to note that we believe these are short term effects to which mark will speak in them, but.

We identified several new marketing partners, including some weight in the season, which performed well and we're excited about the future.

One benefit of the extended tax season that we were able to establish the task we have new relationships approaches during the season.

We also added new technology and tracking to more readily optimized.

Our marketing in future taxi.

A few highlights on the marketing side include.

Website visitors were up 16% year over year, which is a significant improvement and remarkable given that we were down double digits year over year prior.

Through first Pete.

After first peak, we increased traffic relative to last year by 60%.

So first peak down double digits collapsed here and after that up 60%.

We were able to convert some of the increased users, but there are many ways. We can further optimized for next season to capitalize on this large opportunity.

In fact start rate is one of our largest opportunities and we will be a key area of focus.

Single digit improvement would yield a double digit impact in our total body.

Newer reactivated users grew by 12% year over year. This represents the first growth and this metric since tax year 2012, and a significant reversal from 16% decline we saw last season, and 14% decline Weve average since tack to your 2012.

Combining growing new units with increased retention rates mentioned earlier of a powerful combination that builds on itself.

On a customer experience side the sentiment from customers was very positive.

The product improvements put in place combined with significant new features drove increased conversion retention and NPS scores delivering the strongest customer experience metrics, we have seen in recent years.

Through July 16th and compared to the same day last year, a few highlights and customer experience include.

Conversion rate or percentage of starting customers that complete was up six points year over year.

Retention rate or percentage of filers returning from the prior year finished up five points year over year.

And our net promoter score or NPS was up 16 points year over year to what we believe it's the highest level in company history.

We're excited about these improvements, particularly because we expect that these metrics will provide even more benefit next year as those customers who had a positive experience are likely to come back a higher rate.

And maybe even recommend us to a front.

Overall through July 16th are totally filers, which includes consumer and professional filers, we're up about 1% representing the first year of total unit growth since tax year 2014.

Consumer refiled came in at about 3.11 million.

Down about 2.2% from 3.18 million.

Last season, and professional filers were up 5.8%.

Two 2.36 million.

We're pleased to report a return to positive total unit growth. Although we had hoped for positive consumer unit growth as well as a more favorable mix of paid versus free.

A few other items to note for this year.

And our pro offering Taxact pro we continued to do well and outperformed the market.

With our volume growing 6% year over year.

In a pro market overall that declined about half a percent.

This shows the value that we continue to deliver to this market and the benefits of the incremental improvements we've made in the product, including simplifying the on boarding process and data entry experience for pros.

We continue to be positive on the outlook and potential for a pro often.

In hybrid assisted as you may recall this season represented the first full year testing.

With the intent.

Being to gain significant learnings.

From interest and develop a plan and how we can launch at scale should we decide to do so next year.

The interest was so strong that we ended up expanding our cash by about 70% more than our original plan the season to do incremental testing.

We believe we have now learned what is needed scale.

And plan to launch it next year as part of our core offer.

Overall, we made progress that will benefit us in the future and these efforts have enabled us to catch up meaningfully from the flow start, but not fully relative the targets we had set for the business.

Going forward, we believe we have the right team in place.

And feel good about the <unk> this year of learnings.

We will come into next tax season, with product and marketing both optimized and working in concert.

We believe our new marketing team utilizing data driven marketing approaches and our new marketing partners will help us maximize performance.

We've already proven that we can drive significantly increased traffic to our site.

So we will be very focused on driving improvements in our start rate.

As you attract new customers, we will continue to delight them with our improved product experience in fact, we expect that next year.

We will really benefit from this year's high NPS scores and improvements in conversion and retention as customers right great experiences this year come back and complete the higher rate.

During the off season, we plan to continue to make improvements in the experience, which we believe will help drive further gains and customer conversion.

I continue to see a great deal of opportunity for this business over the medium to long term.

We anticipate that product improvements will drive higher retention rates going forward and new initiatives, such as assisted tax preparation will drive higher ARPU.

When combined with improved marketing efforts and additional year round engagement. We believe that these improvements will put us in a stronger position.

Grow paid units and revenue in coming years with less reliance on price.

We have shifted to a more sustainable growth strategy for Taxact and it's important to note that this is a multiyear journey.

While we are satisfied many of the metrics on which we measure ourselves improve meaningfully year over year, we're not satisfied with the near term financial performance and fee room for continued improvements across the business.

With the key areas of focus on increasing or start.

We will also be focused on driving higher share of paid units given that this is the second metric on which we did not see the results were looking for this taxis.

Turning now to wealth management second quarter wealth management revenue was 115.9 million with segment income of 11.79.

Second quarter results now reflect both qualitative and quantitative covert related impacts.

Present in our results last quarter.

This is mostly due to timing of things like interest rate changes and billing cycles.

This includes advisory revenue, which is based on Q1 and being market values, and which we expect to increase in Q3 due to the market rebound.

As well as sweep revenue, which now reflects the effective six rate cuts in the first quarter.

While we're not immune to these expected market forces our focus has been on managing what we can control and successfully navigating through this unprecedented times our financial professionals.

Financial professionals as the term we are using going forward to replacement term advisors.

This change has been instituted to comply with the Fccs.

Regulation best interest, which went into effect for the industry on June Thirtyth 20 Twond.

Our service the finance professionals have been uninterrupted through this period and improving in several areas, allowing our financial professionals to be as successful as possible in this environment.

In fact, our processing times are at historic lows.

Our financial professionals for had a great deal on their plate over the past quarter working through an extended tax season, helping their clients navigate through market volatility and helping clients with things like PPP loans.

There are focused on serving existing clients combined with reduced ability to meet in person.

Has slowed prospecting as well as the ability to sell more complex products, such as alternatives annuities and insurance.

With the overall market for these products seeing softness in the quarter.

This affected our transaction revenue, which was down more than 35% sequentially.

While transaction revenue is always the most difficult to predict with the distractions of tax season behind our financial professionals, we expect to see some improvements and transaction revenue in the second half.

However, the ongoing limited ability to meet with clients may temper the bounce back.

These factors also had an impact on our asset flows in the quarter.

As we saw net outflows from advisory assets of about 285 million.

And from total client assets of about 1 billion.

We believe the outflows were driven by a combination of factors, including a reduced level of prospecting.

Limited in person meetings.

Clients pulling funds for cash flow purposes as.

As well as a few regrettable financial professional departures in the quarter.

Advisory assets as a proportion of total client assets ended the quarter at 38.8%.

A few additional updates I'll call out here for wealth management.

First.

I remain incredibly proud of the team and their ability to continue to effectively work.

In this remote environment.

As I mentioned, our service has not only been uninterrupted.

It has improved in many areas such as processing costs.

During the quarter the team fully rolled out its regionalized service model, which provides an integrated team approach to deliver high value service to our financial professionals.

The next level service model utilizes dedicated high touch teams with a quarterback or service comps here based on the size complexity and geography of the financial professional firms to provide enhanced end to end experience on incoming requests as well as proactive relationship manager.

We believe this upgraded experience will create additional stickiness with financial professionals as they see and feel the value of this program.

Our growth team as pivoted to connecting the financial professional community to each other and our team is virtually and utilizing these forms to let financial professional know about the teams available to help them develop plans for new clients or new funds.

We have seen a strong increase in utilization.

In recruiting we were able to bring in 28, new financial professionals in the quarter, including eight new tax pros and 18 transfers.

Recruiting was a bit slower than normal a quarter due in part the testing centers being closed due to covert 19.

As well as tax pros continue to work through the extended taxis.

In addition.

To the individual financial professionals, we also brought on to larger accounting firms.

With combined accounting revenue.

Up 7 million.

Representing a prospecting opportunity of approximately 700 million in total client assets.

In addition to these highlights.

Just at the end of the quarter, we announced that age Kfs acquisition has closed.

I know we've mentioned the numerous benefits in the past, but to summarize we believe that this transaction.

Adds a fast growing highly profitable are a business to our company.

Increasing our addressable market and providing new organic growth opportunities.

The business has been growing assets that double digit rates.

With adjusted EBITDA margins of about 30%.

It's still the key hole in our offering TCPA firms, allowing us to serve CPA firms and tax professionals either through our event tax model, where she pays on the full wealth management process or SRU H CAPHS assess where the SCPA can refer clients to one of our in house, it's kfs advisers and receive a recur.

