Bill Michalek - VP, IR John Clendening - President and CEO Eric Emans - CFO Stacy Ybarra - VP, IR

Dan Kurnos - The Benchmark Company

Good day, ladies and gentlemen. And welcome to the Blucora Incorporated First Quarter 2017 Earnings Conference Call. At this time, all participant lines are in a listen-only mode to reduce background noise. But later we will be holding a question-and-answer session after the prepared remarks and instructions will follow at that time. [Operator Instructions] As a reminder, today’s call -- conference call is being recorded. I’d now like to introduce your first speaker for today, Bill Michalek, Vice President Investor Relations. You have the floor sir.

Thank you and welcome, everyone to Blucora’s first quarter 2017 earnings conference call. By now, you should've had the opportunity to review a copy of our earnings release, supplemental information and prepared remarks. If you have not reviewed all these documents, all three are available on the Investor Relations section of our Web site at Blucora.com. I'm joined today by John Clendening, Chief Executive Officer and Eric Emans, Chief Financial Officer. In a moment, we'll hear brief remarks from both of them, followed by Q&A. Before we begin, let me remind everyone that today's discussion contains forward-looking statements based on the environment as we currently see it and speak only as of the current date. As such, they include risks and uncertainties, and actual results and events could differ materially from our current expectations. Please refer to our press release and other SEC filings, including our Forms 10-K, 10-Q and other reports, for more information on the specific risk factors. We assume no obligation to update our forward-looking statements. We will discuss both GAAP and non-GAAP financial measures today, and the earnings release on blucora.com includes the full GAAP and non-GAAP reconciliations. With that, let me hand it over to John.

