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Table of Contents

 
UNITED STATES
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
For the quarterly period ended March 31, 2017
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                          to                     
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.)
10900 NE 8th Street, Suite 800, Bellevue, Washington
98004
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (425) 201-6100
 
 
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
April 27, 2017
Common Stock, Par Value $0.0001
42,979,798
 


Table of Contents

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.
 
 
 




Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BLUCORA, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
 
March 31,
2017
 
December 31,
2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
74,609

 
$
51,713

Cash segregated under federal or other regulations
1,872

 
2,355

Available-for-sale investments
160

 
7,101

Accounts receivable, net of allowance
11,448

 
10,209

Commissions receivable
15,402

 
16,144

Other receivables
2,380

 
4,004

Prepaid expenses and other current assets, net
6,800

 
6,321

Total current assets
112,671

 
97,847

Long-term assets:
 
 
 
Property and equipment, net
8,990

 
10,836

Goodwill, net
548,778

 
548,741

Other intangible assets, net
353,847

 
362,178

Other long-term assets
2,897

 
3,057

Total long-term assets
914,512

 
924,812

Total assets
$
1,027,183

 
$
1,022,659

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
7,223

 
$
4,536

Commissions and advisory fees payable
16,389

 
16,587

Accrued expenses and other current liabilities
25,887

 
18,528

Deferred revenue
7,435

 
12,156

Current portion of long-term debt, net
2,560

 
2,560

Total current liabilities
59,494

 
54,367

Long-term liabilities:
 
 
 
Long-term debt, net
212,264

 
248,221

Convertible senior notes, net
165,350

 
164,176

Deferred tax liability, net
59,102

 
111,126

Deferred revenue
1,145

 
1,849

Other long-term liabilities
8,546

 
10,205

Total long-term liabilities
446,407

 
535,577

Total liabilities
505,901

 
589,944

 
 
 
 
Redeemable noncontrolling interests
15,822

 
15,696

 
 
 
 
Commitments and contingencies (Note 10)

 

 
 
 
 
Stockholders’ equity:
 
 
 
Common stock, par $0.0001—authorized shares, 900,000; issued and outstanding shares,
 
 
 
42,635 and 41,845
4

 
4

Additional paid-in capital
1,516,421

 
1,510,152

Accumulated deficit
(1,010,628
)
 
(1,092,756
)
Accumulated other comprehensive loss
(337
)
 
(381
)
Total stockholders’ equity
505,460

 
417,019

Total liabilities and stockholders’ equity
$
1,027,183

 
$
1,022,659

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

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BLUCORA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except per share data)
 
Three months ended March 31,
 
2017
 
2016
Revenue:
 
 
 
Wealth management services revenue
$
82,667

 
$
77,291

Tax preparation services revenue
99,708

 
88,474

Total revenue
182,375

 
165,765

Operating expenses:
 
 
 
Cost of revenue:
 
 
 
Wealth management services cost of revenue
55,874

 
52,269

Tax preparation services cost of revenue
3,818

 
3,207

Amortization of acquired technology
48

 
667

Total cost of revenue
59,740

 
56,143

Engineering and technology
4,748

 
4,295

Sales and marketing
48,998

 
43,837

General and administrative
13,483

 
12,753

Depreciation
940

 
975

Amortization of other acquired intangible assets
8,288

 
8,316

Restructuring
2,289

 

Total operating expenses
138,486

 
126,319

Operating income
43,889

 
39,446

Other loss, net
(9,708
)
 
(7,514
)
Income from continuing operations before income taxes
34,181

 
31,932

Income tax expense
(3,471
)
 
(11,643
)
Income from continuing operations
30,710

 
20,289

Discontinued operations, net of income taxes

 
2,522

Net income
30,710

 
22,811

Net income attributable to noncontrolling interests
(126
)
 
(144
)
Net income attributable to Blucora, Inc.
$
30,584

 
$
22,667

Net income per share attributable to Blucora, Inc. - basic:
 
 
 
Continuing operations
$
0.73

 
$
0.49

Discontinued operations

 
0.06

Basic net income per share
$
0.73

 
$
0.55

Net income per share attributable to Blucora, Inc. - diluted:
 
 
 
Continuing operations
$
0.67

 
$
0.48

Discontinued operations

 
0.06

Diluted net income per share
$
0.67

 
$
0.54

Weighted average shares outstanding:
 
 
 
Basic
42,145

 
41,171

Diluted
45,428

 
41,610

Other comprehensive income:
 
 
 
Net income
$
30,710

 
$
22,811

Unrealized gain on available-for-sale investments, net of tax
1

 
11

Foreign currency translation adjustment
43

 
322

Other comprehensive income
44

 
333

Comprehensive income
30,754

 
23,144

Comprehensive income attributable to noncontrolling interests
(126
)
 
(144
)
Comprehensive income attributable to Blucora, Inc.
$
30,628

 
$
23,000

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

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BLUCORA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
Three months ended March 31,
 
2017
 
2016
Operating Activities:
 
 
 
Net income
$
30,710

 
$
22,811

Less: Discontinued operations, net of income taxes

 
2,522

Net income from continuing operations
30,710

 
20,289

Adjustments to reconcile net income from continuing operations to net cash from operating activities:
 
 
 
Stock-based compensation
2,565

 
4,229

Depreciation and amortization of acquired intangible assets
9,470

 
10,105

Restructuring (non-cash)
864

 

Deferred income taxes
(481
)
 