Revenue stream.

As a result, we no longer have to leave a significant number of prospects on the table.

It gives us a new way to monetize the 700, a retirement plans our financial professional start each year for their clients and this represents an incremental revenue stream for our financial professionals.

For financial professionals seeking options for their succession plans, we can now provide an off ramp for them.

Our financial professionals, who have plateaued, it's given boy to continue to provide wealth management services to their clients.

In both instances, we have a new way to retain assets and a potential improve margins when transitioning assets from the affiliate model to a captive ARIA.

The HCAT Fest transaction closed after the end of the quarter and is not included in our financial results.

However, at a high level, which kept US ended the quarter with approximately 4.5 billion in total client assets up from about 4 billion at the end of Q1 with positive net flows and advisory assets and retirement plan services.

And a growing number of and clients with about 75 partners SCPA firms.

Mark will provide a few additional details in a moment.

As we look ahead in our wealth management business, we plan to.

Improve our service and operational performance to delight, our financial professionals.

Align systems processes, and technology to improve efficiency and scalability.

Maximize financial professional performance by providing tools, including supporting efficient prospecting increased client penetration and wallet share.

And with the H. past Fs acquisition now closed focused on completing our integration efforts without interruption and setting the business.

Up for success.

To summarize at the end of the six month Mark in my tenure and in an unprecedented time I'm pleased to say that we're navigating the current environment well.

We have a dress skill gaps by filling key positions with strong leaders to find our strategic priorities and realigned our business to support detailed execution plans.

We are focused on executing with excellence in the second half of the year.

The best position the company for growth in the coming years.

We have set our sights high as to what we can achieve as an organization to truly empower our customers to improve their financial wellness and have a great deal of work to do.

Our progress has been meaningful, especially amidst this environment, but we recognize there are key areas on which we need to accelerate our progress.

And our tax preparation business, we do not expect significant margin impact stemming from the impacts of coven 19 on this correction tax season to reoccur.

With the tax season behind US we have turned our full attention to walk you through the fall to execute on improving our start rate and the share of paid units positioning ourselves for strong marketing start for the season.

In wealth management, we will continue to roll out our improved financial professional experience programs.

Begin the important work of expanding the HCAT best model and ensuring that we have the systems aligned to enable our financial professionals to gain the efficiency they need to build their book of business.

With that I'll turn it over to Mark.

Thank you Chris.

As Chris mentioned with the change in tax season timing. This here our second quarter results do not include the end of tax season, and therefore, we believe that a number of comparisons to prior periods are not meaningful outside of wealth management.

And I'll try and called that out where appropriate.

Before I get into results I thought I'd pause and reflect briefly on my first three months in the role.

I consider myself fortunate to have joined a business with such dedicated people.

Through a difficult environment, our employees have never wavered in their mission to delight our customers.

We have an ambitious team one that sees the promise of the great things we can accomplish.

And that's visible in the investments that we've made across the business as we headed into 2020.

Sharing their optimism and I'm looking forward to the journey that were on.

At the same time, we understand the importance of discipline and purposeful planning.

Investing for the long term.

And lastly, the value our investors place on profit and cash, which as Chris mentioned earlier. We believe you can expect more as it relates to our tax Act business next year.

Well I've learned a great deal over the last few months I look forward to the opportunity to share more perspective over the next two quarters as they work through our 2021 at the on planning.

That said in the short term my team and I are focused on ensuring optimal efficiency prudent spend management and a constant focus on prioritizing spend toward our key growth priorities that Chris share just a few moments ago.

Longer term, our focus will center on our data management capabilities.

Showing that we have the data to inform both wheel time decisions across that dynamic markets within which we operate.

A long term capital strategy plan that aligns with our growth aspirations and lastly, a commitment to scale will be realized the benefits of scalable operating models across both of our businesses.

Now turning to our results.

I'll begin with consolidated results for the second quarter.

We recorded revenue of $161.1 million.

Adjusted EBITDA of $12.6 million.

Non-GAAP net income of $4.5 million.49 per diluted share.

GAAP net income of $49.6 million or one dollar and three cents per diluted share, which includes a large noncash income tax benefit of $59.7 million, which I will describe momentarily.

Now given the meaningful and varied and attack that the net operating losses or I know wells has had on our reported GAAP net income results over the last few quarters, Let me take a moment to walk you through some of the mechanics.

This is much to do with our specific situation as it relates to our noel's compounded by the phasing of our profit throughout the year.

May recall that in the fourth quarter of last year, we had a 49 million dollar tax benefit.

This was driven by the fact that we had now had three consecutive years of positive GAAP earnings.

So it was now considered more likely than not that we would utilize our wells, we could release evaluation allowance against them.

And the first quarter this year changes in financial markets brought about by the Cobot 19 pandemic as well as other factors caused the amount of and a wells expected to expire in 2020 to increase.

Driving a corresponding increase in our effective tax rate.

Applying inflated tax rate to our first quarter income resulted in a high tax expense.

Q2, we refreshed our forecasted annual profit before tax, which updated our annual effective tax rate calculation.

Applying this revised rate to our year to date profit resulted in a non cash benefit of $59.7 million for the three months ended June Thirtyth 2020.

Turning now to segment performance beginning with tax preparation.

Tax Act second quarter results, which reflect costs of the extended season, but do not include Endosee revenue.

Included revenue of $45.2 million with segment income of $6.7 million.

We expect full year revenue to be able to $203 million to $206 million range.

Down about 2% to 3% versus last year.

I would like to point out that reported growth is not apples to apples.

As you may recall heading into the season, we decided that to align more with a broader market, we would remove our online basic skew.

And that would result in a headwind for the season.

Normalizing for this adjustment as well as for the simple techs divestiture would equate to in year over year growth of between 4% to 5% in the revenue.

Segment margins for the year is expected to come in at about 23%, which includes approximately $20 million an incremental costs due to the effects of covert 19 than it said the taxi.

These costs were comprised of increased marketing spend call Center staff extension as wells executing both finished to this current season, while planning for next season simultaneously.

The other major driver of the margin reduction was our increased investment in marketing.

What's the team had planned before cobot.

They spend was required to re accelerate our growth.

As noted the results were distorted by koeppen, but we remain optimistic about the proof points we've seen.

We expect to healthy rebound in segment margin next year from these levels and while we have yet to complete our financial planning for next year I would expect in a normal tax season, a minimum of $20 million of additional segment income for tax back next year.

Moving onto wealth management.

And tax second quarter revenue was $115.9 million with segment income of $11.7 million.

These results now include the impacts of the lower market levels as of March 31st 2020, as well as interest rate reductions during Q1 that did not impact our Q1 results.

On a pro forma basis when normalized for the acquisition at first global this represents a year over year revenue decline of 20%.

This was driven by a 91% decrease in sweep revenue as interest rates declined to essentially zero.

An additional negative driver to the quarter included a 35% decline in transactional Commission revenue.

Given the fact as Chris mentioned earlier.

Lastly entered or operating model, which focuses heavily on SCPA financial professionals extended taxis and created a headwind whereby our financial professionals were helping existing clients through tax season over longer period of time with limited ability to meet a person, making it difficult to drive the business development activities.

Both with existing customers as well as attracting new ones.

Lastly, advisory and trail revenue, which were down 8%, an 18% year over year, respectively, reflecting a lower market levels at the end of Q1.

As Chris mentioned, we saw net outflows from advisory assets of about $285 million typical total client assets of about $1 billion during the quarter.

We believe a combination of factors led to the outflows, including reduced level prospecting as financial professionals focused on supporting existing clients.

Feeling person meeting planes pulling funds for cash cash flow purposes, as well the fewer credible financial professional departures.

In recent quarters, the vast majority about 90% of departures, but then smaller financial professionals with little production.

This quarter there were few in the region, where credible category that departed following some of the integration disruption as we brought first global and HD vest together.

Our primary focus is on improving the event text financial professional experience, which we believe will drive improved retention in the longer term.

Advisory assets as a proportion of total client assets ended the quarter at 38.8%.

Finishing up on second quarter performance unallocated corporate expenses came in at $5.8 million lower than in recent quarters.

Due to some actively manage cost savings in this uncertain environment as well as the timing of certain expenses between quarters.