Thanks, Bill, and good morning, everyone. Before I get us rolling, I’d like to warmly welcome Bill Michalek, who has recently joined the IR team at Blucora. We are delighted to have him. He has big shoes to fill as Stacy Ybarra, who has been with Blucora since 2005, has elected to not make the move to Irving, and so this is her last earnings call. I know you join me in thanking Stacy for her fine work over the years. I’m pleased to report that Blucora had a very strong start to the year, exceeding our -- the high-end of our range on all guidance metrics: revenue, adjusted EBITDA and non-GAAP EPS. Compared to last year’s first quarter, these metrics were up 10%, 8% and 11%, respectively. Our tax preparation software business, TaxAct, drove strong financial performance and continues to benefit from the strategic shift, which we began last year, to focusing on profitable share versus simply total unit share. And we are well on our way to our 19th consecutive year of revenue growth in this business, a remarkable run. Our wealth management business, HD Vest, saw renewed momentum and continued to benefit from a strong equity market. And we continue to execute on our stated goals and improve our positioning as we complete our multi-stage strategic transformation. I will provide a few more insights on our operational highlights for the quarter, and then turn it over to Eric to review the financial results in more detail. Starting with tax preparation. It was an eventful tax season, which began with the slow start, included the implementation of the PATH Act, and saw increased competition, especially for free filers, and ultimately a flat DIY market. Despite these challenges, TaxAct turned in strong financial results for the tax season. Based on our results, we expect to grow first half 2017 revenue by approximately 15% and segment income by approximately 14% versus the prior year comparable period and ahead of our expectations. This performance is aligned with our focus on higher value customers and driven by a higher average revenue per user. It also demonstrates that under our new strategy we can generate strong financial performance with revenue growth and strong cash flow even in a tough market environment. Stepping back, it's important to emphasize that we are in the early stages of a multi-year pivot to profitable customers and ultimately paid unit growth. This year we focused on simplifying our product and packaging coupled with a transparent marketing message that de-emphasizes free and instead emphasizes our starkly superior value. We are focused on acquiring savvy customers who value a great experience at a fair price and who don’t want to be lured by promises of free filing, only to be forced into an upsell and charged for things they didn’t expect to have to pay for, or to be bombarded with emails pitching low-value products they don’t want or need. With other significant players, and new entrants, all shouting free, we see an opportunity to differentiate TaxAct as the brand that stands for exceptional value and is known as the most trustworthy. We believe that with transparency, we are in the best position to grow customer loyalty over time, and this combined with a focus on paying customers will translate into increased lifetime value. As we would expect when aiming for higher value customers and de-emphasizing free, our total DDIY e-files declined while our average revenue per user increased. Let’s take a moment to dissect the decline in units. Despite an offsetting higher revenue from paid units we saw a decline in total units driven by a reduction of new filers. We also experienced declines in paid units, which was primarily a result of steps we took to simplify our pricing and packaging. For example, we eliminated our basic SKU which was priced at $9.99 for a Federal return at the start of tax season 2015, and included features that we offer in our free SKU this year. The decision to eliminate it was driven by our emphasis on transparency and a better user experience to increased customer loyalty. In short, the right call for our customers and for us long-term. Other factors contributing to the paid unit decline include: a trade-off of paid units in exchange for higher ARPU, decreased marketing efficiency as we spent more heavily in January before the market developed, and experimentation with channel mix and messaging. We are encouraged by a number of developments during the quarter that we believe reinforce the merits of our strategy pivot. Number one, completion rate improved by 140 basis points. We believe this illustrates that customers value transparency and the product and customer experience improvements we have implemented such as expanded coverage for W-2 import. Adoption rate for this feature went from less than 1% of our customers in tax year 15 to approximately 20% this year. Number two, overall retention increased to 70% and paid unit retention increased by approximately 400 basis points. Specifically, we are encouraged by year two retention improvements showing that last year’s pricing and packaging change drove higher-value new customers. Number three, upsell rate decreased as we saw more users start in the right product at the outset. We attribute this to messaging transparency that is resonating and providing a better user experience, which we believe builds customer loyalty and ultimately, higher lifetime value. Number four, paid mix improved when normalizing for pricing and packaging changes and the impact of prior year promotions. Five and lastly, attach rates for both bank and audit ancillary services significantly increased. We are convinced that our new strategy has put us on the right track in the consumer business. We believe that continued pricing power, supported by a substantial pricing umbrella created by the volumetric leader, will enable TaxAct to grow revenue and segment income. Closing on TaxAct first half 2017 performance, we increased the number of professionals using our preparers edition and increased professional e-files. Now turning to Wealth Management. HD Vest performed well in the first quarter, with revenue up 7% and segment income up 9% compared to last year. Assets under management in fee-based AUM grew 16% year-over-year to more than $11 billion, and now represent more than 27% of total assets under administration, a new record for the firm. Net inflows into AUM for the first three months of the year were approximately $300 million compared with net outflows of about $140 million during the same period last year. The strong first quarter performance comes on the heels of approximately $130 million and $150 million in net inflows during the third and fourth quarters of 2016, respectively. Our total assets under administration also set a new record, growing 11% year-over-year and surpassing the $40 billion mark. In addition to gains from market performance, we are seeing momentum in net fee-based advisory flows and AUA tied to VestVision plans. VestVision is our investment and retirement planning tool that enables advisors to create client-personalized, goals-based plans and track individual goals in varying market conditions. Strong growth in VestVision plan creation in recent months, and related inflows, helped lead to a more than a 40% increase in AUA tied to VestVision plans in first quarter versus a year-ago. Big picture, HD Vest has two notable competitive advantages compared to other marketplace participants. First, our financial advisors are primarily certified tax professionals, who are thus ideally positioned to focus on tax smart investing. Other firms, even very successful ones, simply ignore taxes. But we all know taxes matter a great deal, so firms ignore them at the peril of their clients. In fact, Americans spend more on taxes than on