Attached files
| file | filename |
|---|---|
| EX-32.2 - EXHIBIT 32.2 - BLUCORA, INC. | ex-32210xqq22017.htm |
| EX-32.1 - EXHIBIT 32.1 - BLUCORA, INC. | ex-32110xqq22017.htm |
| EX-31.2 - EXHIBIT 31.2 - BLUCORA, INC. | ex-31210xqq22017.htm |
| EX-31.1 - EXHIBIT 31.1 - BLUCORA, INC. | ex-31110xqq22017.htm |
| EX-10.4 - EXHIBIT 10.4 - BLUCORA, INC. | ex-104xform2017rsugrantnot.htm |
| EX-10.3 - EXHIBIT 10.3 - BLUCORA, INC. | ex-103xform2017rsugrantnot.htm |
| EX-10.2 - EXHIBIT 10.2 - BLUCORA, INC. | ex-102xabruderexecemployme.htm |
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 000-25131
BLUCORA, INC.
(Exact name of registrant as specified in its charter)
Delaware | 91-1718107 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
6333 State Hwy 161, 6th Floor, Irving, Texas | 75038 |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (972) 870-6000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. ý Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | o | Accelerated filer | ý |
Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | o |
Emerging growth company | o | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes ý No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Outstanding at | |
Class | July 20, 2017 |
Common Stock, Par Value $0.0001 | 44,931,297 |
TABLE OF CONTENTS
Page | ||
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BLUCORA, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
June 30, 2017 | December 31, 2016 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 78,312 | $ | 51,713 | |||
Cash segregated under federal or other regulations | 799 | 2,355 | |||||
Available-for-sale investments | — | 7,101 | |||||
Accounts receivable, net of allowance | 7,254 | 10,209 | |||||
Commissions receivable | 15,563 | 16,144 | |||||
Other receivables | 432 | 4,004 | |||||
Prepaid expenses and other current assets, net | 7,041 | 6,321 | |||||
Total current assets | 109,401 | 97,847 | |||||
Long-term assets: | |||||||
Property and equipment, net | 8,677 | 10,836 | |||||
Goodwill, net | 548,890 | 548,741 | |||||
Other intangible assets, net | 345,521 | 362,178 | |||||
Other long-term assets | 2,677 | 3,057 | |||||
Total long-term assets | 905,765 | 924,812 | |||||
Total assets | $ | 1,015,166 | $ | 1,022,659 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 3,741 | $ | 4,536 | |||
Commissions and advisory fees payable | 16,143 | 16,587 | |||||
Accrued expenses and other current liabilities | 21,484 | 18,528 | |||||
Deferred revenue | 4,753 | 12,156 | |||||
Current portion of long-term debt, net | 2,560 | 2,560 | |||||
Total current liabilities | 48,681 | 54,367 | |||||
Long-term liabilities: | |||||||
Long-term debt, net | 353,848 | 248,221 | |||||
Convertible senior notes, net | — | 164,176 | |||||
Deferred tax liability, net | 58,905 | 111,126 | |||||
Deferred revenue | 759 | 1,849 | |||||
Other long-term liabilities | 8,628 | 10,205 | |||||
Total long-term liabilities | 422,140 | 535,577 | |||||
Total liabilities | 470,821 | 589,944 | |||||
Redeemable noncontrolling interests | 15,998 | 15,696 | |||||
Commitments and contingencies (Note 9) | |||||||
Stockholders’ equity: | |||||||
Common stock, par $0.0001—authorized shares, 900,000; issued and outstanding shares, | |||||||
44,681 and 41,845 | 4 | 4 | |||||
Additional paid-in capital | 1,535,858 | 1,510,152 | |||||
Accumulated deficit | (1,007,325 | ) | (1,092,756 | ) | |||
Accumulated other comprehensive loss | (190 | ) | (381 | ) | |||
Total stockholders’ equity | 528,347 | 417,019 | |||||
Total liabilities and stockholders’ equity | $ | 1,015,166 | $ | 1,022,659 | |||
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BLUCORA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Revenue: | |||||||||||||||
Wealth management services revenue | $ | 85,296 | $ | 76,117 | $ | 167,963 | $ | 153,408 | |||||||
Tax preparation services revenue | 53,866 | 43,991 | 153,574 | 132,465 | |||||||||||
Total revenue | 139,162 | 120,108 | 321,537 | 285,873 | |||||||||||
Operating expenses: | |||||||||||||||
Cost of revenue: | |||||||||||||||
Wealth management services cost of revenue | 56,963 | 51,023 | 112,837 | 103,292 | |||||||||||
Tax preparation services cost of revenue | 2,411 | 2,023 | 6,229 | 5,230 | |||||||||||
Amortization of acquired technology | 47 | 49 | 95 | 716 | |||||||||||
Total cost of revenue | 59,421 | 53,095 | 119,161 | 109,238 | |||||||||||
Engineering and technology | 4,242 | 3,959 | 8,990 | 8,254 | |||||||||||
Sales and marketing | 22,296 | 19,913 | 71,294 | 63,750 | |||||||||||
General and administrative | 13,715 | 11,508 | 27,198 | 24,261 | |||||||||||
Depreciation | 873 | 963 | 1,813 | 1,938 | |||||||||||
Amortization of other acquired intangible assets | 8,289 | 8,316 | 16,577 | 16,632 | |||||||||||
Restructuring | 331 | — | 2,620 | — | |||||||||||
Total operating expenses | 109,167 | 97,754 | 247,653 | 224,073 | |||||||||||
Operating income | 29,995 | 22,354 | 73,884 | 61,800 | |||||||||||
Other loss, net | (24,200 | ) | (10,916 | ) | (33,908 | ) | (18,430 | ) | |||||||
Income from continuing operations before income taxes | 5,795 | 11,438 | 39,976 | 43,370 | |||||||||||
Income tax expense | (2,315 | ) | (5,793 | ) | (5,786 | ) | (17,436 | ) | |||||||
Income from continuing operations | 3,480 | 5,645 | 34,190 | 25,934 | |||||||||||
Discontinued operations, net of income taxes | — | (19,975 | ) | — | (17,453 | ) | |||||||||
Net income (loss) | 3,480 | (14,330 | ) | 34,190 | 8,481 | ||||||||||
Net income attributable to noncontrolling interests | (176 | ) | (115 | ) | (302 | ) | (259 | ) | |||||||
Net income (loss) attributable to Blucora, Inc. | $ | 3,304 | $ | (14,445 | ) | $ | 33,888 | $ | 8,222 | ||||||
Net income (loss) per share attributable to Blucora, Inc. - basic: | |||||||||||||||
Continuing operations | $ | 0.08 | $ | 0.13 | $ | 0.79 | $ | 0.62 | |||||||
Discontinued operations | — | (0.48 | ) | — | (0.42 | ) | |||||||||
Basic net income (loss) per share | $ | 0.08 | $ | (0.35 | ) | $ | 0.79 | $ | 0.20 | ||||||
Net income (loss) per share attributable to Blucora, Inc. - diluted: | |||||||||||||||
Continuing operations | $ | 0.07 | $ | 0.13 | $ | 0.73 | $ | 0.61 | |||||||
Discontinued operations | — | (0.47 | ) | — | (0.41 | ) | |||||||||
Diluted net income (loss) per share | $ | 0.07 | $ | (0.34 | ) | $ | 0.73 | $ | 0.20 | ||||||
Weighted average shares outstanding: | |||||||||||||||
Basic | 43,644 | 41,405 | 42,895 | 41,288 | |||||||||||
Diluted | 46,937 | 42,298 | 46,182 | 41,954 | |||||||||||
Other comprehensive income: | |||||||||||||||
Net income (loss) | $ | 3,480 | $ | (14,330 | ) | $ | 34,190 | $ | 8,481 | ||||||
Unrealized gain (loss) on available-for-sale investments, net of tax | — | (1 | ) | 1 | 10 | ||||||||||
Foreign currency translation adjustment | 147 | 1 | 190 | 323 | |||||||||||
Other comprehensive income | 147 | — | 191 | 333 | |||||||||||
Comprehensive income (loss) | 3,627 | (14,330 | ) | 34,381 | 8,814 | ||||||||||
Comprehensive income attributable to noncontrolling interests | (176 | ) | (115 | ) | (302 | ) | (259 | ) | |||||||
Comprehensive income (loss) attributable to Blucora, Inc. | $ | 3,451 | $ | (14,445 | ) | $ | 34,079 | $ | 8,555 | ||||||
See accompanying notes to Unaudited Condensed Consolidated Financial Statements.