Also had about $4 million, an unusual expenses, including 1.7 million an integration costs related to first mobile.

1.1 million and transaction related costs associated with the acquisition of HCAT fast.

During the quarter, we utilized 55 million and cash to fully repaid the outstanding balance on a revolving credit facility.

And we had about $11 million property plant and equipment expenditures related to our new headquarters building.

We ended the quarter with cash and cash equivalents of $90.1 million and our net debt was $299 million.

Our reported net leverage ratio at the end of the quarter increased to 4.4 times.

Primarily due to the extension of tax season, and therefore, our last 12 month EBITDA as a quarter and does not include a full tax season.

As it relates to the HK assessed transaction closing subsequent to the ended the quarter on July Onest, we entered into a $175 million add on term loan it increase to our existing credit facility.

The interest rate on the now 564.1 million term loan is a floating rate based on LIBOR plus 4%.

$100 million of the proceeds from the term loan are used to pay the purchase price for the Ace Kfs acquisition.

With the remaining proceeds of 75 million net of fees and expenses held for additional working capital.

As we look forward from a capital allocation perspective.

We will continue to be very prudent.

We have not engaged in any share repurchase activity and have no near term plans to do so.

With the H. Kfs acquisition completed the short list of where to deploy cash would be to support organic growth and to pay down debt.

Long term net leverage goal remains below three times.

With that let's turn to consolidated outlook for third quarter full year.

But the third quarter, we expect tax act revenue between $36.5 million to $39 million and segment income of $14 million to $15 million.

For our wealth management business, including H. Kfs, we expect third quarter revenue of 133.5 to 138.5 million in segment income of $15 million to $16.5 million.

On a consolidated basis for the third quarter again, including HCAT Pes, we expect total of core revenue between $170 million to $177.5 million adjusted EBITDA of between 21.5 $25 million.

Non-GAAP net income of 7.5 to 11 $25 million or 15 to 23 cents per share and a GAAP net loss attributable to blucora.

28 to 22 million or 58 to 46 cents per share.

This outlook includes third quarter unallocated operating expenses of $6.5 million to $7.5 million.

For the full year, we expect tax act revenue of between $203 million to $206 million segment income of $46.5 million to $48 million.

For wealth management business, we expect full year revenue, which includes eight kfs for the period of July one through year end of 530 to 541 million and segment income of $65.5 million to $69.5 million.

This translates to consolidated school your outlook again, including H. Kfs for the partial year revenue of between 733 and $747 million.

Adjusted EBITDA of $86 million to $93 million.

Non-GAAP net income of $40.5 million to $48 million or 83 to 98 cents per diluted share and a GAAP net loss attributable to blucora of $343.5 million to $334 million for $7, a nine cents to $6.92.

Per diluted share with 24.5 $26 million corporate unallocated expense.

A few final items I'll call out as it relates to our guidance.

First we consider a broad range for transactional revenue to deal with it its inherent variability.

Second GAAP net income or loss attributable to Blucora is greatly impacted by variability in our tax rate.

Given current estimates we are currently estimating and net tax benefit for the year.

Assumed in these figures are market level, staying consistent with where they ended at the second quarter.

And finally for the full year. The company continues to expect total acquisition related integration costs of about $13 million for first global and $8 million for H. campus.

With that I'll turn it over to the operator for today.

Operator.

Thank you we will now begin a question and answer session. If you have to question. Please press Star then one I knew Touchtone phone if you wish to be removed from the Q. Please press the pound site are the hash key having easy new speaker phone you money to pick up the handset first before passing the numbers once again.

If you have a question. Please press Star then one I knew touchtone phone.

Well when do you have your first question fun, Chris Shutler from William Blair.

Hey, guys good morning.

Good morning.

So, let's let's start and then the tax act business sounds like Chris begin big Big focus on improving the start rates going forward.

Can you talk about.

At least at a high level, how you were tracking on that metric.

After you came in and kind of the month of March before the tax state line extension and just to give us some some sense. So for some evidence that you were seeing improvement and then.

Maybe just drill down into it a bit I know.

Brent Thanks, but just give us the the few strategies kind of underneath that to drive the improvement in the Saar rate going forward.

Yes sure so.

[music].

First in terms of start rate start rate earlier in season.

<unk> was was higher right and as we got later into the season. It was a I'm a bit more challenging with all of the confusion right because many people that were coming to us they were uncertain.

About exactly what was going to happen.

In terms of the timing of the filing deadline and so ultimately what will be looking at to move start rate going forward is a number of things by first we've got to make sure that we're bringing the right people.

Through our site at the right time and their decision making process.

Next is when they arrive at the site the messaging that we are hitting them with needs to resonate with them and ultimately the experience needs to be very positive right. So where are we fared well. This year. After we employed a number of kind of new marketing tactics was driving a.

Dramatic increase in terms of a number of potential customers coming our way and the dimensions I just described or the areas that we'll be focusing on to convert a higher share of those into into customers in the coming seasons. Ultimately, we think with some of the elimination of the confusion.

About the tax season, written a normalized tax season, we think we'll do much better just.

Due to the normalized tax season, but also.

You know well do much better based on the learnings from the seats.

[noise] is there with all the additional people so the two unique visitors coming to the site. The season is there a way to.

Do you do have some of their their contact information you can.

Try to market to those individuals next tax season, specifically, so increases your marketing funnel right off the bat.

Yes, so we have the ability to actually remarket more retarget with people who have visited our sites and so we do have a good repository. Obviously everybody that starts we have information on them and then we have less information, but the ability to re target people that actually came to our site.

Okay, and then I think you you mentioned.

More recently finding need to improve certain product capabilities did I hear that correctly and if so what what what around the product or experience needs to improve in your view.

Yes. This is something that we actually do a lot of work in the off season, and I think we've talked about the meaningful increases, but we saw on a number of different critical dimensions, including.

NPS score, which is the best indicator of customer satisfaction and the way. We go about targeting our development efforts is really looking at any of the friction points within the product and and when I say friction points you can observe whether our drop off rates as you move through the entire product experience.

And obviously, depending on the skew in the complexity of a tax filing.

Those drop off points maybe different.

So what we did in the past off season was target a number of the areas within the experience where there were those greatest drop off points and what we're doing right now is evaluating the areas, where we'll focus our development synergies in the coming off season right. So it's a really data driven process and it proved.

Worked very effectively this off season.

Okay. So they weren't like.

A major deficiencies that was just more comment around kind of continuing to just ongoing.

Improvement continual improvement.

Second.

Okay Fair enough and then lastly on tax is.

Is is there anything you can say about.

Next tax season in terms of sort of the margin profile the business beyond the.

You called out the $20 million anything else you would.

I want to say at this point.

So as we typically do we'll we'll plan to talk a lot more about our outlook for next season or next call.

However, as we mentioned in her remarks, given normal season, we would expect a minimum of 20 million an additional segment income Protection Act next year.

That alone represent a pretty significant rebound next year.

Even if you assume no revenue growth and flows through.

That would take the margins in the low Twentys total thirtys, but we'll definitely be in a position to share more once we've completed our planning for next season.

But but I think 20 million as you know.

As for that but we would expect a minimum of that additional segment income next year.

Okay got it they're just two on on the on the wealth business quickly so the.

The just touched touch on the outlook for flows any kind of known regrettable adviser, our financial professional losses coming up.

And then I'm also curious.

Maybe just talk about H. GFS performance in the corner, a little bit more what type of.

Inflows, they saw and how you're looking at that.

The financial impact of H. Kfs in 2020.

Sure. So in terms of flows we think that the this past quarter was are uniquely challenging environment for all obviously, we're still and then everyone still dealing with effects of the pandemic and that does limit the ability for in person meetings, but said.

We.

We believe that going forward, we will be in a in a better positioned this past quarter as it relates to flows.

Why don't I forget the Mark who can comment on H. campus and the financial impact.

Sure I'll just echo Chris his comments in terms of what we've seen more recently.

I think with you at S., specifically about any regrettable advisors that we see potentially leaving on the on the horizon and so far through the third quarter, Oh, we're seeing a nice improvement relative to what we saw in Q2 as it relates to H. Kfs. We continue to expect EBITDA to deliver what we said it would for this year what.

Yes.