food, clothing and housing combined. And a significant amount of potential tax savings go unclaimed each year, so this is a big deal. Second, we grow our own advisors, cultivating and empowering them to grow their tax practices through wealth management. This, in turn, creates loyalty to the HD Vest brand, and creates a model with far-superior economics versus other players. Bob Oros joined the firm in February and is already looking at several ways to further capitalize on these structural advantages. One initiative is focused on advisor recruitment effectiveness and efficiency. A core part of this initiative involves the rollout of new predictive models that identify which tax professionals are most likely to be successful as a wealth management advisor. Second, we are exploring ways in which we can optimally align our focus and support of the overall advisor base in the most effective way. We will look to sharpen our focus on advisors that create the most value and have the most potential going forward. As a part of this, we expect to deploy more HD Vest resources to help high-potential mid-tier advisors to become even more successful. We are looking at metrics such as assets per advisor and support per advisor ratios, much more than simply the total numbers of advisors. We will talk more about this in coming quarters. I’ll wrap up on Wealth Management with a brief comment on the DOL fiduciary rule. We continue to work with our advisors to prepare for the new rule. At this point, more than 80% of our AUA sits with advisors who are already licensed to give fiduciary advice as a fee-based advisor under the Investment Advisers Act. We have continued to encourage advisors to move to fee-based accounts when that is appropriate for clients and we’ve seen good momentum thus far with increased fee-based flows. As you know, the fiduciary rule is currently under review. As a result of this review, unless there is a further delay, the implementation date has been moved so that it will begin to be phased in beginning in June rather than April. And, while the final outcome of the rule remains unclear, our teams continue to work on the assumption that the rule’s transition period will begin on June 9. And we are well-positioned for full implementation of the rule on January 1. Now let’s discuss synergies. Stepping back, it's fair to say that we have just begun our efforts to capitalize on the combination of our two great businesses. As we’ve noted previously, our go-forward strategy will focus on four main areas. First, extending financial solutions to TaxAct DDIY tax filers. Second, converting TaxAct professional users into HD Vest Advisors. Third, creating integrated tax pro software solutions, and fourth, generating operational synergies. A quick update on each. First, this tax season we launched BluVest, an integrated platform that offers TaxAct customers the option to obtain affordable and objective investment advice through an automated or robo type offering. The service provides our customers with a current year tax benefit by investing in individual retirement accounts during the tax return filing process, and funds their investments directly with their tax refund. We are thrilled to offer such a unique service to our customers, no other tax return software provider or automated investment advisor offers a comparable integrated solution. Although we did not expect BluVest to materially impact our financial results this year, we did a lot of testing and gained valuable insights that we will incorporate into version 2.0 of this service for next tax season. Second, through our marketing efforts to TaxAct pros, we’ve generated hundreds of qualified leads, and we are now seeing these leads turn into licensed HD Vest advisors. Though small in absolute numbers, we like what we see so far and are redoubling our efforts in this upcoming off-season. Third, providing integrated solutions for tax pros is a longer-term goal, and we’ve begun to take small steps in that direction. This year’s professional edition integrated HD Vest’s 1040 Analyst, allowing TaxAct Pros, with their client’s permission, to seamlessly utilize their tax data from the Form 1040 to provide a customized report highlighting tax smart investment opportunities. As both the wealth manager and a tax software company, we are in a unique position to deliver integrated, comprehensive solutions to tax professionals. We believe there is significant value to be unlocked if we are successful. Fourth, we are already achieving benefits from our new One Blucora operating model. By bringing our teams together we’ve created stronger connections and collaboration across the business units. And our shared services approach enables us to operate the business more efficiently as well. Turning now to our strategic transformation. We’ve been open and clear with you about our plans to transform the business, and have continued to update you on our strong progress. We’ve now simplified and streamlined our business around Tax Act and HD Vest and deployed a new operating model. As a result, we are now able to turn much more of our focus to growing our businesses organically. Last quarter, we provided a summary of our significant accomplishments in 2016, and our progress has continued at a rapid pace so far in 2017. During the quarter, we named Sanjay Baskaran, who joined us from Amazon, to lead TaxAct and named Bob Oros, a former Fidelity executive, to lead HD Vest. The fusion of new and strong leadership with deeply experienced teams has already begun to bear fruit in each of our businesses. We continued our aggressive delevering efforts, paying down $38 million in debt during the quarter. We appointed two new independent directors with long and successful track records in financial services, adding significant strength to our board. We continued to fill the remaining positions in our new headquarters location and are about 80% complete. We also agreed to a sublease agreement for our Bellevue office, which will enable us to come in at the lower-end of our cash restructuring cost guidance. In addition, in April, we announced that we plan to enter into a new credit facility that simplifies our capital structure, adds tenor and is expected to reduce our annual interest expense. We expect to close this facility in May. Our Board of Directors has also nominated another independent director for election at our annual meeting of stockholders and I believe she will also be a great addition to our Board. Simply put, we continue to do what we said we would do and I’m pleased with our progress. In closing, we’ve two strong businesses that are well positioned in attractive markets and with strong growth potential. The businesses share a tax theme and together provide a unique and distinctive information advantage that enables us to serve customers better than other far larger and better resourced companies. Both businesses generated compelling financial performance in the quarter. Our work to capture synergies between the businesses is just beginning, and, we believe, remains a significant opportunity. And lastly, our progress in paying down debt and in reducing our interest rate, combined with strong adjusted EBITDA performance and our significant NOL, is enabling us to drive strong non-GAAP EPS performance. Our transformation continues and we continue to execute on our stated objectives. And, overall, as I pass my one-year anniversary with Blucora, I’m even more optimistic about our future than I was when I joined. And we have only just begun. Finally, I wanted to add a big thank you to our employees for all of their work on behalf of our customers, clients and advisors. The team has been doing incredible work and I’m very proud to represent them. With that I’ll turn it over to Eric.