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BLUCORA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six months ended June 30, | |||||||
2017 | 2016 | ||||||
Operating Activities: | |||||||
Net income | $ | 34,190 | $ | 8,481 | |||
Less: Discontinued operations, net of income taxes | — | (17,453 | ) | ||||
Net income from continuing operations | 34,190 | 25,934 | |||||
Adjustments to reconcile net income from continuing operations to net cash from operating activities: | |||||||
Stock-based compensation | 5,302 | 7,252 | |||||
Depreciation and amortization of acquired intangible assets | 18,865 | 19,597 | |||||
Restructuring (non-cash) | 1,402 | — | |||||
Deferred income taxes | (681 | ) | (8,806 | ) | |||
Amortization of premium on investments, net | 10 | 155 | |||||
Amortization of debt issuance costs | 714 | 1,027 | |||||
Accretion of debt discounts | 1,840 | 2,500 | |||||
(Gain) loss on debt extinguishment | 19,581 | (2,846 | ) | ||||
Revaluation of acquisition-related contingent consideration liability | — | 391 | |||||
Other | — | 13 | |||||
Cash provided (used) by changes in operating assets and liabilities: | |||||||
Accounts receivable | 2,956 | 1,395 | |||||
Commissions receivable | 581 | 1,520 | |||||
Other receivables | 2,544 | 19,460 | |||||
Prepaid expenses and other current assets | (545 | ) | 4,870 | ||||
Other long-term assets | 341 | 95 | |||||
Accounts payable | (795 | ) | (1,491 | ) | |||
Commissions and advisory fees payable | (444 | ) | (1,980 | ) | |||
Deferred revenue | (8,493 | ) | (4,257 | ) | |||
Accrued expenses and other current and long-term liabilities | 3,768 | 26,057 | |||||
Net cash provided by operating activities from continuing operations | 81,136 | 90,886 | |||||
Investing Activities: | |||||||
Business acquisition, net of cash acquired | — | (1,788 | ) | ||||
Purchases of property and equipment | (1,911 | ) | (1,528 | ) | |||
Proceeds from sales of investments | 249 | — | |||||
Proceeds from maturities of investments | 7,252 | 4,000 | |||||
Purchases of investments | (409 | ) | (659 | ) | |||
Net cash provided by investing activities from continuing operations | 5,181 | 25 | |||||
Financing Activities: | |||||||
Proceeds from credit facilities, net of debt issuance costs and debt discount of $5,913 and $1,875 | 367,212 | — | |||||
Payments on convertible notes | (172,827 | ) | (20,667 | ) | |||
Payments on credit facilities | (275,000 | ) | (60,000 | ) | |||
Proceeds from stock option exercises | 23,996 | 1,142 | |||||
Proceeds from issuance of stock through employee stock purchase plan | 662 | 562 | |||||
Tax payments from shares withheld for equity awards | (5,267 | ) | (901 | ) | |||
Contingent consideration payments for business acquisition | (946 | ) | — | ||||
Net cash used by financing activities from continuing operations | (62,170 | ) | (79,864 | ) | |||
Net cash provided by continuing operations | 24,147 | 11,047 | |||||
Net cash provided by operating activities from discontinued operations | — | 14,198 | |||||
Net cash provided (used) by investing activities from discontinued operations | 1,028 | (970 | ) | ||||
Net cash used by financing activities from discontinued operations | — | (7,000 | ) | ||||
Net cash provided by discontinued operations | 1,028 | 6,228 | |||||
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 43 | (7 | ) | ||||
Net increase in cash, cash equivalents, and restricted cash | 25,218 | 17,268 | |||||
Cash, cash equivalents, and restricted cash, beginning of period | 54,868 | 59,830 | |||||
Cash, cash equivalents, and restricted cash, end of period | $ | 80,086 | $ | 77,098 | |||
Cash paid for income taxes from continuing operations | $ | 719 | $ | 1,198 | |||
Cash paid for interest from continuing operations | $ | 9,478 | $ | 17,616 | |||
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BLUCORA, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: The Company and Basis of Presentation
Description of the business: Blucora, Inc. (the "Company" or "Blucora") operates two businesses: a Wealth Management business and an online Tax Preparation business. The Wealth Management business consists of the operations of HDV Holdings, Inc. and its subsidiaries ("HD Vest"). HDV Holdings, Inc. is the parent company of the Wealth Management business and owns all outstanding shares of HD Vest, Inc., which serves as a holding company for the various financial services subsidiaries. Those subsidiaries include HD Vest Investment Securities, Inc. (an introducing broker-dealer), HD Vest Advisory Services, Inc. (a registered investment advisor), and HD Vest Insurance Agency, LLC (an insurance broker) (collectively referred to as the "Wealth Management business" or the "Wealth Management segment"). The Tax Preparation business consists of the operations of TaxAct, Inc. ("TaxAct") and provides digital tax preparation solutions for consumers, small business owners, and tax professionals through its website www.TaxAct.com (collectively referred to as the "Tax Preparation business" or the "Tax Preparation segment").
The Company also operated an internet Search and Content business and an E-Commerce business through 2016. The Search and Content business operated through the InfoSpace LLC subsidiary ("InfoSpace"), and the E-Commerce business consisted of the operations of Monoprice, Inc. ("Monoprice").
On October 14, 2015, the Company announced its plans to focus on the technology-enabled financial solutions market (the "Strategic Transformation"). Strategic Transformation refers to the Company's transformation into a technology-enabled financial solutions company comprised of TaxAct and HD Vest (see "Note 3: Business Combinations") and the divestitures of the Search and Content and E-Commerce businesses in 2016 (see "Note 4: Discontinued Operations"). As part of the Strategic Transformation and "One Company" operating model, the Company announced on October 27, 2016 plans to relocate its corporate headquarters by June 2017 from Bellevue, Washington to Irving, Texas. The actions to relocate corporate headquarters were intended to drive efficiencies and improve operational effectiveness (see "Note 5: Restructuring"). The restructuring is now substantially complete and it is expected to be completed by December 31, 2017.
Segments: The Company has two reportable segments: the Wealth Management segment and the Tax Preparation segment. The former Search and Content and E-Commerce segments are included in discontinued operations. (see "Note 11: Segment Information").
Reclassification: The Company reclassified certain amounts on its consolidated statements of cash flows related to excess tax benefits generated from stock-based compensation and restricted cash, both in connection with the implementation of new accounting pronouncements. See the "Recent accounting pronouncements" section of "Note 2: Summary of Significant Accounting Policies" for additional information.
Note 2: Summary of Significant Accounting Policies
Interim financial information: The accompanying consolidated financial statements have been prepared by the Company under the rules and regulations of the Securities and Exchange Commission (the "SEC") for interim financial reporting. These consolidated financial statements are unaudited and, in management’s opinion, include all adjustments, consisting of normal recurring adjustments and accruals, necessary for a fair presentation of the consolidated financial position, results of operations, and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("GAAP") have been omitted in accordance with the rules and regulations of the SEC. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes in Part II Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. Interim results are not necessarily indicative of results for a full year.
Cash, cash equivalents, and restricted cash: The following table presents cash, cash equivalents, and restricted cash as reported on the consolidated balance sheets that equal the total amounts on the consolidated statements of cash flows (in thousands):
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June 30, | December 31, | ||||||||||||||
2017 | 2016 | 2016 | 2015 | ||||||||||||
Cash and cash equivalents | $ | 78,312 | $ | 74,273 | $ | 51,713 | $ | 55,473 | |||||||
Cash segregated under federal or other regulations | 799 | 2,025 | 2,355 | 3,557 | |||||||||||
Restricted cash included in "Prepaid expenses and other current assets, net" | 425 | 100 | 250 | 100 | |||||||||||
Restricted cash included in "Other long-term assets" | 550 | 700 | 550 | 700 | |||||||||||
Total cash, cash equivalents, and restricted cash | $ | 80,086 | $ | 77,098 | $ | 54,868 | $ | 59,830 | |||||||
See the "Recent accounting pronouncements" section of this note for additional information. Cash segregated under federal and other regulations is held in a segregated bank account for the exclusive benefit of the Company’s Wealth Management business customers. Restricted cash included in prepaid expenses and other current assets, net and other long-term assets represents amounts pledged as collateral for certain of the Company's banking arrangements.
Fair value of financial instruments: The Company measures its cash equivalents, available-for-sale investments, and contingent consideration liability at fair value. The Company considers the carrying values of accounts receivable, commissions receivable, other receivables, prepaid expenses, other current assets, accounts payable, commissions and advisory fees payable, accrued expenses, and other current liabilities to approximate fair values primarily due to their short-term natures.
Cash equivalents and debt securities are classified within Level 2 (see "Note 6: Fair Value Measurements") of the fair value hierarchy because the Company values them utilizing market observable inputs. Unrealized gains and losses are included in "Accumulated other comprehensive loss" on the consolidated balance sheets, and amounts reclassified out of comprehensive income into net income are determined on the basis of specific identification.