In the $10 million range as it relates to flows for H. kfs in the second quarter. It was positive for both advisory as well as retirement plans.

So we continue to see HCAT Fest performed nicely.

Based on the expectations.

But we have fun.

Our interactions with them so far.

Mark just remind me the age kfs.

EBITDA that $10 million that say an annualized number that's correct and so we've have recognized roughly six months.

Got it thank you.

[music].

And just get reminder, if you do you have to question. Please press Star then one I you touched on phone.

We can happen next question from well Cadiz from JP Morgan.

Good morning, Thank you for taking my questions.

And are committed Chris what you've been in the CEO position for around six months now you've had an opportunity to build that your management team and we see the changes you're making your business I'm trying to think about how we think about.

The evolution of Blue coat here.

Are we still in the stage, where you're still building out of your management team and Flushing out some of the strategy are we getting to that point, where we can begin to see more execution focus and less of these like some of the the changes in detached business in around strategy I try to think about the timeframe of of yours.

Management.

Like tenure.

Sure. So we have locked in on our strategy right. There were some shift some of you described some of the shifts in the XTRAC strategy that we're absolutely required.

We both have the leadership team in place and a very clear strategy that we're in the process of executing them.

And so in terms of timeframe, but seeing those benefits right or benefits from that execution.

Clearly for tax effect, and we expect to see some.

You know some some very favorable impacts in terms of the next tax season and in wealth management right. We will begin to see the impact of a number of a things that we're executing on over the coming quarter with more notable impacts you know in and nine to 12 months from now so we're clearly and execution mode. There aren't further refined.

What's the strategy come.

Thank you.

The higher marketing spends.

[laughter] to frame, how we should think about the increase in marketing spend to support the the changes that were made this year.

I know we have to covert impact, but is there way to that we can think about how much. It that's interesting note the markings disposition.

Yes, so in terms of the cobot impact right, it's probably just under half of the marketing spend was or incremental marketing spend was due to the extension fee.

And so we would not expect three marketing at those levels going forward unless there was a incredibly high return that we're seeing in year on that spend.

As we look at the rest of the spend right. We're assessing that all of the incremental spend based on the return that we could see unfortunately, there's a lot of data on all the performance oriented spends and so we can see which marketing partners, which tactics actually work. The best then we're going to be able to refine pretty materially.

You know what our.

Marketing tactics are and strategy for the coming here I think the one thing that the through mentioned that this year and I think we referenced.

In the call as we look at the return from this year spend due to a weakness in the first peak we were wrapping spend through March right and we're seeing lots of very very positive impacts from that ramp and we noted.

One of them being a pretty extraordinary increase in the traffic those coming to us.

The challenges the normal decision, making timeframe that we see.

Did not play out at all right then when I say normal decision, making timeframe, we know when somebody comes the site.

How often is that they start immediately or for those that are new how frequently they come back and how long it takes them to engage in the process all of those normal time frames were thrown off after the extension for the season and so ultimately we got a lower return on our investment.

Due to that and so one of the complexities, we working on through the off season as appropriately evaluating the spend given the uniqueness of the of the C.

Okay.

That's right I think have another way I guess it in terms of the expenses I had a ballpark marking expenses for cash that is or is there like a like if we looked at expense profile like a rough range like how much is marketing.

How much is marketing driving some of them.

Hey, again, excluding coded like how much of marketing expense base.

Yeah, So Phil and Mark I defer to you in terms of how we break this out.

Cool.

Sure so.

Okay.

Mark you want that.

Sure. So what we think about marketing we can break it into.

We can break it up into two different buckets like Theres, a the media spend.

As well the agencies family think about the media spend which is yes, all advertising to our customers its typically Andy.

Mid $40 million range each season.

That's been held steady over the last several years, but basically we aspirations.

To grow this business I believe we stated publicly that we believe this can be a high single digit growth.

Growth business.

That requires an additional investment in marketing and pretax year 19, there was a person marketing somewhere towards the end of first peak in order to recover from some of the things that Chris and the team saw upon their entry into the business.

We still haven't gone to planning for tax Eurtwenty, yet, we would expect that it would be more than a levels that you've seen historically, but not quite to the levels at least at this point that we've seen a.

This year, so we would expect it to be somewhere between historic level. What was actually spent this year excluding cobot.

Okay.

Thank you that's helpful and apologies if I missed this but.

I call it drops.

On the large adviser departures.

During the prepared remarks mentioned some pain points around the integration I could you maybe elaborate on what those pain points for it and how those have been addressed.

Sure I think whenever you have integrations right, there's changes and kind of people and and structure was also systems and process changes and so.

I think we've shared before that we we still have work to do we brought together the organization the organizations and provided absolute clarity structure.

And it's clear who worked is supporting all of our advisors and and we've been rolled out a new service model.

That provide jay quarterback or costs here for.

A number of our advisors and so.

Prior to having not right. There was obviously a little bit of confusion, but we still have work to do on the integration of systems and processes and we'll be working on that over the upcoming year, but as we continue to make progress on that and if friction will reduce overtime, we've already seen some pretty meaningful improvements, which.

Referenced on the on the call, where we are seeing better service performance levels, which is or trending in the right direction on all metrics. We just have more work to do which is why we're very focused on.

Alright, Thank you for taking my questions.

Hi, This is a major if you could have a question. Please press star then one I mean touchtone phone.

And we have no question. Thank you.

Okay.

Great.

Well. Thank you for you all for joining us today and for your interest in Blucora.

I would once again like to thank all of our employees across the company for their hard work dedication and determination during this period.

And for rising to meet each challenge as we support our financial professionals to customers and clients.

Yeah.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.

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[noise] Andy.

[noise] [noise] and.

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[music].

Welcome to the Q2 2020 <unk> core earnings Conference call. My name is carried out will be operator for today's call. At this time, all participants are going to listen only mode. Later, we'll conduct a question and answer session. During the question answer session. If you have a question. Please press Star then one I touched on.

So I would not no call over to delve a show like VP of Investor Relations they'll you may begin.

Thank you and welcome everyone could look for a second quarter 2020 earnings conference call.

By now you shouldn't had the opportunity to review a copy of our earnings release and supplemental information.

No.

D document they're available on the Investor Relations section on our website <unk> Dot Com I'm joined today by Chris Walters, Chief Executive Officer, and Mark Nelson 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 paid 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 FCC filings, including our forms 10-K, 10-Q, and other reports for more information on that specific risk factors.

We see no obligation to update our forward looking statements, except as required by law.

Well, that's both GAAP and non-GAAP financial measures todays earnings release and presentation for today's call are available corridor.

And include full reconciliations of these non-GAAP financial measure that's got a mirror applicable GAAP measure with that living handed over to Chris.

Thanks, Bill and good morning, everyone.

I Hope you all think safe in the midst of all that is going on at this time.

Nucor continues to operate effectively correct me if unprecedented times and our team remains focused on delivering on our mission to empower people to improve their for natural.

The challenge as we outlined last quarter stemming from a pandemic, including the extended tax season and reduction in interest rates.

Bond with the workplace shut down for financial professional did create headwinds for business as expected.

While these challenges of impacted our financial performance in the short term. We've also made meaningful progress in a short period of time to improve key business metrics strengthen our team.

That's our strategic priority to position ourselves well for future growth.

Before I turn to results I'd note.

Given the seasonality of our taxes than usual extensional pack season.

To the third quarter, our financial result per pack back and Blucora overall do not provide for consistent comparison prior period.

Therefore have included more information to make it easier to draw compare.

Starting first with tax preparation.

We embarked on a ship.

Strategy for tax back during the taxi.

For a number of years growth has been driven.

Largely by price increases coupled with stable markets expand deployed without the benefit of the most sophisticated direct marketing approaches.

More recently, there was a realization that additional investment product was made it.

We're pleased to report that we've seen the benefits of these additional investments in the recently completed tax season with customer satisfaction conversion and retention all improving.

Going forward our strategy will focus on it you think.

Continue to enhance investment and a winning product experience.

Deploying marketing spend and a sophisticated data driven matter connected to performance outcome.

Which may result in more spend when we see opportunities to generate strong return on investment.

Engaging customers throughout the year to maintain relationships and bring it higher share of <unk> Kearney customers back at a lower cost.