Thanks John. Lots to cover today including first quarter results, tax season expectations, and outlook for the second quarter and full-year. Additionally, we will provide some detail on our debt refinancing and update our estimates on our restructuring expenses. Let’s begin with a summary of our first quarter results and year-on-year growth rates, which finished ahead our expectations. Consolidated revenue of $182.4 million, up 10%, adjusted EBITDA of $58.2 million, up 8%, non-GAAP net income of $47.4 million, up 21%, or $1.04 per diluted share which is up 11%, and GAAP net income attributable to Blucora of $30.6 million, up 35%, or $0.67 per diluted share, which is up 24%. GAAP net income attributable to Blucora included a benefit of $7.4 million or $0.16 per diluted share primarily related to the reversal of valuation allowance. This reflects the impact of the beginning of the year adoption of the new stock-based compensation rule, ASU 2016-09, which now requires the release of valuation allowance on equity NOLs to flow thru tax expense versus APIC which was the prior practice. Turning to the balance sheet, we’ve cash, cash equivalents and short-term investments of $74.8 million. During the quarter, we paid down debt of $38 million and we exited the quarter with net debt of $323.3 million for a net leverage ratio of 3.3x. We expect to make an additional debt pay down of at least $25 million in the second quarter and expect to achieve our stated goal of 3x times net leverage by June 30th. As John mentioned, we expect to complete a refinancing of our debt in the second quarter. It has been our explicit goal to refinance our existing term loan and redeem our convertible notes upon the completion of tax season and in doing so we will optimize the refinancing costs while taking advantage of a favorable credit market. I’m happy to report that we expect to close a $425 million credit facility comprised of $375 million of term loan and $50 million of revolver in May. The new term loan will have a maturity of seven-years and be priced at LIBOR plus 375 basis points with a LIBOR floor of 1%, which will drive cash interest savings of approximately $3.4 million annually. This result exceeded our expectations and speaks to our strong execution since the HD Vest acquisition. Shifting to segment performance, beginning with Tax Prep. TaxAct revenue for the quarter was $99.7 million, up 13% versus prior year and segment income of $53.1 million, up 12% year-on-year. Both revenue and segment income exceeded the high-end of our guidance expectations. Let me provide a bit more color on our tax results in the context of our tax season expectations, which include second quarter. For the first half of 2017, we expect revenue growth of approximately 15% and segment income growth of approximately 14%. These results are driven by an approximate 35% increase in DDIY consumer average revenue per user, primarily from software revenue. We expect these ARPU gains will translate into approximately 16% growth in consumer revenue for the first half of 2017 and be more than sufficient to offset the DDIY consumer e-file decline of 14% for this tax season as compared to the last year’s tax season. Additionally, we expect growth of our professional software revenue for the first half of 2017 of approximately 5% driven by a 4% increase in units sold to preparers who drove a 5% increase in e-files this year. First half 2017 segment income is expected to grow approximately 14% as operating expenses are expected to increase approximately 18%. Higher operating expenses reflect increased marketing, in part driven by early season inefficiency, increased in-season customer service costs and increased personnel and professional service costs focused on growth initiatives beginning in the second quarter and are expected to continue into the second half of the year. Let me touch on these initiatives in the context of our TaxAct outlook. Starting with the second quarter, we expect TaxAct revenue of $52.5 to $53 million and segment income of $34.5 to $35 million. For the full-year, we expect revenue growth of 13.5% to 14.5% and segment margin of 45% to 45.5%. On the revenue side, we expect revenue to be flat in the second half of 2017. This reflects the impact of no longer charging for data archive service, or DAS. DAS revenue is recognized ratably over a three-year period and will phase out over the next two years. The full-year segment margin step down from 2016, reflects the impact of planned investments and while we're not going to get into a lot of detail on these investments, I’m confident that these investments will further improve customer experience and service, enable new revenue opportunities, provide flexibility in our go-to-market strategies and will benefit not just TaxAct for 2017 and beyond, but Blucora as a whole. In order to provide a bit of context, one of these initiatives involves taking TaxAct to the cloud for next season and while we will take on some transition costs this year the long-term benefits are clear, and include increased innovation, added speed and agility, enhanced information security and processing scale that will better support TaxAct’s seasonality. The other initiatives are squarely focused on driving revenue growth. Transitioning to our Wealth Management segment. HD Vest first quarter revenue was $82.7 million, up 7% versus the prior year and segment income was $11.9 million, up 9 %. Revenue came in just above the high-end of our guidance range on the strength of transactional revenue which was up 9% versus first quarter 2016, driven in large part by mutual fund and insurance sales. Both fee based advisory revenue and trailers were up 6%. Other revenue was up 7% year-on-year driven by sweep product revenue which has benefited from two federal fund rate increases over the past twelve months. I do want to point out that our clearing firm contract does contain an interest rate cap and given where interest rates sit today, we will only partially benefit from the next raise and then be