The Company has a contingent consideration liability that is related to the Company's 2015 acquisition of SimpleTax Software Inc. ("SimpleTax") and is classified within Level 3 (see "Note 6: Fair Value Measurements") of the fair value hierarchy because the Company values it utilizing significant inputs not observable in the market. Specifically, the Company has determined the fair value of the contingent consideration liability based on a probability-weighted discounted cash flow analysis, which includes assumptions related to estimating revenues, the probability of payment, and the discount rate. The change in the fair value of the contingent consideration liability is recognized in "General and administrative" expense on the consolidated statements of comprehensive income for the period in which the fair value changes.
Concentration of credit risk: Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term investments, trade accounts receivable, and commissions receivable. These instruments are generally unsecured and uninsured.
For cash equivalents, short-term investments, and commissions receivable, the Company attempts to manage exposure to counterparty credit risk by only entering into agreements with major financial institutions and investment sponsors that are expected to be able to fully perform under the terms of the agreement.
Accounts receivable are typically unsecured and are derived from revenues earned from customers primarily located in the United States operating in a variety of geographic areas. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses.
Recent accounting pronouncements: Changes to GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of accounting standards updates ("ASUs") to the FASB’s Accounting Standards Codification ("ASC"). The Company considers the applicability and impact of all recent ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s consolidated financial position and results of operations. The Company currently is evaluating ASUs that impact the following areas:
Revenue recognition - In May 2014, the FASB issued guidance codified in ASC 606, "Revenue from Contracts with Customers," which amends the guidance in former ASC 605 "Revenue Recognition." The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This will be achieved in a five-step process. Enhanced disclosures also will be required. This guidance is effective on a retrospective basis--either to each reporting period presented or with the cumulative effect of initially applying this guidance recognized at the date of initial application--for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning
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after December 15, 2017. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company has made significant progress toward completing its evaluation of potential changes from adopting the new guidance on its core revenues and continues to evaluate the impact of this guidance on its consolidated financial statements and related disclosures. Currently, the Company expects to have its preliminary evaluation, including the selection of an adoption method, completed by the end of the third quarter of 2017. The Company expects to adopt the new guidance on January 1, 2018.
Leases (ASU 2016-02) - In February 2016, the FASB issued an ASU on lease accounting, whereby lease assets and liabilities, whether arising from leases that are considered operating or finance (capital) and have a term of twelve months or less, will be recognized on the balance sheet. Enhanced qualitative disclosures also will be required. This guidance is effective on a modified retrospective basis--with various practical expedients related to leases that commenced before the effective date--for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning after December 15, 2018. Early adoption is permitted. The Company currently is evaluating the impact of this guidance on its consolidated financial statements and related disclosures.
Stock-based compensation (ASU 2016-09) - In March 2016, the FASB issued an ASU on employee share-based payment accounting. The ASU requires that excess tax benefits and deficiencies be recognized as income tax benefit or expense, rather than as additional paid-in capital. In addition, the ASU requires that excess tax benefits be recorded in the period that shares vest or settle, regardless of whether the benefit reduces taxes payable in the same period. Cash flows related to excess tax benefits will be included as an operating activity, and no longer classified as a financing activity, in the statement of cash flows. This guidance was effective for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning after December 15, 2016. The guidance related to the recognition of excess tax benefits and deficiencies as income tax benefit or expense was effective on a prospective basis, and the guidance related to the timing of excess tax benefit recognition was effective using a modified retrospective transition method with a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. The cash flow presentation guidance was effective on a retrospective or prospective basis.
The Company implemented this ASU on January 1, 2017 and recorded a cumulative-effect adjustment of $51.5 million to credit retained earnings for deferred tax assets related to net operating losses that arose from excess tax benefits, which the Company has deemed realizable. In addition to this:
• | At the time of adoption and on a prospective basis, the primary impact of adoption was the recognition of excess tax benefits and deficiencies, including deferred tax assets related to net operating losses that arose from excess tax benefits which the Company has deemed realizable, in the income tax provision (rather than in additional paid-in capital). This caused income taxes to differ from taxes at the statutory rates in 2017. For the three months ended June 30, 2017, the Company recognized an estimated $0.8 million increase to the income tax provision, which resulted in a $0.8 million decrease to income from continuing operations and net income attributable to Blucora, a $0.02 decrease to basic earnings per share, and a $0.02 decrease to diluted earnings per share. For the six months ended June 30, 2017, the Company recognized an estimated $6.6 million decrease to the income tax provision, which resulted in a $6.6 million increase to income from continuing operations and net income attributable to Blucora, a $0.15 increase to basic earnings per share, and a $0.14 increase to diluted earnings per share. |
• | The Company applied the cash flow presentation guidance on a retrospective basis, restating the consolidated statements of cash flows to present excess tax benefits as an operating activity (rather than a financing activity). This resulted in an increase to cash provided by operating activities from continuing operations and a corresponding increase to cash used by financing activities from continuing operations for the amount historically presented in the "excess tax benefits from stock-based award activity" line item in the consolidated statements of cash flows. For the three and six months ended June 30, 2016, this amount was $10.0 million and $26.9 million, respectively. The restatement had no impact on total cash flows for the periods presented. |
The ASU also clarifies that payments made to tax authorities on an employee's behalf for withheld shares should be presented as a financing activity in the statement of cash flows, allows the repurchase of more of an employee's shares for tax withholding purposes without triggering liability accounting, and provides an accounting policy election to account for forfeitures as they occur. The cash flow presentation requirements for payments made to tax authorities on an employee's behalf had no impact to any periods presented, since such cash flows historically have been presented as a financing activity. The Company is not planning to change tax withholdings and will continue to estimate forfeitures in determining the amount of compensation cost to be recognized in each period.
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Statement of cash flows and restricted cash (ASU 2016-18) - In November 2016, the FASB issued an ASU on the classification and presentation of changes in restricted cash on the statement of cash flows. The ASU requires that the statement of cash flows explains the change during the period in the total of cash, cash equivalents, and restricted cash; therefore, the amounts described as restricted cash should be included with cash and cash equivalents when reconciling the beginning and end of period total amounts on the statement of cash flows. This guidance is effective for annual reporting periods, including interim reporting periods within those annual reporting periods, beginning after December 15, 2017. Early adoption is permitted. The guidance is effective on a retrospective basis. The Company elected to early adopt this guidance as of January 1, 2017. The reclassification was not material to the periods presented and had no impact on total cash flows, income from continuing operations, or net income attributable to Blucora for the periods presented. See the "Cash, cash equivalents, and restricted cash" section of this note for additional information.
Note 3: Business Combinations
HD Vest: On December 31, 2015 and pursuant to the Purchase Agreement dated October 14, 2015, the Company acquired HD Vest for $613.7 million, after a $1.8 million final working capital adjustment in the first quarter of 2016. HD Vest provides wealth management solutions for financial advisors and their clients. In connection with the acquisition, certain members of HD Vest management rolled over a portion of the proceeds they would have otherwise received at the closing into shares of the acquisition subsidiary through which the Company consummated the purchase of HD Vest. A portion of those shares were sold to the Company in exchange for a promissory note. After giving effect to the rollover shares and related purchase of the rollover shares for the promissory note, the Company indirectly owns 95.52% of HDV Holdings, Inc., with the remaining 4.48% noncontrolling interest held collectively by the rollover management members and subject to put and call arrangements exercisable beginning in 2019.
The Purchase Agreement dictated that the Company placed into escrow $20.0 million of additional consideration that was contingent upon HD Vest's 2015 earnings performance. The contingent consideration threshold was not achieved; therefore, the amount was excluded from the purchase price and recorded as a receivable in "Other receivables" as of December 31, 2015 for the amount that was returned to the Company from the escrow agent in the first quarter of 2016.
Note 4: Discontinued Operations
On November 17, 2016, the Company closed on an agreement with YFC-Boneagle Electric Co., Ltd ("YFC"), under which YFC acquired the E-Commerce business for $40.5 million, which included a working capital adjustment. Of this amount, $39.5 million was received in the fourth quarter of 2016 and $1.0 million was received in the second quarter of 2017--both amounts were included in investing activities from discontinued operations in the consolidated statements of cash flows. The Company used all of the proceeds to pay down debt and recognized a loss on sale of the E-Commerce business of approximately $52.2 million in the fourth quarter of 2016.
On August 9, 2016, the Company closed on an agreement with OpenMail LLC ("OpenMail"), under which OpenMail acquired substantially all of the assets and assumed certain specified liabilities of the Search and Content business for $45.2 million, which included a working capital adjustment, and was included in investing activities from discontinued operations in the consolidated statements of cash flows. The Company used all of the proceeds to pay down debt and recognized a loss on sale of the Search and Content business of approximately $21.6 million in the third quarter of 2016.