And careful utilizing price to support wrote.

The scaling up of our assisted offering being the primary driver.

Average revenue per user.

Unfortunately.

Timing of our increase in marketing spend occurred just prior to the extension of attack.

Causing customers to whom we have marketed to focus on things other than tax.

And therefore resulted in a lower return unexpected.

That said there were several important learnings from this challenging pack season, upon which we will build in the coming years.

With that in mind, let's jump into performance for this discussion I will be speaking the main taxis.

Which is through tax day, plus one fourth of July 16th.

Taxact improved on a number of important business metrics amid.

Coven 19 environment, However, our financial results were below our expectations.

Part of the lower than expected result stem from the cobot and.

And part related to tax that's starting to even out a position for marketing perspective.

Quantify this approximately $20 million on incremental cost was due to the effects of the cobot 19 extended taxis.

Which included increased marketing spend.

Call Center.

Staff extension as well as incremental costs due to executing it finished to this current season simultaneous with planning for next year.

Beyond these cobot impacts we increased marketing spend to address the weak performance through the first Pete.

As we will discuss the good news is that we saw cleared funds progress that we believe will position us for next season and beyond.

I will walk you through some of the highlights which include significantly increasing the volume of potential customers visiting our website.

Growing new filers for the first time since tax year 2012.

Increasing conversion rates, increasing retention rates, increasing NPS scores and strong operational performance among others.

So let's get into a bit of the detail.

Tax season started off as one might have expected with the D. I watch segment of the industry showing about 3.6% year over year growth through March Twentyth.

Prior to the IRS announcing a delay in the filing.

Following that announcement industry volume dropped precipitously before slowly recovering and we estimate ultimately finished the season up 10.5% and unit volume.

Excluding stimulus filings.

Overall, we estimate Iris filings increased 4% with a pro market declined by about half a person.

I joined the CEO on January 30, and it quickly became clear the tax Act had started the season out a position from a marketing perspective.

A portion of this was driven by messaging that didnt resonate with early Susan filers, who tend to focus much more on free filing auctions.

There were additional challenges, including limited investment and top of funnel marketing activities, a lack of search engine optimization.

Insufficient measurement tools to support time, you spend optimization.

All of which generally done months in advance to prepare for the taxi.

We believe this led to a double digit percentage decrease in a number of potential customers visiting our sites.

Critical time the season.

To address these issues, we course corrected made changes to the marketing leadership and altered our approach.

Beginning in March we invested meaningful incremental dollars and marketing to catch up and we're seeing positive results. Just ahead of the iris announcing the tax season delay.

The tax filing date extension negated, what we believed would have been a positive marketing impact.

The extension of the filing date also required additional investment over extended period.

Well this is unfortunate and will depress our segment margin for this year. It is important to note that we believe these are short term affects the which mark will speak in them, but.

We identified several new marketing partners, including some weight in the season, which performed well and we're excited about the future.

One benefit of the extended tax season that we were able to establish the test new relationships approaches during the season.

We also added new technology and tracking to more readily optimized.

Our marketing in future taxi.

A few highlights on the marketing side include.

Website visitors were up 16% year over year, which has a significant improvement and remarkable given that we were down double digits year over year.

<unk>.

Roof first Pete.

After first peak, we increased traffic relative to last year by 60%.

So first peak down double digits for last year and after that up 60%.

We were able to convert some of the increased users, but there are many ways. We can further optimize for next season to capitalize on this large opportunity.

Back to start rate is one of our largest opportunities and we will be a key area of focus.

Single digit improvement would yield a double digit impact in our total body.

Newer reactivated users grew by 12% year over year. This represents the first growth and this metric since tax your 2012 and a significant reversal from the 16% decline we saw last season, and 14% decline Weve average since tax year 2012.

Combining growing new units with increased retention rates mentioned earlier of a powerful combination that builds on itself.

On the customer experience sides assignments from customers was very positive.

The product improvements put in place combined with significant new features drove increased conversion retention in NPS scores delivering the strongest customer experience metrics, we have seen in recent years.

Through July 16th and compared to the same day last year, a few highlights and customer experience include.

Conversion rate or percentage of starting customers that complete was up six points year over year.

Retention rate or percentage of filers returning from the prior year finished up five points year over year.

And our net promoter score or Npis was up 16 points year over year to what we believe it's the highest level in company history.

We're excited about these improvements, particularly because we expect that these metrics will provide even more benefit next year as those customers who had a positive experience are likely to come back a higher rate.

And maybe even recommend us to a friend.

Overall through July 16th are totally filers, which includes consumer and professional fathers were up.

Got 1%, representing the first year total unit growth since taxi your 2014.

In summary filed came in at about 3.11 million.

Down about 2.2% from 3.18 million last season, and professional filers were up 5.8%.

Two 2.36 million.

We're pleased to report a return to positive total unit growth. Although we had hoped for positive consumer unit growth as well as a more favorable mix paid horses for it.

A few other items to note for this year.

And our pro offering Taxact pro we continued to do well and outperformed the market.

With our volume growing 6% year over year.

And a pro market overall that decline about half a percent.

This shows the value that we continue to deliver it to this market and the benefits of the incremental improvements we have made in the product, including simplifying the onboarding process and data entry experience for pros.

We continue to be positive on the outlook and potential for a pro off.

In hybrid assisted as you may recall this season represented the first full year testing.

With the intent.

Being to gain significant learning.

From interest and develop a plan and how we could launch at scale should we decide to do so next year.

The interest was so strong that we ended up expanding our cash by about 70% more than our original plan.

Season to do incremental testing.

We believe we have now learned what is needed scale.

Planned to launch it next year as part of our core offering.

Overall, we made progress that will benefit us in the future and these efforts have enabled us to catch up meaningfully from the slow start but not fully relative to targets, we had set for the business.

Going forward, we believe we have the right team in place.

And feel good about the <unk> this year of learnings.

We will come into next tax season with product and marketing both optimized working in concert.

We believe our new marketing team utilizing data driven marketing approaches and our new marketing partners will help us maximize performance.

We've already proven that we can drive significantly increased traffic to our site.

So we will be very focused on driving improvements in our start rate.

Have you attract new customers, we will continue to delight them with our improved product experience in fact, we expect that next year.

We'll really benefit from this year's high NPS scores and improvements in conversion and retention as customers right great experiences this year come back and complete at a higher rate.

During the off season, we plan to continue to make improvements in the experience, which we believe will help drive further gains in customer conversion.

I continue to see a great deal of opportunity for this business over the medium to long term.

We anticipate that product improvements will drive higher retention rates going forward and new initiatives, such as assisted tax preparation will drive higher ARPU.

When combined with improved marketing efforts and.

Additional year round engagement, we believe that these improvements will put us in a stronger position to grow paid units and revenue in coming years with less reliance on price.

We have shifted to a more sustainable growth strategy for tax Act and it's important to note that this is a multiyear journey.

While we are satisfied that many of the metrics on which we measure ourselves improved meaningfully year over year, we're not satisfied with a near term financial performance and fee room for continued improvements across the business.

With a key areas of focus on increasing or sorry.

We will also be focused on driving higher share of paid units given that this is the second metric on which we did not see the results were looking for this taxis.

Turning now to wealth management second quarter wealth management revenue was 115.9 million with segment income of 11.79.

Second quarter results now reflect both qualitative and quantitative covert related impacts not present in our results last quarter.

This is mostly due to timing of things like interest rate changes and billing cycles.

This includes advisory revenue, which is based on Q1, ending market values, and which we expect to increase in Q3 due to the market rebound.

As well as sweep revenue, which now reflects the effect of six rate cuts in the first quarter.

While we're not immune to these expected market forces our focus has been on managing what we can control and successfully navigating through this unprecedented times our financial professionals.

Financial professionals as the term we are using going forward to replacement term advisors.

This change has been instituted to comply with the Fccs.

Regulation best interest, which went into effect for the industry on June Thirtyth 2020.

Our surface to finance professionals has been uninterrupted through this period, an improving in several areas, allowing our financial professionals to be as successful as possible in this environment.

In fact, our processing time very historic lows.

Our financial professionals for had a great deal on your plate over the past quarter working through an extended tax season, helping their clients navigate through market volatility and helping clients with things like PPP logs.