capped. We will be seeking to renegotiate the cap with our clearing partner. Fee-based AUM net flows were again the highlight of the quarter as we brought in net inflows of $298 million. While these inflows provide minimal benefit within the quarter, they will benefit us in the second quarter and beyond. As John called out, this marks the third quarter of net fee-based inflows representing an increase of fee-based AUM of approximately $580 million over the past nine months. Additionally, a strong equity market produced an approximate $400 million increase in our fee-based AUM in the first quarter, enabling us to crest the $11 billion mark. Fee-based AUM is up 16% year-on-year and 7% sequentially. Touching quickly on total AUA, which includes fee-based AUM, we exceeded $40 billion for the first quarter, up 11% year-on-year and 5% sequentially. HD Vest segment income came in at the high-end of our guidance range. The 9% growth can be attributed to revenue growth coupled with operating expense leverage. Turning to outlook, we expect second quarter HD Vest revenue of $82.5 to $85.5 million and segment income of $11 to $12.5 million. For the full-year, we expect revenue to grow approximately 6% to 9% with segment margin of 13.8% to 14.7%. In determining our second quarter and full-year ranges, we considered several factors including but not limited to the following: a broad range for transactional revenue due to its inherent variability, the impact of DOL, which we believe will drive increased operating expenses as opposed to significant revenue impact in 2017. Specifically, we have included $2 to $2.3 million in additional expense, of which $1.7 to $1.9 million are implementation costs and therefore non-recurring. We expect a portion of these costs will impact the second quarter pending clarity from the DOL expected in early June. Incremental operating expense as Bob comes up to speed and identifies investment needs, and market volatility, including impact to net flows, and a range of interest rate outcomes. Let’s finish up with unallocated corporate operating expenses and an update to our restructuring estimates. First quarter unallocated operating expenses came in at $6.8 million and better than our guidance. Of the $6.8 million, $2.9 million related to non-recurring transition costs associated with our headquarters move, which do not qualify for restructuring expense treatment, as well as costs associated with the HD Vest leadership transition. For the second quarter, we expect unallocated operating expenses of $6.1 to $5.5 million of which approximately $2.2 million is non-recurring. During our third quarter of 2016 call, we provided a restructuring expense range of $7.5 to $11.3 million, of which we expected $5.6 to $8.7 million to be cash charges. Given our current line of sight, we expect total restructuring expense of approximately $7 million, of which approximately $6 million will be cash charges. We are very pleased with this result, especially on the cash side. The primary driver of lower cash, which John noted, was securing the sublease of our Bellevue, Washington office that commences in June for the remainder of the lease term and provided approximately $2.3 million of cash savings versus the high-end of the range. With that, let’s turn to our consolidated outlook for the second quarter and full-year. For the second quarter we expect revenue between $135 million to $138.5 million, Adjusted EBITDA between $39.4 and $42 million, non-GAAP net income of $28.5 million to $31.5 million or $0.63 to $0.69 per diluted share. And GAAP net loss attributable to Blucora of $4 million to $200, 000 or a $0.09 loss per share to breakeven. Before I share full-year outlook, it is worth noting that although I have provided color on our full-year expectations for each segment, including segment margin, we are focused on segment revenue growth and consolidated adjusted EBITDA. Thus, we expect as we proceed through the year, we will continue refine our investments into each segment, along with corporate operating expense, optimizing for adjusted EBITDA. For the full-year, we expect revenue between $493 million to $506 million, Adjusted EBITDA between $96 to $103.3 million, non-GAAP net income of $59 million to $66.8 million or $1.28 to $1.45 per diluted share and a GAAP net loss attributable to Blucora of $3.4 million or a $0.08 loss per share to net income attributable to Blucora of $2.9 million or $0.06 per diluted share. As a reminder, second quarter and full-year 2017 guidance includes the aforementioned increase in operating expense related to DOL. Lastly, there are a few things to be aware for our GAAP net income and loss attributable to Blucora guidance. First, it includes the impact of debt extinguishment costs with the expected refinancing of our existing term loan and convertible notes, which are estimated to be approximately $16 million in the second quarter. Second, it includes the impact of restructuring expense. Third, GAAP net income or loss attributable to Blucora will greatly be impacted by the variability of tax rate which can be volatile, especially on an intra-period basis, as we expect full-year book income before taxes to be just north of breakeven. Given current estimates, our effective tax rate for the year is approximately 20%, but again this will likely vary as estimates are adjusted throughout the year. With that being said, we expect to pay $3.5 million to $4 million in cash taxes this year, and finally, our GAAP net income or loss attributable to Blucora guidance excludes any impact of tax expense for discrete items and variable stock compensation granted to non-employee advisors. Before I turn the call over to the operator, I'd like to add that we are exiting the first quarter with good momentum to deliver top line and bottom line growth across the firm. As a team, we are focused on execution, including strategic investments that will allow us to deliver growth for years to come. With that, I'll turn the call over to the operator and we will take your questions.