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Summarized financial information for discontinued operations is as follows (in thousands):
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Major classes of items in net income (loss): | |||||||||||||||
Revenues | $ | — | $ | 76,057 | $ | — | $ | 155,387 | |||||||
Operating expenses | — | (66,891 | ) | — | (141,922 | ) | |||||||||
Other loss, net | — | (197 | ) | — | (429 | ) | |||||||||
Income from discontinued operations before income taxes | — | 8,969 | — | 13,036 | |||||||||||
Loss on sale of discontinued operations before income taxes | — | (38,525 | ) | — | (38,525 | ) | |||||||||
Discontinued operations, before income taxes | — | (29,556 | ) | — | (25,489 | ) | |||||||||
Income tax benefit | — | 9,581 | — | 8,036 | |||||||||||
Discontinued operations, net of income taxes | $ | — | $ | (19,975 | ) | $ | — | $ | (17,453 | ) | |||||
Note 5: Restructuring
The following table summarizes the activity in the restructuring liability (in thousands), resulting from the relocation of corporate headquarters to Irving, Texas as part of the Strategic Transformation:
Employee-Related Termination Costs | Contract Termination Costs | Fixed Asset Impairments | Stock-Based Compensation | Other Costs | Total | ||||||||||||||||||
Balance as of December 31, 2016 | $ | 4,234 | $ | — | $ | — | $ | — | $ | — | $ | 4,234 | |||||||||||
Restructuring charges | (30 | ) | (241 | ) | 1,878 | 981 | 32 | 2,620 | |||||||||||||||
Payments | (434 | ) | (161 | ) | — | — | (32 | ) | (627 | ) | |||||||||||||
Non-cash | — | 1,457 | (1,878 | ) | (981 | ) | — | (1,402 | ) | ||||||||||||||
Balance as of June 30, 2017 | $ | 3,770 | $ | 1,055 | $ | — | $ | — | $ | — | $ | 4,825 | |||||||||||
Employee-related termination costs primarily include severance benefits, under both ongoing and one-time benefit arrangements that are payable at termination dates throughout 2017, with the majority expected to be paid in the second half of 2017. Contract termination costs and fixed asset impairments were incurred in connection with the Bellevue facility's operating lease and related fixed assets, which are described further in the next two paragraphs, respectively. Stock-based compensation primarily includes the impact of equity award modifications associated with employment contracts for certain individuals impacted by the relocation, as well as forfeitures that were recorded for severed employees. Other costs include office moving costs.
The Company has a non-cancelable operating lease that runs through 2020 for its former corporate headquarters in Bellevue, Washington, which the Company occupied until May 2017. In March 2017, the Company agreed to a sublease for the entire Bellevue facility, which was effective June 1, 2017 and expires on September 30, 2020, consistent with the underlying operating lease. Under that sublease agreement, the Company will not recover all of its remaining lease rental obligations (including common area maintenance costs and real estate taxes) and, therefore, recognized a loss on sublease of $1.1 million. See "Note 9: Commitments and Contingencies" for additional information on the sublease. The Company also wrote-off its $1.5 million deferred rent liability (a non-cash item), related to various lease incentives that had been provided originally by the landlord, and incurred broker commissions related to the sublease agreement. All of these items were recorded as contract termination costs in the first quarter of 2017.
The Company began receiving sublease offers in the first quarter of 2017, at which point it was indicated that the remaining lease rental obligations, and the related value for the leasehold improvements and the office furniture and equipment, would not be fully recovered. As a result and given the nature of these fixed assets, the Company fully impaired the $1.9 million carrying value of those assets in the first quarter of 2017.
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Note 6: Fair Value Measurements
In accordance with ASC 820, Fair Value Measurements and Disclosures ("ASC 820"), certain of the Company's assets and liabilities, which are carried at fair value, are classified in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs, other than Level 1, or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data and reflect the Company’s own assumptions.
The fair value hierarchy of the Company’s assets and liabilities carried at fair value and measured on a recurring basis was as follows (in thousands):
Fair value measurements at the reporting date using | |||||||||||||||
June 30, 2017 | Quoted prices in active markets using identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||||
Cash equivalents: money market and other funds | $ | 10,799 | $ | — | $ | 10,799 | $ | — | |||||||
Total assets at fair value | $ | 10,799 | $ | — | $ | 10,799 | $ | — | |||||||
Acquisition-related contingent consideration liability | $ | 2,599 | $ | — | $ | — | $ | 2,599 | |||||||
Total liabilities at fair value | $ | 2,599 | $ | — | $ | — | $ | 2,599 | |||||||
Fair value measurements at the reporting date using | |||||||||||||||
December 31, 2016 | Quoted prices in active markets using identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||||
Cash equivalents: | |||||||||||||||
U.S government securities | $ | 2,749 | $ | — | $ | 2,749 | $ | — | |||||||
Money market and other funds | 4,090 | — | 4,090 | — | |||||||||||
Commercial paper | 1,999 | — | 1,999 | — | |||||||||||
Taxable municipal bonds | 1,301 | — | 1,301 | — | |||||||||||
Total cash equivalents | 10,139 | — | 10,139 | — | |||||||||||
Available-for-sale investments: | |||||||||||||||
Debt securities: | |||||||||||||||
U.S. government securities | 2,000 | — | 2,000 | — | |||||||||||
Commercial paper | 1,998 | — | 1,998 | — | |||||||||||
Time deposits | 807 | — | 807 | — | |||||||||||
Taxable municipal bonds | 2,296 | — | 2,296 | — | |||||||||||
Total debt securities | 7,101 | — | 7,101 | — | |||||||||||
Total assets at fair value | $ | 17,240 | $ | — | $ | 17,240 | $ | — | |||||||
Acquisition-related contingent consideration liability | $ | 3,421 | $ | — | $ | — | $ | 3,421 | |||||||
Total liabilities at fair value | $ | 3,421 | $ | — | $ | — | $ | 3,421 | |||||||
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A reconciliation of Level 3 items measured at fair value on a recurring basis is as follows (in thousands):
Acquisition-related contingent consideration liability: | |||
Balance as of December 31, 2016 | $ | 3,421 | |
Payment | (946 | ) | |
Foreign currency transaction loss | 124 | ||
Balance as of June 30, 2017 | $ | 2,599 | |
The contingent consideration liability is related to the Company's 2015 acquisition of SimpleTax. The full contractual obligation under the contingent consideration arrangement was accrued during the year ended December 31, 2016. Payments are contingent upon product availability and revenue performance over a three-year period ending December 31, 2018 and are expected to occur annually over that period. The first payment was made in the first quarter of 2017 and classified as a financing activity on the consolidated statements of cash flows. The remaining payments are expected through 2019. The foreign currency transaction loss was included in "Other loss, net" on the consolidated statements of comprehensive income. As of June 30, 2017, $1.3 million of the contingent consideration liability was included in "Accrued expenses and other current liabilities" and $1.3 million in "Other long-term liabilities" on the consolidated balance sheets.
The contractual maturities of the debt securities classified as available-for-sale at December 31, 2016 were less than one year.
The cost and fair value of available-for-sale investments were as follows (in thousands):
Amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||
Balance as of December 31, 2016 | $ | 7,102 | $ | — | $ | (1 | ) | $ | 7,101 | ||||||
The Company had non-recurring Level 3 fair value measurements in 2017 and 2016 related to the redemption and repurchase of its Convertible Senior Notes. See "Note 7: Debt" for details.
Note 7: Debt
The Company’s debt consisted of the following (in thousands):
June 30, 2017 | December 31, 2016 | ||||||||||||||||||||||||||||||
Principal amount | Discount | Debt issuance costs | Net carrying value | Principal amount | Discount | Debt issuance costs | Net carrying value | ||||||||||||||||||||||||
Senior secured credit facility | $ | 360,000 | $ | (1,782 | ) | $ | (5,010 | ) | $ | 353,208 | $ | — | $ | — | $ | — | $ | — | |||||||||||||
TaxAct - HD Vest 2015 credit facility | — | — | — | — | 260,000 | (7,124 | ) | (5,295 | ) | 247,581 | |||||||||||||||||||||
Convertible Senior Notes | — | — | — | — | 172,859 | (6,913 | ) | (1,770 | ) | 164,176 | |||||||||||||||||||||
Note payable, related party | 3,200 | — | — | 3,200 | 3,200 | — | — | 3,200 | |||||||||||||||||||||||
Total debt | $ | 363,200 | $ | (1,782 | ) | $ | (5,010 | ) | $ | 356,408 | $ | 436,059 | $ | (14,037 | ) | $ | (7,065 | ) | $ | 414,957 | |||||||||||
Senior secured credit facility: On May 22, 2017, Blucora entered into an agreement with a syndicate of lenders for the purposes of refinancing the credit facility previously entered into in 2015 for the purposes of financing the HD Vest acquisition (the "TaxAct - HD Vest 2015 credit facility"), redeeming its Convertible Senior Notes that were outstanding at the time (the "Notes"), and providing future working capital and capital expenditure flexibility. Consequently, the TaxAct - HD Vest 2015 credit facility was repaid in full and the commitments under the TaxAct - HD Vest revolving credit facility were terminated. The Blucora senior secured credit facility consists of a committed $50.0 million revolving credit loan, which includes a letter of credit sub-facility, and a $375.0 million term loan for an aggregate $425.0 million credit facility. The final maturity dates of the revolving credit loan and term loan are May 22, 2022 and May 22, 2024, respectively. Obligations under the credit facility are guaranteed by certain of Blucora's subsidiaries and secured by the assets of Blucora and those subsidiaries.