They're focused on serving existing clients combined with reduced ability to meet in person.

Has slowed prospecting as well as the ability to sell more complex products, such as alternatives annuities and insurance.

With the overall market for these products seeing softness in the core.

That's affected our transaction revenue, which was down more than 35% sequentially.

Well transaction revenue is always the most difficult to predict with a distraction of tax season behind our financial professionals, we expect to see some improvements and transaction revenue in the second half.

However, the ongoing.

Limited ability to meet with clients may temper the bounce back.

These factors also had an impact on our asset flows in the quarter.

As we saw net outflows from advisory assets of about 285 million.

And from total client assets of about 1 billion.

We believe the outflows were driven by a combination of factors, including a reduced level of prospecting.

Limited in person meetings.

Clients pulling funds for cash flow purposes as.

As well as a few regrettable financial professional departures in the quarter.

Advisory assets as a proportion of total client assets ended the quarter at 38.8%.

A few additional updates I'll call out here for wealth management.

First.

I remain incredibly proud of the team and their ability to continue to effectively work.

In this remote environment.

As I mentioned, our service has not only been uninterrupted.

It has improved in many areas such as processing times.

During the quarter the team fully rolled out its regionalized surface model, which provides an integrated team approach to deliver high value service to our financial professionals.

The next level service model utilizes dedicated high touch teams with a quarterback or service comps here.

Based on the size complexity and geography of the financial professional firms to provide enhanced and and experience on incoming requests as well as proactive relationship management.

We believe this upgraded experience will create additional stickiness with financial professionals as they see and feel the value of this program.

Our growth team has pivoted connecting the financial professional community to each other and Archie was virtually and utilizing these forms to let financial professionals and though about the teams available to help them develop plans for new clients or new funds.

We have seen a strong increasing utilization.

In recruiting we were able to bring in 28, new financial professionals in the quarter, including eight new tax pros and 18 transfers.

Recruiting was a bit slower than normal quarter due in part the testing centers being closed due to cope with 19.

Well as tax pros continue to work through the extended taxis.

In addition.

To the individual financial professionals, we also brought on to larger accounting firms.

With combined accounting revenue of about 7 million.

Representing a prospecting opportunity of approximately 700 million in total client assets.

In addition to these highlights just at the end of the quarter, we announced that age Kfs acquisition has closed.

No. We have mentioned the numerous benefits in the past, but to summarize we believe that this transaction.

Adds a fast growing highly profitable or a business to our company.

Increasing our addressable market and providing new organic growth opportunities.

The business has been growing assets a double digit rates.

With adjusted EBITDA margins of about 30%.

It's still the key hole in our offering TCPA firms, allowing us to serve SCPA firms and tax professionals either through our event tax model, where she pays on the full wealth management process or SRU, HCAT FES, where the SCPA can refer clients to one of our in house, it's kfs advisers and receive a recurring revenues.

Correct.

As a result, we no longer have to leave a significant number of prospects on the table.

It gives us a new way to monetize the 700 retirement plans, our financial professional sport each year for their clients and this represents an incremental revenue stream for our financial professionals.

For financial professional seeking options for their succession plans you can now provide an off ramp for them.

Well financial professionals, who have plateaued. This gives boy to continue to provide wealth management services to their clients.

In both instances, we have a new way to retain assets and a potential improve margins when transitioning assets from the affiliate model to a captive ARIA.

The HCAT best transaction closed after the end of the quarter as not included in our financial results.

However, at a high level H. Kfs ended the quarter with approximately 4.5 billion in total client assets up from about 4 billion at the end of Q1 with positive net flows and advisory assets and retirement plan services.

And a growing number of and clients with about 75 partners EPA from.

Mark will provide a few additional details in a moment.

As we look ahead in our wealth management business, we plan to.

Improve our service and operational performance for the lighter financial professionals.

Align systems processes, and technology to improve efficiency and scalability.

Maximize financial professional performance by providing tools.

Putting supporting efficient prospecting increased client penetration and wallet share.

And with the Edgecast excess acquisition now close focused on completing our integration efforts without interruption and setting the business.

For success.

To summarize at the end of the six month Mark in my tenure and in an unprecedented time I'm pleased to say that we're navigating the current environment well.

We have a dress skill gaps by filling key positions with strong leaders to find our strategic priorities and realigned our business to support detailed execution plans.

We are focused on executing with excellence and the second half of the year.

The best position the company for growth in the coming years.

We have set our sights high as to what we can achieve as an organization to truly empower our customers to improve their financial wellness and have a great deal of work to do.

Our progress has been meaningful, especially amidst this environment, but we recognize there are key areas on which we need to accelerate our progress.

And our tax preparation business, we do not expect significant margin impact stemming from the impacts of Kogan night team on this action packed fusion to reoccur.

With the tax season behind US we have turned our full attention to walk you through the fall to execute on improving our start rate and the share of paid units positioning ourselves for strong marketing start for the season.

In wealth management, we will continue to roll out or improved financial professional experience programs.

Begin the important work of expanding its kept us model and ensuring that we have the systems aligned to enable our financial professionals. The game the efficiency they need to build their book of business.

With that I'll turn it over to Mark.

Thank you Chris.

As Chris mentioned with the change in tax season timeliness here, our second quarter results do not include the end of tax season, and therefore, we believe that a number of comparisons to prior periods, but not meaningful outside of wealth management.

And I'll try and called that out where appropriate.

Before we get into results I thought I'd pause or foot briefly on my first three months in the role.

I consider myself fortunate to have joined a business with such dedicated people.

To a difficult environment or employees have never wavered in their mission to delight our customers.

We have an ambitious team one that sees the promise of the great things we can accomplish.

And that's visible in the investments that we've made across the business as we headed into 2020.

Sharing their optimism and I'm looking forward to the journey that were on.

At the same time, we understand the importance of discipline and purposeful planting.

Investing for the long term and lastly, the value our investors place on profit and cash, which as Chris mentioned earlier. We believe you can expect more as it relates to our tech stack business next year.

Well I've learned a great deal over the last few months I look forward to the opportunity to share more perspective over the next two quarters as they work so our 2021 heavy on planning.

That said in the short term my team and I are focused on ensuring optimal efficiency prudent spend management.

Constant focus on prioritizing spend toward our key growth priorities that Chris share just a few moments ago.

Longer term, our focus will center on our data management capabilities.

During that we have that data 24 in both the wheel time decisions across that dynamic markets with which we operate.

Our long term capital strategy plan that aligns with our growth aspirations and lastly, a commitment to scale will be realized the benefits of scalable operating models across both of our businesses.

Now turning to our results.

I'll begin with consolidated results for the second quarter.

We recorded revenue of $161.1 million.

Adjusted EBITDA of $12.6 million.

Non-GAAP net income of $4.5 million.49 per diluted share.

GAAP net income of $49.6 million or one dollar and three cents per diluted share, which includes a large noncash income tax benefit of $59.7 million, which I will describe momentarily.

Now given the meaningful and varied as tax at the net operating losses or I know wells has had on our reported GAAP net income results over the last few quarters, Let me take a moment to walk you through some of the mechanics.

Just as much to do with our specific situation as it relates to our noel's compounded by the phasing of our profit throughout the year.

Recall that in the fourth quarter of last year, we had at 49 million dollar tax benefit.

This was driven by the fact that we had now had three consecutive years of positive GAAP earnings.

Since it was now considered more likely than not that we would utilize our and our wells, we could release evaluation allowance against them.

In the first quarter this year.

Ranges in financial markets brought about by the Cobot 19 pandemic as well as other factors caused the amount of end of wells expected to expire and 2020 to increase.

Driving a corresponding increase at our effective tax rate.

Applying inflated tax rate to our first quarter and called resulted in a high tax expense.

In Q2, we refreshed our forecasted annual profit before tax which updated our annual effective tax rate calculation.

Applying this revised rate to our year to date profit resulted in a noncash benefit of $59.7 million for the three months ended June Thirtyth 2020.

Turning now to segment performance.

Beginning with tax preparation.

<unk> second quarter results, which reflect cost of the extended season, but do not include Endosee revenue included revenue of $45.2 million with segment income of $6.7 million.

We expect full year revenue to be able to $203 million to $206 million range.

Down about 2% to 3% versus last year.

I would like to point out that reported growth is not apples to apples.