[Operator Instructions] We will be taking our first question from the line of Dan Kurnos from The Benchmark. Your line is open.

Yes, good morning. First off, congratulations on the strong results. John, the stories come a long way over the last 12 months and I think you should be commended for that. I think everyone will probably revolt if I start with questions on HD Vest. So I guess I got to ask about tax first. I don't think we’re getting, we can quibble with the results, so let's just touch on a couple of the high-level pieces here. So I guess John, maybe can you just start with the obvious questions about filers and product mix. Maybe just talk a little bit more about given the transition you're undergoing and strategy, can you focus a little bit on how comfortable you’re with your current SKUs? How we should view the balance going forward between the total filer number, paid filer growth and may be the pace of normalization we should see on the unit front as you work through some of these disruptive changes?

Dan, thank you. Good morning. Great to hear you again. So, a couple of things on your question. Big picture, we’re encouraged by the developments that we saw in the quarter. Our sense is that they reinforce the soundness of the strategy that we are on. I won't repeat the metric since we’ve just shared them, but again, big picture, we are convinced that the strategy has us on the right track. Relative to SKUs and do we’ve the right lineup, a couple of thoughts there. First is, we continue to innovate around the client experience. We made more improvements in the client experience in the last tax season than the couple previously combined. And the team is already looking at and in development on additional experience improvements for next year. So I’ve done a lineup against each of the SKUs, right, that’s a core experiential benefit. On top of things like adding chat, live chat, adding increased coverage on the phone centers and those sorts of things that round out the sort of experience that people typically actually don’t get in this environment. So we are looking for world-class in terms of those customer contact experiences. Now as we shared before, we believe that critical to our strategy is picking our spot. One big sort of vector on that is going after the part of the market that is looking for great value, looking for a great experience, they are savvy, so they know, at the end of some process, they’re going to end up paying something. So why not find the player they can trust around working with that right experience and understanding their prices as they had in that experience. On top of that, it's such a big market that we do see opportunities to more finally segment the market around consumer needs underneath that umbrella of that savvy tax filer who is looking for a good value and a brand that they can trust. It's too early to share what the specifics of that are. We look to be more disclosive towards the end of the year as we put the sort of final and finer touches on those strategies. Relative to balance between paid versus free filers, so as we began sharing last year this time, we really look at the most important metric in terms of units and unit share, as paid share and paid units. And for us, that means people who are paying upfront as part of the process as opposed to having a bunch of free filers who we find a way to nickel and dime later on after the process has concluded. We don’t want any surprises like that in our brand. Admittedly, that’s quite counter to what the industry practices are in this business. And so I want to target that by saying, yes, we are looking for paid filers, but not people that we sort of trip into paying us. We want people who are going to be paying us up front and know what they’re getting. So as far as that balance goes, while we are open for business with those that file with us for free, some small percentage of those folks get more complex in their situation sort of end up being -- becoming paid filers later, but it's really around that paid filer that we are primarily focused upon. Dan, did I get all the questions?

Yes, I think you mostly hit it. Just maybe to quickly follow-up, because I’ve a couple more here, just on that kind of balance, John, I guess, that is also looking a little bit more for, over the next several years as you kind of work through the product portfolio and I’m assuming you haven't changed your long-term guide for TaxAct, just kind of how we should think about, if you are focusing on paid filers, do we get more of a normalization of total units, understanding that that may be a less relevant metric for you on a go-forward?

So I think from a -- I think what I’m sensing is kind of look around what's the sort of the timing and how are we thinking about unit share and paid versus free over time. I think the main thing to share there is look when we embarked upon this strategy beginning last year, much more forcefully this year, we knew that we would be looking at a couple of year process, a couple of season process to do things like reset the current paid filer base, we walked with some basic SKU, which I think was exactly the right thing to do. And we had in mind that it's going to take a couple of seasons to begin to see the growth that we want to see in terms of, again, primarily paid units. Internally, I got to tell you, we don’t look at the total aggressively. We don’t look at free near as much as we look at paid. And so over time, and we recognize that from the outside looking end, you don’t see anything really, but total units, and even those numbers are quite confusing sometimes from some of the players. But that -- from our standpoint, it's -- you'd expect to see a greater balance over time in all likelihood toward paid in the mix of our total units. And the other thing around the products that I do want to round out on though, Dan, is, as you know, we’ve launched BluVest offering this year. We are looking to extend the tax business beyond just a one-year transaction and given that we’ve got access to this risk data set, with the client's permission, we are offering a financial health scorecard check and then getting a -- getting that client also into a retirement account or even a brokerage account. And that’s another way we see evolving the product set and the experience over time.

Got it. Yes, that’s helpful, John. Thanks. And then, kind of just leveraging on some of your other comments in your initial response to me here. Obviously, marketing has been an area of focus. I don’t know you kind of said that maybe some of your initiatives you might give more color on later, but can you give us, at least, a little bit of sense of some of the channel mix testings you did in this period? And maybe just talk about any improvements in brand awareness and your thoughts on kind of driving that metric higher and what’s clearly a more targeted audience?

You bet. So, just to sort of double-click in that general topic, for us, it started with transparency in the marketing message itself, giving customers a lot more clarity, in fact full clarity on cost to users upfront getting people into the right product at the outset. And so that’s why we shared, lower f-sales is actually a good thing for us, because it means that our clients are going to be happier. Channel mix, we did a ton of experimentation here around television versus digital, as an example, within paid search a variety of messages, also looking at micro targeting. So a good example would be, looking around display and video, targeting married homeowners. Obvious reason, we feel like they’re far more likely to have complex returns. They will have an experience around paying to get their taxes done. Some large percentage would be ticked off, that they thought they’re kind of do that for free, but didn’t. And so we looked at a lot of examples like that -- opportunities like that to fine tune the places that TaxAct showed up, combined with that better message along with the first time being very clear on the price advantage that you have when it comes to TaxAct. And so we did a lot of experimentation. Eric referenced that when the season got off to a slow start and we did pull the marketing lever, not been fully clear those first couple two, three weeks around what the situation was, and as a consequence, we kind of blew some of our marketing money and it was quite inefficient for us upfront. And so there is learning around all those elements. And another learning, of course, is around price elasticity. Given our situation, we’ve got to be really smart around what's the best way to price each of these SKUs in the overall business and so we did a lot of experimentation on that front. And what that did was it's -- it did create some less than optimal results, but the benefit is because of the breadth of the testing. And again, we had a ton of it, we are far smarter heading into next year.