Blucora borrowed $375.0 million under the term loan when it entered into the senior secured credit facility. Principal payments on the term loan are payable quarterly in an amount equal to 0.25% of the initial outstanding principal. The interest rate on the term loan is variable at the London Interbank Offered Rate ("LIBOR"), subject to a floor of 1.00%, plus a margin
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of 3.75%, payable at the end of each interest period. In the second quarter of 2017, Blucora made a prepayment of $15.0 million towards the term loan.
Blucora may borrow under the revolving credit loan in an aggregate principal amount not less than $2.0 million or any whole multiple of $1.0 million in excess thereof. Principal payments on the revolving credit loan are payable at maturity. The interest rate on the revolving credit loan is variable, with initial draws at LIBOR plus a margin of 3.25%. Subsequent draws on the revolving credit loan also have variable interest rates, based upon LIBOR plus a margin of between 2.75% and 3.25%. In each case, the applicable margin within the range depends upon Blucora's Consolidated First Lien Net Leverage Ratio (as defined in the credit agreement for the credit facility) over the previous four quarters. Interest is payable at the end of each interest period. Blucora has not borrowed any amounts under the revolving credit loan.
Blucora has the right to permanently reduce and/or prepay, without premium or penalty (other than customary LIBOR breakage costs), the entire credit facility at any time or portions of the credit facility in an aggregate principal amount not less than $5.0 million ($2.0 million in the case of prepayments) or any whole multiple of $1.0 million in excess thereof, except for prepayments through November 22, 2017, which require a prepayment of a premium equal to 1.00% of the total principal amount prepaid. Beginning on December 31, 2018, Blucora will be required to make annual prepayments if certain levels of cash flow are achieved.
The credit facility includes financial and operating covenants, including a consolidated total net leverage ratio, which are set forth in detail in the credit agreement. As of June 30, 2017, Blucora was in compliance with all of the financial and operating covenants.
As of June 30, 2017, the credit facility's principal amount approximated its fair value as it is a variable rate instrument and the current applicable margin approximates current market conditions.
In connection with the refinancing, the Company performed an analysis by creditor and determined that the refinancing qualified as an extinguishment. As a result, the Company recognized a loss on debt extinguishment during the three months ended June 30, 2017, which was recorded in "Other loss, net" on the consolidated statements of comprehensive income and consisted of the following (in thousands):
Loss on debt extinguishment - TaxAct - HD Vest 2015 credit facility | $ | 9,593 | |
Loss on debt extinguishment - Convertible Senior Notes | 6,715 | ||
Total loss on debt extinguishment | $ | 16,308 | |
The amount for the TaxAct - HD Vest 2015 credit facility included the write-off of the remaining unamortized discount and debt issuance costs. For the Notes, the Company allocated the cash paid first to the liability component of the Notes based on the fair value of the redeemed Notes. The fair value was based on a discounted cash flow analysis of the Notes' principal and related interest payments, using a discount rate that approximated the current market rate for similar debt without conversion rights. The difference between the fair value and net carrying value of the repurchased Notes was recognized as a loss and recorded in "Other loss, net" on the consolidated statements of comprehensive income. No amount was allocated to the equity component of the Notes, since the fair value of the liability component exceeded the cash paid.
TaxAct - HD Vest 2015 credit facility: Prior to the refinancing, the Company had repayment activity of $64.0 million and $60.0 million during the six months ended June 30, 2017 and 2016, respectively. These repayments resulted in the acceleration of a portion of the unamortized discount and debt issuance costs, which were recorded in "Other loss, net" on the consolidated statements of comprehensive income.
Convertible Senior Notes: In June 2017, the Company redeemed almost all of the outstanding Notes for cash with proceeds from the senior secured credit facility.
During the six months ended June 30, 2016, the Company repurchased $28.4 million of the Notes for cash of $20.7 million. Similar to the analysis performed for the Notes that were redeemed in June 2017, the Company allocated the cash paid first to the liability component of the Notes based on the fair value of the repurchased Notes. The difference between the fair value and net carrying value of the repurchased Notes was recognized as a gain, since the Notes were repurchased below par value, and recorded in "Other loss, net" on the consolidated statements of comprehensive income. No amount was allocated to the equity component of the Notes, since the fair value of the liability component exceeded the cash paid.
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The following table sets forth total interest expense, prior to the refinancing, related to the Notes (in thousands):
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Contractual interest expense (Cash) | $ | 1,304 | $ | 1,837 | $ | 3,141 | $ | 3,946 | |||||||
Amortization of debt issuance costs (Non-cash) | 161 | 226 | 401 | 473 | |||||||||||
Accretion of debt discount (Non-cash) | 633 | 885 | 1,567 | 1,848 | |||||||||||
Total interest expense | $ | 2,098 | $ | 2,948 | $ | 5,109 | $ | 6,267 | |||||||
Note payable, related party: The note payable is with the former President of HD Vest and arose in connection with the acquisition of HD Vest. Certain members of HD Vest management rolled over a portion of the proceeds they would have otherwise received at the acquisition's closing into shares of the acquisition subsidiary through which the Company consummated the purchase of HD Vest. The former President of HD Vest sold a portion of his shares to the Company in exchange for the note. The note will be paid over a three-year period, with 50% paid in year one ($3.2 million was paid in December 2016), 40% paid in year two, and 10% paid in year three. The note bears interest at a rate of 5% per year, with a principal amount that approximates its fair value.
Note 8: Redeemable Noncontrolling Interests
A reconciliation of redeemable noncontrolling interests is as follows (in thousands):
Balance as of December 31, 2016 | $ | 15,696 | |
Net income attributable to noncontrolling interests | 302 | ||
Balance as of June 30, 2017 | $ | 15,998 | |
The redemption amount at June 30, 2017 was $12.2 million.
Note 9: Commitments and Contingencies
The material events during the period covered by this Quarterly Report on Form 10-Q, outside of the ordinary course of the Company’s business, include debt activity (as discussed further in "Note 7: Debt"), payment of a portion of the acquisition-related contingent consideration liability (as discussed further in "Note 6: Fair Value Measurements"), estimated sublease income of $4.1 million primarily related to the sublease agreement for the Bellevue facility (as discussed further in "Note 5: Restructuring"), and purchase commitments with a vendor to provide cloud computation services of $11.3 million over the next four years. Additional information on the Company’s Commitments and Contingencies can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Litigation: From time to time, the Company is subject to various legal proceedings or claims that arise in the ordinary course of business. The Company accrues a liability when management believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. The following is a brief description of the more significant legal proceedings. Although the Company believes that resolving such claims, individually or in aggregate, will not have a material adverse impact on its financial statements, these matters are subject to inherent uncertainties.
On December 12, 2016 a shareholder derivative action was filed by Jeffrey Tilden against the Company, as a nominal defendant, Andrew Snyder, who was a director of the Company at that time, certain companies affiliated with Mr. Snyder, a former officer of the Company, GCA Savvian Advisors, LLC ("GCA Savvian"), and certain other current and former members of the Blucora Board of Directors, in the Superior Court of the State of California in and for the County of San Francisco. The complaint asserts claims for breaches of fiduciary duty against certain current and former directors of the Company related to the Company’s share repurchases and the Company’s acquisitions of HD Vest and Monoprice. The complaint asserts a claim against GCA Savvian, the Company’s financial advisor in connection with the HD Vest acquisition, for aiding and abetting breaches of fiduciary duty. The complaint also asserts a claim for insider trading against Mr. Snyder, a former officer of the Company, and certain companies affiliated with Mr. Snyder. The derivative action does not seek monetary damages from the Company. The complaint seeks corporate governance reforms, declaratory relief, monetary damages from the other defendants, attorney’s fees and prejudgment interest.
On March 10, 2017, the Company filed a motion to dismiss for improper venue as a result of a forum selection provision in the Company’s bylaws that required the plaintiff to file his derivative fiduciary duty claims in Delaware. Other defendants
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also filed motions to quash the summons due to a lack of personal jurisdiction over them. On July 25, 2017, the Court granted the Company's motion to dismiss, and the case will be stayed for 90 days and then dismissed.
The Company has entered into indemnification agreements in the ordinary course of business with its officers and directors, and the agreement entered into with GCA Savvian in connection with the acquisition of HD Vest also contained indemnification provisions. Pursuant to these agreements, the Company may be obligated to advance payment of legal fees and costs incurred by the defendants pursuant to the Company’s obligations under these indemnification agreements and applicable Delaware law.