As you may recall heading into the season, we decided that to align more with a broader market, we would remove our online basic skill.

And that would result in a headwind for the season.

Normalizing for this adjustment as well as for the simple text divestiture would equate to a year over year growth of between 4% to 5% revenue.

Segment margin for the year is expected to come in at about 23%, which includes approximately $20 million of incremental cost due to the effects of coated 19, and they had said detects either.

These costs were comprised of increased marketing spend call Center staff extension as well to executing both finished at this current season, while planning for next season simultaneously.

The other major driver of the margin reduction was our increased investment in marketing.

What's the team had planned before cobot.

This then was required to re accelerate our growth.

As noted the results were distorted by cobot, but we remain optimistic about the proof points we've seen.

We expect a healthy rebound in segment margin next year from these levels now while we have yet to complete our financial planning for next year I would expect center normal tax season, a minimum of $20 million of additional segment and called for tax back last year.

Moving on to wealth management.

And tax second quarter revenue was $115.9 million with segment income of $11.7 million.

These results now include the impact of the lower market levels as of March 30, Onest 2020, as well as interest rate reductions during Q1 that did not impact our Q1 results.

On a pro forma basis normalized for the acquisition of first global this represents a year over year revenue decline of 20%.

This was driven by a 91% decrease in sweep revenue as interest rates declining to essentially zero.

An additional negative driver to the quarter included a 35% decline and transactional Commission revenue.

Due to the fact as Chris mentioned earlier.

Lastly, and should or operating model, let's focus heavily on SCPA financial professionals extended taxis and created a headwind whereby our financial professionals were helping existing claims through tax season over a longer period of time with limited ability to meet a person, making it difficult to drive the business development activities.

Welcome to existing customers as well as attracting new ones.

Lastly, advisory and trail revenue, which were down 8% and 18% year over year, respectively reflect the low end market levels at the end of Q1.

As Chris mentioned, we saw net outflows from advisory assets of about $285 million. That's will total client assets of about $1 billion during the quarter.

We believe a combination of factors led to the outflows, including reduced level prospecting as financial professionals focused on supporting it fiscal plan.

Feeling person meeting claims pulling funds for cash cash flow purposes, as well the fewer incredible financial professional departures.

In recent quarters, the vast majority about 90% of departures, but then smaller financial professionals with little production.

This quarter there were few in the region, where credible category that departed following some of the integration disruption as we brought first global and HD vest together.

Our primary focus is on improving the event text financial professional experience, which we believe we'll try to improve retention in the longer term.

Every assets as a proportion of total client assets ended the quarter at 38.8%.

Finishing up on second quarter performance unallocated corporate expenses came in at $5.8 million lower than in recent quarters.

Through this is actively manage cost savings in this uncertain environment as well as the timing of certain expenses between quarters.

Also had about $4 million an unusual expenses.

1.7 million in integration costs related to first global.

At 1.1 billion and transaction related cost associated with the acquisition of H. Cath.

During the quarter, we utilized 55 million and cash to fully repaid the outstanding balance on our revolving credit facility.

And we had about $11 million property plant equipment expenditures related to our new headquarters building.

We ended the quarter with cash and cash equivalent of $90.1 billion and our net debt was $299 million.

Our reported net leverage ratio at the end of the quarter increased to 4.4 times.

Primarily due to the extension of Tech data and therefore, our last 12 month EBITDA as a quarter and does not include a full pack season.

As it relates the Ace Kfs transactional clothing subsequent to the ended the quarter in July 1st we entered into a $175 million add on term loan it increase to our existing credit facility.

The interest rate on the now 564.1 million term loan is a floating rate based on LIBOR plus 4%.

$100 million of the proceeds from the term loan are used to pay the purchase price for the Ace Kfs acquisition with the remaining proceeds of 75 million net of fees and expenses held for additional working capital.

As we look forward from a capital allocation perspective.

We'll continue to be very prudent.

We have not engaged in any share repurchase activity and that's no near term plans to do so.

With the H CAPHS acquisition completed the short list avoided deploy cash would be to support organic growth and to pay down debt.

Our long term net leverage goal remains below three times.

With that let's turn to consolidated outlook for third quarter full year.

But the third quarter, we expect tax act revenue between $36.5 million to $39 million and segment income of $14 million to $15 million.

For our wealth management business, including H. Kfs, we expect third quarter revenue of 133.5 to 138.5 million and segment income of $15 million to $16.5 million.

On a consolidated basis for the third quarter again, including HCAT Pes, we expect total of core revenue between $170 million to $177.5 million adjusted EBITDA of between 21.5 $25 million.

Non-GAAP net income of 7.5 to 11 $25 million or 15 to 23 cents per share like GAAP net loss attributable to Blucora.

28 to 22 million or 58 to 46 cents per share.

This outlook includes third quarter unallocated operating expenses of $6.5 million to $7.5 million.

For the full year, we expect tax act revenue of between $203 million to $206 million segment income of 46.5 $48 million.

For wealth management business, we expect full year revenue, which includes H CAPHS fast for the period of July one through year end of 530 to 541 million and segment income of $65.5 million to $69.5 million.

This translates to consolidated school your outlook again, including H. Kfs for the partial year revenue of between 733 and $747 million.

Adjusted EBITDA of $86 million to $93 million.

Non-GAAP net income of $40.5 million to $48 million or 83 to 98 cents per diluted share and a GAAP net loss attributable to blucora of $343.5 million to $334 million for $7, a nine cents to $6.92.

Diluted share with 24.5 $26 million corporate unallocated expense.

A few final items I'll call out as it relates to our guidance.

First we consider a broad range for transactional revenue to deal with it its inherent variability.

Second GAAP net income or loss attributable to Blucora is greatly impacted by variability in our tax rate given current estimates. We are currently estimating and net tax benefit for the year.

Assumed in these figures are market level, staying consistent with where they ended at the second quarter.

And finally for the full year. The company continues to expect total acquisition related integration costs of about $13 million for first global and $8 million for H. campus.

With that I'll turn it over to the operator for today or either.

Thank you we will now begin the question and answer session. If you have to question. Please press Star then one and you touched on phone if you wish to be removed from the Q. Please press the pound side or the hash key if you using a speaker phone you many to pick up the handset first before passing the number.

Once again, if you have a question. Please press Star then one I knew touchtone phone.

And when do you have her first question fun, Chris Shutler from William Blair.

Hi, guys good morning.

Good morning.

So let's start in the tax act business sounds like Chris begin big Big focus on improving the start rates going forward.

Can you talk about.

At least at a high level, how you were tracking on that metric.

After you came in and the kind of the month of March before the tax dead line extension and just to give us some some sense for some evidence that you were seeing improvement and then.

Maybe just drill down into it a bit I know.

Brent Thanks, but just give us the the few strategies just kind of underneath that to drive the improvement in the Saar rate going forward.

Yes sure so.

First in terms of start rate start rate earlier in the season.

It was was higher right and as we got later into the season. It was a I'm a bit more challenging with all of the confusion because many people that were coming to us they were uncertain.

About exactly what was going to happen.

Terms of the timing of the filing deadline and so ultimately what will be looking out to move start rate going forward is a number of things.

First you've got to make sure that we're bringing the right people.

Through our five at the right time in their decision making process.

Next is when they arrive at the site the messaging that we are hitting them with needs to resonate with them and ultimately the experience needs to be very positive right. So where are we fared well this year a after we employed a number of kind of new marketing tactics was driving a.

Dramatic increase in terms of a number of potential customers coming our way and the dimensions I just described or the areas that we'll be focusing on to convert a higher share of those into into customers in the coming seasons. Ultimately, we think with some of the elimination of the confusion about the tax season written a normalized.

Excuse and we think we'll do much better just.

Due to the normalized tax season, but also.

You know well do much better bear some learnings from the suit.

[noise] is there with all the additional peoples.

[music] unique visitors coming to the site. The season is there a way to.

Do you do have some of their their contact information you can.

Try to market to those individuals next tax season, specifically, so increases your marketing funnel right off the bat.

Yes, so we have the ability to actually remarket more retarget equal to visit our sites and so we do have a good repository. Obviously everybody starts we have information on them and then we have less information, but the ability to re target the people that actually came to us I.