Great. And then just one more, I guess, if I can ask kind of a quick one on HD Vest, although I don’t how much of an answer I’m going to get on this, but if you are sure about the market benefits and the strong tailwind that you are getting from that $300 million fee-based AUM inflow in Q1, given that total adviser count is kind of flat to down-ish, it seems clear to us that you’re already getting some productivity gains out of your overall advisor group. So I know there is always some noise as it relates to underperforming advisors, you called out a ton in your prepared remarks about focusing on advisor recruitment efficiency. Can you kind of just give us a sense of how long, I guess, it will take to optimize your advisor group? And with the understanding that you did say you talk about it more in the future, maybe like a flavor of how you’re thinking about investing in either product offerings or analytics tools for the advisors themselves to further drive gains -- productivity gains outside of your own sort of predictive improvements to improve recruitment efficiency?

So a couple of things there. On the -- and I think you are wise, by the way, to separate this into how we are thinking about attracting that next new advisor versus what to do about the existing advisor base. Relative to the next new advisor, to amplify just a little bit on the comments that we shared. And this is pretty similar to TaxAct, right, where we are focused not just on the headline number, we are focused on long-term value creation here at Blucora. And so what that means is we want to be bringing in advisors who have a far greater likelihood of becoming not just a modest producer, but becoming a difference maker in terms of their outcomes that they're driving economically for themselves as well as for us. So we've picked apart that entire process. We are in motion on essentially reinstalling that process. So it's something that we are doing as we go, right? We don’t want to stop and then wait 12 months and restart something. And so we are in motion on that and it's around every aspect of this including the targeting, which we already referenced in the comments previously. And again, that’s all around. Let's bring in advisors that may be -- lets face it, right, you bring in 500 advisors, and in -- if in 5 years you’ve got 25 left that are economic, what’s the point of that? I would rather bring in 150 and have 125 that are producing for us. Relative to existing advisors, this is an area where Bob brings -- Bob Oras brings a track record and significant experience. And we look at our existing advisor base, no surprise, you will have a distribution right? You will have a skew, EW, around effectiveness of advisors in terms of their outcomes and economics. And so we want to make sure that while we do all we can to have those largest advisors stay with us and happy and still growing, we see a massive opportunity in what we’ve called the movable middle. And so that’s around realigning our service approach. It's around education and continued training. It's around ensuring the people advisors are being offered the very best of back office solutions that make it very easy for them to do their business. It's around gaining adoption of a best vision. There is a series of things that we can do, but this is the part where we are going to need to give us some time to get more specific on what those focus areas might be and we are excited, because this is a huge opportunity for us. We like what we’ve in our advisor base. And certainly, when you talk to our largest and more successful advisors, they too would make the same point that hey, you guys ought to really focus on those folks that can become like us. If you spent just a bit more time cultivating this movable middle, you would have a whole bunch more advisers that are as successful as we are and we've taken that advice to heart and we are acting on it.

Got it. Great. Thanks for all the color, John. I will step back into the queue. Congratulations again guys on the strong quarter and Stacy all the best on wherever life takes you next.

Thank you, Dan.

[Operator Instructions] We have no other questioners in the queue at this time, but we will hold for one moment for further questions. Looks like Dan Kurnos from Benchmark would like to ask another question. Your line is back open, sir.

If there is no one else asking questions, I guess I will pick your brain a little bit more, John, if you don’t mind.

[Indiscernible]. Thank you, Dan.

So, I guess -- so let's shift back to tax then. Can you just talk about the prepared side of the equation? I think that was a little bit of a pleasant surprise in the quarter. Software hasn’t been necessarily a major push, but -- and obviously there are some potential cross pollination efforts further down the road with HD Vest. So, maybe if you can just kind of talk about some of the success in that area and how you are thinking about that market opportunity in general?

Yes, thanks. So, let's do the success part first. The main driver around the improvements that we’ve seen there, which have been terrific and frankly without a lot of resource behind it yet given our prioritization on the consumer side of the business has been around sales tactics and sales approach. The team took a step back around how they’re lining up against opportunities, around the sort of support model, around the small sales team that we have, and so there is essentially just some teasing apart of roles. So we had some folks more aggressively focused on hunting and a larger group of folks being able to be there around support for that sales function. We saw a very nice response, 4% or 5% response there in terms of growth. As far as the long-term, those around this part of the business, a couple things. First is we know we’ve got an opportunity over time to build that integrated suite of Tax Prep and Wealth Management. Part of what we’re doing is exposing more of the HD Vest advisers to the TaxAct preparation software, so we can get input from them specifically around, hey, what do you need for this to be something better than what you are getting today. On the tax side alone, not just because of the integration. Now within the tax preparer business itself, we are doing some work this off-season, and I am really excited about how quickly the team has turned their attention, whether it's consumer or the preparers market, turn their attention to focusing already around next year. And the work there is to identify, like we’ve already done on the consumer side, hey what’s the best target market? Where do we want to best focus inside that large market so that we are tuning up our product development and our experience roadmaps to match that target. We see a good opportunity. When you’ve got a business that’s really not been the one you’ve focused on as an organization where our people have had to use sort of their guile and their sort of personal energy on a very small team, focus on a business and you get that sort of growth rate, it's exciting. And so, we are looking to put more into that business, but net-net we still have to put the lion's share of our focus at consumer, because of the opportunities that are on that side of the business.