Note 10: Stockholders’ Equity
Stock-based compensation: The Company included the following amounts for stock-based compensation expense, which related to stock options, restricted stock units ("RSUs"), and the Company’s employee stock purchase plan ("ESPP"), in the consolidated statements of comprehensive income (in thousands):
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Cost of revenue | $ | 88 | $ | 23 | $ | 134 | $ | 65 | |||||||
Engineering and technology | 224 | 322 | 509 | 733 | |||||||||||
Sales and marketing | 581 | 426 | 1,272 | 1,027 | |||||||||||
General and administrative | 1,844 | 2,252 | 3,387 | 5,427 | |||||||||||
Restructuring | 538 | — | 981 | — | |||||||||||
Total in continuing operations | 3,275 | 3,023 | 6,283 | 7,252 | |||||||||||
Discontinued operations | — | 1,170 | — | 2,741 | |||||||||||
Total | $ | 3,275 | $ | 4,193 | $ | 6,283 | $ | 9,993 | |||||||
In the second quarter of 2017, the Company granted 350,000 non-qualified stock options to certain HD Vest financial advisors, who are considered non-employees. These stock options vest fully three years from the date of grant. The Company used the Black-Scholes-Merton valuation method to calculate stock-based compensation, using assumptions for the risk-free interest rate, expected dividend yield, expected volatility, and expected life under the same methodology that is used for employee grants. Since these are non-employee grants, stock-based compensation expense will be remeasured at the end of each quarter. For the three and six months ended June 30, 2017, stock-based compensation expense for these non-employees was $0.1 million and was recorded in "Cost of revenue" on the consolidated statements of comprehensive income.
Total net shares issued for stock options exercised, RSUs vested, and shares purchased pursuant to the ESPP were as follows (in thousands):
Three months ended June 30, | Six months ended June 30, | ||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||
Stock options exercised | 1,841 | 15 | 2,408 | 140 | |||||||
RSUs vested | 204 | 235 | 351 | 324 | |||||||
Shares purchased pursuant to ESPP | — | — | 76 | 77 | |||||||
Total | 2,045 | 250 | 2,835 | 541 | |||||||
Note 11: Segment Information
The Company has two reportable segments: the Wealth Management segment and the Tax Preparation segment. The former Search and Content and E-Commerce segments are included in discontinued operations. The Company’s Chief Executive Officer is its chief operating decision maker and reviews financial information presented on a disaggregated basis. This information is used for purposes of allocating resources and evaluating financial performance.
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Information on reportable segments currently presented to the Company’s chief operating decision maker and a reconciliation to consolidated net income are presented below (in thousands):
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Revenue: | |||||||||||||||
Wealth Management | $ | 85,296 | $ | 76,117 | $ | 167,963 | $ | 153,408 | |||||||
Tax Preparation | 53,866 | 43,991 | 153,574 | 132,465 | |||||||||||
Total revenue | 139,162 | 120,108 | 321,537 | 285,873 | |||||||||||
Operating income: | |||||||||||||||
Wealth Management | 12,406 | 9,924 | 24,259 | 20,830 | |||||||||||
Tax Preparation | 36,515 | 29,796 | 89,648 | 77,369 | |||||||||||
Corporate-level activity | (18,926 | ) | (17,366 | ) | (40,023 | ) | (36,399 | ) | |||||||
Total operating income | 29,995 | 22,354 | 73,884 | 61,800 | |||||||||||
Other loss, net | (24,200 | ) | (10,916 | ) | (33,908 | ) | (18,430 | ) | |||||||
Income tax expense | (2,315 | ) | (5,793 | ) | (5,786 | ) | (17,436 | ) | |||||||
Discontinued operations, net of income taxes | — | (19,975 | ) | — | (17,453 | ) | |||||||||
Net income (loss) | $ | 3,480 | $ | (14,330 | ) | $ | 34,190 | $ | 8,481 | ||||||
Revenues by major category within each segment are presented below (in thousands):
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Wealth Management: | |||||||||||||||
Commission | $ | 38,154 | $ | 35,252 | $ | 77,749 | $ | 72,108 | |||||||
Advisory | 35,914 | 31,522 | 69,490 | 63,054 | |||||||||||
Asset-based | 6,784 | 5,395 | 12,750 | 11,213 | |||||||||||
Transaction and fee | 4,444 | 3,948 | 7,974 | 7,033 | |||||||||||
Total Wealth Management revenue | $ | 85,296 | $ | 76,117 | $ | 167,963 | $ | 153,408 | |||||||
Tax Preparation: | |||||||||||||||
Consumer | $ | 51,848 | $ | 42,257 | $ | 140,090 | $ | 119,728 | |||||||
Professional | 2,018 | 1,734 | 13,484 | 12,737 | |||||||||||
Total Tax Preparation revenue | $ | 53,866 | $ | 43,991 | $ | 153,574 | $ | 132,465 | |||||||
Note 12: Net Income (Loss) Per Share
"Basic net income (loss) per share" is computed using the weighted average number of common shares outstanding during the period. "Diluted net income (loss) per share" is computed using the weighted average number of common shares outstanding plus the number of dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of the incremental common shares issuable upon the exercise of outstanding stock options and vesting of unvested RSUs. Dilutive potential common shares are excluded from the computation of earnings per share if their effect is antidilutive.
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The computation of basic and diluted net income (loss) per share attributable to Blucora, Inc. is as follows (in thousands):
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Numerator: | |||||||||||||||
Income from continuing operations | $ | 3,480 | $ | 5,645 | $ | 34,190 | $ | 25,934 | |||||||
Net income attributable to noncontrolling interests | (176 | ) | (115 | ) | (302 | ) | (259 | ) | |||||||
Income from continuing operations attributable to Blucora, Inc. | 3,304 | 5,530 | 33,888 | 25,675 | |||||||||||
Loss from discontinued operations attributable to Blucora, Inc. | — | (19,975 | ) | — | (17,453 | ) | |||||||||
Net income (loss) attributable to Blucora, Inc. | $ | 3,304 | $ | (14,445 | ) | $ | 33,888 | $ | 8,222 | ||||||
Denominator: | |||||||||||||||
Weighted average common shares outstanding, basic | 43,644 | 41,405 | 42,895 | 41,288 | |||||||||||
Dilutive potential common shares | 3,293 | 893 | 3,287 | 666 | |||||||||||
Weighted average common shares outstanding, diluted | 46,937 | 42,298 | 46,182 | 41,954 | |||||||||||
Net income (loss) per share attributable to Blucora, Inc. - basic: | |||||||||||||||
Continuing operations | $ | 0.08 | $ | 0.13 | $ | 0.79 | $ | 0.62 | |||||||
Discontinued operations | — | (0.48 | ) | — | (0.42 | ) | |||||||||
Basic net income (loss) per share | $ | 0.08 | $ | (0.35 | ) | $ | 0.79 | $ | 0.20 | ||||||
Net income (loss) per share attributable to Blucora, Inc. - diluted: | |||||||||||||||
Continuing operations | $ | 0.07 | $ | 0.13 | $ | 0.73 | $ | 0.61 | |||||||
Discontinued operations | — | (0.47 | ) | — | (0.41 | ) | |||||||||
Diluted net income (loss) per share | $ | 0.07 | $ | (0.34 | ) | $ | 0.73 | $ | 0.20 | ||||||
Shares excluded | 664 | 7,524 | 1,363 | 7,648 | |||||||||||
Shares excluded primarily related to stock options with an exercise price greater than the average price during the applicable periods.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. The statements in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements generally are identified by the words "anticipate," "believe," "plan," "project," "expect," "future," "intend," "may," "will," "should," "estimate," "predict," "potential," "continue," and similar expressions. These forward-looking statements include, but are not limited to: statements regarding projections of our future financial performance; trends in our businesses; our future business plans and growth strategy, including our "Strategic Transformation;" and the sufficiency of our cash balances and cash generated from operating, investing, and financing activities for our future liquidity and capital resource needs.
Forward-looking statements are subject to known and unknown risks, uncertainties, and other factors that may cause our results, levels of activity, performance, achievements, and prospects to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties, and other factors include, among others, those identified under Part II Item 1A, "Risk Factors," and elsewhere in this report. You should not rely on forward-looking statements included herein, which speak only as of the date of this Quarterly Report on Form 10-Q or the date specified herein. We do not undertake any obligation to update publicly any forward-looking statement to reflect new information, events, or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.
The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes included under Part 1 Item 1 of this report, as well as with our consolidated financial statements, accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2016.
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Our Business
Blucora (the "Company," "Blucora," or "we") operates two businesses: a Wealth Management business and an online Tax Preparation business.