Okay, and then I think you you mentioned.

More recently finding need to improve certain product capabilities did I hear that correctly and if so what what what around the product or experience needs to improve in your view.

Yes. This is something that we actually do a lot of work in the off season, and I think we've talked about the meaningful increases that we saw on a number of different critical dimensions, including.

NPS score, which was the best indicator of customer satisfaction and the way. We go about targeting our development efforts is really looking at any of the friction points within the product and and when I say friction points you can observe whether our drop off rates as you move through the entire product experience.

And obviously, depending on the skew and the complexity of a tax filing.

Those drop off once maybe different.

So what we did in this past off season was target a number of the areas with EMEA experience, where there were those greatest drop off points.

What we're doing right now is evaluating the areas, where we'll focus our development and she's in the coming off season right. So it's a really data driven process and it proved to work very effectively this off season.

Okay. So they weren't like major deficiencies that was just more comment around kind of continuing to just ongoing.

Improvement continual improvement.

Good.

Okay.

Fair enough and then lastly on tax is.

Is a is there anything you can say about.

Next tax season in terms of sort of the margin profile the business beyond.

You called out the $20 million anything else you would want.

I want to say at this point.

So as we typically do we'll we'll plan to talk a lot more about our outlook for next season or next call.

As we mentioned in her remarks, given normal season, we would expect a minimum of 20 million an additional segment income for tax effect next year.

So that alone represent a pretty significant rebound next year.

Even if you assume no revenue growth and floats through.

That would take the margins in the low Twentys total 30.

But we'll definitely be in a position to share more once we've completed a planning for next season.

But but I think $20 million as you know as said that that we would expect a minimum of that additional segment income next year.

Okay got it they're just two on on the on the wealth business quickly so the.

The just touched touch on the outlook for flows any kind of known are incredible adviser, our financial professional losses coming up.

And then I'm also curious.

Maybe just talk about H. GFS performance in the corner little bit more what type of.

In flows they saw and how you're looking at that.

The financial impact of H. Kfs in 2020.

Sure. So in terms of flows we think that the this past quarter was they uniquely challenging environment for all obviously, we're still.

And then everyone still dealing with the effects of dependent making it does limit the ability for in person meetings.

That said we.

But weve that going forward, we will be in a in a better positioned this past quarter as it relates to flows.

Why don't I forget the Mark who can comment on HCAT Fest and the financial impact of.

Sure I'll, just echo Chris has confidence in terms of what we've seen more recently.

I think Chris you had asked specifically about any regrettable advisor is that we see a potentially leaving on the on the horizon and so far through the third quarter, Oh, we're seeing a nice improvement relative to what we saw in Q2 as it relates to age Kfs. We continue to expect EBITDA to deliver what we said it would for this year what.

<unk>.

In the $10 million range.

As it relates to flows for H. kfs in the second quarter. It was positive for both advisory as well as retirement plans.

We continue to see HCAT Fest performed nicely.

Based on the expectations.

But we have fun.

Our interactions with them so far.

Mark just remind me the age of Kfs.

EBITDA that $10 million that say an annualized number that's correct. So weve recognized roughly six months.

Got it thank you.

So.

And as a reminder, if you can have a question. Please press Star then one are you touched on phone.

Your next question from well Cadiz from JP Morgan.

Good morning, Thank you for taking my questions.

<unk>, Chris So you've been the CEO position for around six months now you had an opportunity to build that your management team and we see the changes you're making your business I'm trying to think about how we think about.

The evolution of Blue coat here.

Are we still in the stage, where you're still building out of your management team and Flushing out some of the strategy are we getting set point, where we can begin to see more execution focus and less of these like some of the the changes in detached business and around strategy I try to think about like the timeframe of of your math.

Has been.

Like tenure.

Sure. So we have locked in on our strategy right. There were some shift some of you described some of the ships in the tax Act strategy that we're absolutely required. That's we both have the leadership team in place and a very clear strategy that we're in the process of executing on.

So in terms of timeframe, but seeing those benefits right or benefits from that execution.

Clearly for tax effect.

We expect to see some.

You know some some very favorable impacts in terms of the next tax season and in wealth management right. We will begin to see the impact of a number of of things that we're executing on over the coming quarter with more notable impacts you know in and nine to 12 months from now so we're clearly and execution mode. There aren't further refined.

The strategy come.

Thank you.

On the higher marketing spend it's possible to frame, how we should think about the increase in marketing spend to support the the changes that were made this year.

I know we have to the Kobe impact, but is there way that we kept thinking about how much. It that's interesting note the markings disposition.

Yes, so in terms of the cobot impact right, it's probably just under half of the marketing spend was or incremental marketing spend was due to the extension fee.

And so we would not expect three marketing at those levels going forward unless there was a incredibly high return that we're seeing in year on that spend.

As we look at the rest of the spend right. We're assessing that all of the incremental spend based on the return that we could see unfortunately, there's a lot of data on all the performance oriented spends and so we can see which marketing partners, which tactics actually work. The best then we're going to be able to refine pretty materially.

You know what our.

Marketing tactics are and strategy for the coming here I think the one thing that the through a wrench in at this year and that you referenced.

On the call as we look at the return from this year spend.

Due to a weakness in the first peak, we were wrapping spend through March right and we're seeing lots of very very positive impacts from that ramp and we noted.

One of them being a pretty extraordinary increase from the traffic that was coming to us.

The challenge is the normal decision, making timeframe that we see.

Did not play out at all.

And when I say normal decision, making timeframe, we know when somebody comes the site.

How often is that they start immediately or for those that are new how frequently they come back and how long it takes them to engage in the process. All have moved normal time frames were thrown off after the extension for the season and so ultimately we got a lower return on our investment.

Due to that and so one of the complexities, we working on through the off season as appropriately evaluating the spend given the uniqueness of the of the C.

Okay.

That's right I think have another way I guess it in terms of the expenses.

Got it ballpark, marking expenses for tax purposes or is there I got like if we looked at expense profile like a rough range like how much is marketing.

How much is marketing driving some of them.

You got an excluding coded like how much of marketing expense base.

Yeah, So Phil and Mark.

Do you in terms of how we break this out.

Well.

Sure so.

[music].

Mark you want to.

Sure. So what we think about marketing we can break it into.

We can break it up into two different buckets like Theres, a the media spend.

As well the agencies that when we think about the media spend what's your gas all advertising to our customers its typically Andy.

Mid $40 million range each season.

That's been held steady over the last several years, but no basically aspirations.

To grow this business I believe we stated publicly that we believe this can be a high single digit.

Growth business.

That requires an additional investment in marketing and pretax year 19, there was a person marketing somewhere towards the end of first peak in order to recover some of the things that Chris and the team saw upon their entry into the business.

We still haven't gone to planning for tax Eurtwenty as we would expect that it would be more than the levels that we've seen historically, but not quite to the levels at least at this point that we've seen a for this year. So we would expect it to be somewhere between historic level. What was actually spent this year excluding cobot.

Right.

Thank you that's helpful and apologies if I missed this I call it drops but on the large adviser departures.

I think they're prepared remarks mentioned some pain points around the integration I could you maybe elaborate on what those pain points for it and how those have been addressed.

Sure I think whenever you have integrations right, there's changes and kind of people and structure, There's also systems and process changes and so.

I think we've shared before that we we still have work to do we brought together the organization the organizations and provided absolute clarity structure.

And it's clear who are supporting all of our advisors and you've been rolled out into service model.

That provide jay quarterback or costs here for.

A number of our advisors and so.

Prior to having not right. There was obviously a little bit of confusion, but we still have work to do on the integration of systems and processes and we'll be working on that over the coming year, but as we continue to make progress on that and if friction will reduce overtime, we've already seen some pretty meaningful improvements, which.

Referenced on the on the call, where we are seeing better service performance levels, which is or trending in the right direction on all metrics, we'd have more work to do which is why we're very focused on.

Alright, Thank you for taking my questions.

I just wonder if you have a question. Please press Star then one I mean touchtone phone.

[noise] and we have no question. Thank you.

Okay.

Great.

Well. Thank you for you all for joining us today and for your interest in Blucora.

I would once again like to thank all of our employees across the company for their hard work dedication and determination during this period.

And for rising to meet each challenge as we support our financial professionals customers and clients.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.