And then just two -- just, I guess, maybe just two more. Just one on -- this is not probably a large portion, but just can you talk a little bit about if you are seeing any traction on sort of the mobile side as it relates to tax? I know that obviously if you tend to shift more towards complicated returns, it's more likely to be a desktop type solution, but I don’t know if you are thinking about product simplification, and if it's whether it's a branding towards mobile or kind of the cross device, if you are seeing any of that shift, and how that is impacting your thinking about either advertising or where you are placing your products?

So, yes, it's -- mobile clearly is an opportunity for us. We need to up our game in mobile. It is a question of segmentation, right? So there will be some filers who can use mobile alone and get what they need done, get in and out, no problem. For other filers, it can be like other industries, I think, where it's part of a front-end experience, where they may begin on mobile, finish up on desktop. Mobile becomes more of an alert sort of feature for those sorts of clients. And as a referenced a bit ago, we are looking to make the tax experience a full-year experience, so that people can instead of being focused on maximizing their refund, focus on minimizing your taxes. That implies a connectivity with clients over time during the course of the season. Much more to come on that at the end of the -- more toward the end of this year, but that’s where mobile can play a role. So for, again, segmentation for paid filers, more complex filers, we think mobile has a role to play. We don’t think it's going to be a deal and end all, whereas for some very simple filers, it can be the entirety of the experience. Either way, we’ve got a significant opportunity to modernize that experience and it's something that you are going to see from us in tax year '17.

And then just the last one on the cloud migration. If you can just kind of talk about -- it sounds like the expenses are embedded in kind of your outlook, although I don’t know if you want to quantify a little bit more kind of what that might run over, I don’t know, if it takes you 12- or 24 month period to migrate fully to the cloud. But it sounds like it certainly will give you the ability to increase your agility with pushing new products, kind of rightsizing the consumer facing offering, and then ultimately, I'd assume, and John, of course, correct me if I’m wrong, that there is probably some back-end benefits to you guys as well as it translates to synergy opportunities between HD Vest and TaxAct, whether there is -- whether it's actual, specific cross-sell of products, a la BluVest, or learnings that you can kind of quickly import stuff from tax and put it into sort of the HD Vest profile for the investor.

Hey, Dan, it's Eric. Starting with just with the expense part of your question, and just maybe just a finer point on it. Look, our goal is to be into the cloud for next year's tax season. It's starting off as a TaxAct initiative, you can imagine that we will broaden that to the rest of the firm. Cost wise, yes, there is some upfront costs that are set up in nature, some of which will be capitalized, but all built into the guidance. And then obviously, we look at the cost on an ongoing basis versus our operating costs of running two data centers right now as well as the hardware costs to support that. So ultimately, I think it's the right financial decision for us long-term. And this is the year to make the investments and then you are absolutely right on all the benefits that you touched on. It's going to enable so much more, as well as just enhancements to things like information security. They’re best-in-breed when you go to the cloud and you get all the benefit of that by partnering with one of the best-in-breed. So we are excited about it, and we think it's definitely something we can accomplish and be up and running in next tax season.

Yes, and that’s exactly right. The only thing I would add is that, on top of information security, as we go to the cloud and ultimately go to the cloud for Blucora, we are going to find that as we re-architect the data as we go to the cloud, our ability to unleash the power of the data that’s inherent in both of our businesses in a way that’s great for clients and great for us will be far enhanced. So we are not just going to the cloud, right, we are looking for ways to go to the cloud that enable technology improvements, client experience improvements, all the benefits that Eric has shared. And on top of that, we will have this other benefit, it won't be easy to see from the outside, but this benefit of re-architecting our data, so we can far better capitalize on it. It's a very, very big opportunity for us.

All right. Perfect. Thanks again for all the additional color and Eric, also good to hear from you. Nice work with the balance sheet. Thanks, guys.

Thanks.

Thanks, Dan.

Ladies and gentlemen, I see no other questioners in the queue at this time. So I would like to turn the call back over to John for closing comments.

So thanks everybody for joining today. We are certainly pleased to report such a strong start to the year and look forward to continuing to update you all on our progress as the year continues. Take care, everybody.

Ladies and gentlemen, thank you again for your participation in today's conference call. This now concludes the program and you may now disconnect at this time. Everyone, have a great day.