The Wealth Management business consists of the operations of HDV Holdings, Inc. and its subsidiaries (collectively referred to as "HD Vest" or the "Wealth Management Business"). HD Vest provides wealth management solutions for financial advisors and their clients. Specifically, HD Vest provides an integrated platform of brokerage, investment advisory and insurance services to assist in making each financial advisor a financial service center for his/her clients. HD Vest was founded to help tax and accounting professionals integrate financial services into their practices. HD Vest primarily recruits independent tax professionals with established tax practices and offers specialized training and support, which allows them to join the HD Vest platform as independent financial advisors. HD Vest generates revenue primarily through commissions, quarterly investment advisory fees based on assets under management and other fees.
The Tax Preparation business consists of the operations of TaxAct, Inc. (collectively referred to as "TaxAct" or the "Tax Preparation business"). TaxAct provides digital do-it-yourself ("DDIY") tax preparation solutions for consumers, small business owners, and tax professionals. TaxAct generates revenue primarily through its online service at www.TaxAct.com.
Strategic Transformation
On October 14, 2015, we announced our plans to acquire HD Vest and focus on the technology-enabled financial solutions market (the "Strategic Transformation"). The Strategic Transformation refers to our transformation into a technology-enabled financial solutions company comprised of TaxAct and HD Vest and the divestitures of our Search and Content business that was operated through our former InfoSpace LLC subsidiary ("InfoSpace") and E-Commerce business that consisted of the operations of Monoprice, Inc. ("Monoprice") in 2016. As part of the Strategic Transformation and "One Company" operating model, we announced on October 27, 2016 plans to relocate our corporate headquarters by June 2017 from Bellevue, Washington to Irving, Texas. The transformation is intended to drive efficiencies and improve operational effectiveness.
In connection with the relocation of our corporate headquarters, we expect to incur restructuring costs of approximately $6.7 million, of which $6.5 million has already been incurred. These costs will be recorded within corporate-level activity for segment purposes. See "Note 5: Restructuring" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report for additional information. We also will incur costs that do not qualify for restructuring classification, such as recruiting and overlap in personnel expenses as we transition positions to Texas ("Strategic Transformation Costs"). The restructuring is now substantially complete and it is expected to be completed by December 31, 2017.
For a discussion of the associated risks, see the sections under the heading "Risks Associated With our Strategic Transformation" in Part II Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2016.
Seasonality
Our Tax Preparation business is highly seasonal, with a significant portion of its annual revenue earned in the first four months of our fiscal year. During the third and fourth quarters, the Tax Preparation business typically reports losses because revenue from the business is minimal while core operating expenses continue.
Comparability
We reclassified certain amounts on our consolidated statements of cash flows related to excess tax benefits generated from stock-based compensation and restricted cash, both in connection with the implementation of new accounting pronouncements. See the "Recent accounting pronouncements" section of "Note 2: Summary of Significant Accounting Policies" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report for additional information.
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RESULTS OF OPERATIONS
Summary
(In thousands, except percentages) | Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||
2017 | 2016 | Percentage Change | 2017 | 2016 | Percentage Change | ||||||||||||||||
Revenue | $ | 139,162 | $ | 120,108 | 16 | % | $ | 321,537 | $ | 285,873 | 12 | % | |||||||||
Operating income | $ | 29,995 | $ | 22,354 | 34 | % | $ | 73,884 | $ | 61,800 | 20 | % | |||||||||
Three months ended June 30, 2017 compared with three months ended June 30, 2016
Revenue increased approximately $19.1 million due to increases of $9.2 million and $9.9 million in revenue related to our Wealth Management and Tax Preparation businesses, respectively, as discussed in the following "Segment Revenue/Operating Income" section.
Operating income increased approximately $7.6 million, consisting of the $19.1 million increase in revenue and offset by an $11.5 million increase in operating expenses. Key changes in operating expenses were:
• | $6.7 million increase in the Wealth Management segment’s operating expenses primarily due to higher commissions paid to our financial advisors, which fluctuated in proportion to the change in underlying commission and advisory revenues earned on client accounts. |
• | $3.2 million increase in the Tax Preparation segment’s operating expenses primarily due to higher spending on marketing, higher data and call center costs related to software support, and maintenance fees and personnel expenses resulting from overall increased headcount supporting most functions. |
• | $1.6 million increase in corporate-level expense activity primarily due to Strategic Transformation Costs. |
Six months ended June 30, 2017 compared with six months ended June 30, 2016
Revenue increased approximately $35.7 million due to increases of $14.6 million and $21.1 million in revenue related to our Wealth Management and Tax Preparation businesses, respectively, as discussed in the following "Segment Revenue/Operating Income" section.
Operating income increased approximately $12.1 million, consisting of the $35.7 million increase in revenue and offset by a $23.6 million increase in operating expenses. Key changes in operating expenses were:
• | $11.2 million increase in the Wealth Management segment’s operating expenses due to higher commissions paid to our financial advisors, which fluctuated in proportion to the change in underlying commission and advisory revenues earned on client accounts, and, to a lesser extent, higher net personnel expenses as we continue to standardize employee benefits across our businesses. |
• | $8.8 million increase in the Tax Preparation segment’s operating expenses primarily due to higher spending on marketing, higher professional services fees mostly related to marketing and development projects, higher data center costs related to software support and maintenance fees, and higher personnel expenses resulting from overall increased headcount supporting most functions. |
• | $3.6 million increase in corporate-level expense activity primarily due to Strategic Transformation Costs. |
SEGMENT REVENUE/OPERATING INCOME
The revenue and operating income amounts in this section are presented on a basis consistent with accounting principles generally accepted in the U.S. ("GAAP") and include certain reconciling items attributable to each of the segments. Segment information appearing in "Note 11: Segment Information" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report is presented on a basis consistent with our current internal management financial reporting. We have two reportable segments: Wealth Management and Tax Preparation. We do not allocate certain general and administrative costs (including personnel and overhead costs), stock-based compensation, depreciation, amortization of
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acquired intangible assets, restructuring, other loss, net, and income taxes to segment operating results. We analyze these separately.
Wealth Management
(In thousands, except percentages) | Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||
2017 | 2016 | Percentage Change | 2017 | 2016 | Percentage Change | ||||||||||||||||
Revenue | $ | 85,296 | $ | 76,117 | 12 | % | $ | 167,963 | $ | 153,408 | 9 | % | |||||||||
Operating income | $ | 12,406 | $ | 9,924 | 25 | % | $ | 24,259 | $ | 20,830 | 16 | % | |||||||||
Segment margin | 15 | % | 13 | % | 14 | % | 14 | % | |||||||||||||
Wealth Management revenue is derived from multiple sources. We track sources of revenue, primary drivers of each revenue source, and recurring revenue. In addition, we focus on several business and key financial metrics in evaluating the success of our business relationships, our resulting financial position and operating performance. A summary of our sources of revenue and business metrics are as follows:
Sources of revenue
(In thousands, except percentages) | Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||
Sources of Revenue | Primary Drivers | 2017 | 2016 | Percentage Change | 2017 | 2016 | Percentage Change | ||||||||||||||||
Advisor-driven | Commission | - Transactions - Asset levels | $ | 38,154 | $ | 35,252 | 8 | % | $ | 77,749 | $ | 72,108 | 8 | % | |||||||||
Advisory | - Advisory asset levels | 35,914 | 31,522 | 14 | % | 69,490 | 63,054 | 10 | % | ||||||||||||||
Other revenue | Asset-based | - Cash balances - Interest rates - Number of accounts - Client asset levels | 6,784 | 5,395 | 26 | % | 12,750 | 11,213 | 14 | % | |||||||||||||
Transaction and fee | - Account activity - Number of clients - Number of advisors - Number of accounts | 4,444 | 3,948 | 13 | % | 7,974 | 7,033 | 13 | % | ||||||||||||||
Total revenue | $ | 85,296 | $ | 76,117 | 12 | % | $ | 167,963 | $ | 153,408 | 9 | % | |||||||||||
Total recurring revenue | $ | 68,971 | $ | 61,160 | 13 | % | $ | 132,878 | $ | 121,229 | 10 | % | |||||||||||
Recurring revenue rate | 80.9 | % | 80.3 | % | 79.1 | % | 79.0 | % | |||||||||||||||
Recurring revenue consists of trailing commissions, advisory fees, fees from cash sweep programs, and certain transaction and fee revenue, all as described further below in Commission revenue, Advisory revenue, Asset-based revenue, and Transaction and fee revenue, respectively. Certain recurring revenues are associated with asset balances and will fluctuate depending on market values and current interest rates. Accordingly, our recurring revenue can be negatively impacted by adverse external market conditions. However, recurring revenue is meaningful despite these fluctuations because it is not dependent upon transaction volumes or other activity-based revenues, which are more difficult to predict, particularly in declining or volatile markets.
Business metrics
(In thousands, except percentages and as otherwise indicated) | June 30, | |||||||||
2017 | 2016 | Percentage Change | ||||||||
Total Assets Under Administration ("AUA") | $ | 41,427,028 | $ | 37,233,522 | 11 | % | ||||
Advisory Assets Under Management ("AUM") | $ | 11,551,288 | $ | 9,814,232 | 18 | % | ||||
Percentage of total AUA | 27.9 | % | 26.4 | % | ||||||
Number of advisors (in ones) | 4,426 | 4,561 | (3 | )% | ||||||
Total assets under administration ("AUA") include assets that we hold directly or indirectly on behalf of clients under a safekeeping or custody arrangement or for which we provide administrative services for clients. To the extent that we provide more than one AUA service for a client’s assets, the value of the asset is only counted once in the total amount of AUA. AUA
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assets include Advisory Assets under Management, non-advisory brokerage accounts, annuities and mutual fund positions held directly with fund companies. These assets are not reported on the consolidated balance sheets.
Advisory assets under management ("AUM") includes external client assets for which we provide investment advisory and management services, typically as a fiduciary under the Investment Advisers Act of 1940. Our compensation for providing such services is typically a fee based on the value of the AUM for each advisory client. These assets are not reported on the consolidated balance sheets.
Three months ended June 30, 2017 compared with three months ended June 30, 2016
Wealth Management revenue increased approximately $9.2 million as discussed by each source of revenue below.
Wealth Management operating income increased approximately $2.5 million, consisting of the $9.2 million increase in revenue and offset by a $6.7 million increase in operating expenses. The increase in Wealth Management operating expenses was primarily due to higher commissions paid to our financial advisors, which fluctuated in proportion to the change in underlying commission and advisory revenues earned on client accounts.
Six months ended June 30, 2017 compared with six months ended June 30, 2016
Wealth Management revenue increased approximately $14.6 million as discussed by each source of revenue below.
Wealth Management operating income increased approximately $3.4 million, consisting of the $14.6 million increase in revenue and offset by an $11.2 million increase in operating expenses. The increase in Wealth Management operating expenses was primarily due to an increase in commissions paid to our financial advisors, which fluctuated in proportion to the change in underlying commission and advisory revenues earned on client accounts, and, to a lesser extent, a net increase in personnel expenses as we continue to standardize employee benefits across our businesses.
Commission revenue: We generate two types of commissions: transaction-based sales commissions and trailing commissions. Transaction-based sales commissions, which occur when clients trade securities or purchase investment products, represent gross commissions generated by our financial advisors. The level of transaction-based sales commissions can vary from period-to-period based on the overall economic environment, number of trading days in the reporting period, and investment activity of our financial advisors' clients. We earn trailing commissions (a commission or fee that is paid periodically over time) on mutual funds and variable annuities held by clients. Trailing commissions are recurring in nature and are based on the market value of investment holdings in trail-eligible assets. Our commission revenue, by product category and by sales-based and trailing, was as follows:
(In thousands, except percentages) | Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||
2017 | 2016 | Percentage Change | 2017 | 2016 | Percentage Change | ||||||||||||||||
By product category: | |||||||||||||||||||||
Mutual funds | $ | 20,782 | $ | 19,786 | 5 | % | $ | 41,243 | $ | 38,825 | 6 | % | |||||||||
Variable annuities | 11,730 | 10,690 | 10 | % | 23,941 | 23,330 | 3 | % | |||||||||||||
Insurance | 3,006 | 2,373 | 27 | % | 6,678 | 5,147 | 30 | % | |||||||||||||
General securities | 2,636 | 2,403 | 10 | % | 5,887 | 4,806 | 22 | % | |||||||||||||
Total commission revenue | $ | 38,154 | $ | 35,252 | 8 | % | $ | 77,749 | $ | 72,108 | 8 | % | |||||||||
By sales-based and trailing: | |||||||||||||||||||||
Sales-based | $ | 15,654 | $ | 14,306 | 9 | % | $ | 33,600 | $ | 30,778 | 9 | % | |||||||||
Trailing | 22,500 | 20,946 | 7 | % | 44,149 | 41,330 | 7 | % | |||||||||||||
Total commission revenue | $ | 38,154 | $ | 35,252 | 8 | % | $ | 77,749 | $ | 72,108 | 8 | % | |||||||||
Three months ended June 30, 2017 compared with three months ended June 30, 2016
Sales-based commission revenue increased approximately $1.3 million primarily due to increased activity in mutual funds, variable annuities, insurance and general securities resulting from overall market performance, portfolio rebalancings,
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product availability and segment refocusing. General securities include equities, exchange-traded funds, bonds and alternative investments.
Trailing commission revenue increased approximately $1.6 million and reflects an increase in the market value of the underlying assets, offset by a loss of commissions being paid on assets in advisory accounts primarily due to proactively changing products in anticipation of regulatory developments.
Six months ended June 30, 2017 compared with six months ended June 30, 2016
Sales-based commission revenue increased approximately $2.8 million primarily due to increased activity in mutual funds, variable annuities, insurance and general securities resulting from overall market performance, portfolio rebalancings, product availability and segment refocusing.
Trailing commission revenue increased approximately $2.8 million and reflects an increase in the market value of the underlying assets, offset by the loss of commissions being paid on assets in advisory accounts due to proactively changing products in anticipation of regulatory developments.
Advisory revenue: Advisory revenue primarily includes fees charged to clients in advisory accounts where HD Vest is the Registered Investment Advisor ("RIA") and is based on the value of AUM. Advisory fees are typically billed to clients quarterly, in advance, and are recognized as revenue ratably during the quarter. The value of the assets in an advisory account on the billing date determines the amount billed and, accordingly, the revenues earned in the following three-month period. The majority of our accounts are billed in advance using values as of the last business day of the prior calendar quarter.
The activity within our AUM was as follows:
(In thousands) | Three months ended June 30, | Six months ended June 30, | |||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Balance, beginning of the period | $ | 11,090,767 | $ | 9,592,025 | $ | 10,397,071 | $ | 9,692,244 | |||||||
Net increase (decrease) in new advisory assets | 221,831 | 11,070 | 519,440 | (133,339 | ) | ||||||||||
Market impact and other | 238,690 | 211,137 | 634,777 | 255,327 | |||||||||||
Balance, end of the period | $ | 11,551,288 | $ | 9,814,232 | $ | 11,551,288 | $ | 9,814,232 | |||||||
Increases or decreases in advisory assets have a limited impact on advisory fee revenue in the period in which they occur. Rather, increases or decreases in advisory assets are a primary driver of future advisory fee revenue. Advisory revenue for a particular quarter is predominately driven by the prior quarter-end AUM.
Three months ended June 30, 2017 compared with three months ended June 30, 2016
The increase in advisory revenue of approximately $4.4 million is consistent with the increase in the beginning-of-period AUM for the three months ended June 30, 2017 compared with three months ended June 30, 2016.
Six months ended June 30, 2017 compared with six months ended June 30, 2016
The increase in advisory revenue of approximately $6.4 million is consistent with the increase in the beginning-of-period AUM for the six months ended June 30, 2017 compared with six months ended June 30, 2016.
Asset-based revenue: Asset-based revenue primarily includes fees from financial product manufacturer sponsorship programs and cash sweep programs.
Three months ended June 30, 2017 compared with three months ended June 30, 2016
Asset-based revenue increased primarily from higher cash sweep revenues following increases in interest rates.
Six months ended June 30, 2017 compared with six months ended June 30, 2016
Asset-based revenue increased primarily from higher cash sweep revenues following increases in interest rates.
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Transaction and fee revenue: Transaction and fee revenue primarily includes fees for executing certain transactions in client accounts and fees related to services provided and other account charges as generally outlined in agreements with financial advisors, clients, and financial institutions.
Three months ended June 30, 2017 compared with three months ended June 30, 2016
Transaction and fee revenue increased approximately $0.5 million primarily related to advisor fee increases.
Six months ended June 30, 2017 compared with six months ended June 30, 2016
Transaction and fee revenue increased approximately $0.9 million primarily related to advisor fee increases.
Tax Preparation
(In thousands, except percentages) | Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||
2017 | 2016 | Percentage Change | 2017 | 2016 | Percentage Change | ||||||||||||||||
Revenue | $ | 53,866 | $ | 43,991 | 22 | % | $ | 153,574 | $ | 132,465 | 16 | % | |||||||||
Operating income | $ | 36,515 | $ | 29,796 | 23 | % | $ | 89,648 | $ | 77,369 | 16 | % | |||||||||
Segment margin | 68 | % | 68 | % | 58 | % | 58 | % | |||||||||||||
Tax Preparation revenue is derived primarily from sales of our consumer tax preparation software and online services as well as other offerings and ancillary services to consumers and small business owners. We also generate revenue through the professional tax preparer software that we sell to professional tax preparers who use it to prepare and file individual and business returns for their clients. Revenue by category was as follows:
(In thousands, except percentages) | Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||
2017 | 2016 | Percentage | |||||||||||||||||||