(5,127
)
Amortization of premium on investments, net
10

 
79

Amortization of debt issuance costs
387

 
610

Accretion of debt discounts
1,085

 
1,406

(Gain) loss on debt extinguishment and modification expense
1,780

 
(3,843
)
Other

 
13

Cash provided (used) by changes in operating assets and liabilities:
 
 
 
Accounts receivable
(1,239
)
 
(2,967
)
Commissions receivable
742

 
1,266

Other receivables
2,198

 
20,146

Prepaid expenses and other current assets
(479
)
 
2,709

Other long-term assets
122

 
95

Accounts payable
2,687

 
5,217

Commissions and advisory fees payable
(198
)
 
(1,705
)
Deferred revenue
(5,425
)
 
(2,610
)
Accrued expenses and other current and long-term liabilities
8,102

 
18,809

Net cash provided by operating activities from continuing operations
52,900

 
68,721

Investing Activities:
 
 
 
Purchases of property and equipment
(1,165
)
 
(677
)
Proceeds from sales of investments
249

 

Proceeds from maturities of investments
7,092

 

Purchases of investments
(409
)
 
(403
)
Net cash provided (used) by investing activities from continuing operations
5,767

 
(1,080
)
Financing Activities:
 
 
 
Repurchase of convertible notes

 
(20,667
)
Repayment of credit facility
(38,000
)
 
(40,000
)
Proceeds from stock option exercises
4,234

 
1,088

Proceeds from issuance of stock through employee stock purchase plan
662

 
562

Tax payments from shares withheld for equity awards
(2,209
)
 
(329
)
Contingent consideration payments for business acquisition
(946
)
 

Net cash used by financing activities from continuing operations
(36,259
)
 
(59,346
)
Net cash provided by continuing operations
22,408

 
8,295

 
 
 
 
Net cash provided by operating activities from discontinued operations

 
9,795

Net cash used by investing activities from discontinued operations

 
(479
)
Net cash used by financing activities from discontinued operations

 
(5,000
)
Net cash provided by discontinued operations

 
4,316

 
 
 
 
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
5

 

Net increase in cash, cash equivalents, and restricted cash
22,413

 
12,611

Cash, cash equivalents, and restricted cash, beginning of period
54,868

 
59,830

Cash, cash equivalents, and restricted cash, end of period
$
77,281

 
$
72,441

 
 
 
 
Cash paid for income taxes from continuing operations
$
284

 
$
294

Cash paid for interest from continuing operations
$
4,504

 
$
7,569

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

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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). 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.
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 provided search services and online content. The E-Commerce business consisted of the operations of Monoprice, Inc. (“Monoprice”) and sold self-branded electronics and accessories to both consumers and businesses.
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 (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 are intended to drive efficiencies and improve operational effectiveness (see "Note 5: Restructuring").
The Company completed both divestitures in 2016. Specifically, 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. 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.
Segments: The Company has two reportable segments: the Wealth Management segment, which is the HD Vest business, and the Tax Preparation segment, which is the TaxAct business. The former Search and Content and E-Commerce segments are included in discontinued operations. The former Search and Content segment was the InfoSpace business, and the former E-Commerce segment was the Monoprice business. Unless the context indicates otherwise, the Company uses the term “Wealth Management” to represent services sold through the HD Vest business, the term “Tax Preparation” to represent services and software sold through the TaxAct business, the term “Search and Content” to represent search and content services sold through the InfoSpace business, and the term “E-Commerce” to represent products sold through the Monoprice business (see "Note 12: Segment Information").
Principles of consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany accounts and transactions have been eliminated.
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.
Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and disclosure of contingencies. Estimates include those used for impairment of goodwill and other intangible assets, useful lives of other intangible assets, acquisition accounting, valuation of investments, revenue recognition, the estimated allowance for sales returns and doubtful accounts, internally developed software, accrued contingencies, stock option valuation, and valuation allowance for deferred tax assets. Actual amounts may differ from estimates.

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Net capital and regulatory requirements: The Company's HD Vest broker-dealer subsidiary operates in a highly regulated industry and is subject to various regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have substantial monetary and non-monetary impacts to HD Vest's operations. As of March 31, 2017, HD Vest met all capital adequacy requirements to which it was subject.
Seasonality: Blucora’s Tax Preparation segment is highly seasonal, with a significant portion of its annual revenue earned in the first four months of the Company’s fiscal year. During the third and fourth quarters, the Tax Preparation segment typically reports losses because revenue from the segment is minimal while core operating expenses continue.
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 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):
 
March 31,
 
December 31,
 
2017
 
2016
 
2016
 
2015
Cash and cash equivalents
$
74,609

 
$
67,955

 
$
51,713

 
$
55,473

Cash segregated under federal or other regulations
1,872

 
3,686

 
2,355

 
3,557

Restricted cash included in "Prepaid expenses and other current assets, net"
250

 
100

 
250

 
100

Restricted cash included in "Other long-term assets"
550

 
700

 
550

 
700

Total cash, cash equivalents, and restricted cash
$
77,281

 
$
72,441

 
$
54,868

 
$
59,830

See the "Recent accounting pronouncements" section of this note for additional information.
The Company considers all highly liquid debt instruments with an original maturity of ninety days or less at date of acquisition to be cash equivalents. Cash segregated under federal and other regulations is held in a special bank account for the exclusive benefit of the Company’s wealth management 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.
Short-term investments: The Company principally invests its available cash in fixed-rate debt securities. Fixed-rate debt securities generally include debt instruments issued by the U.S. federal government and its agencies, international governments, municipalities and publicly-held corporations, as well as commercial paper, insured time deposits with commercial banks, and money market funds invested in securities issued by agencies of the U.S., although specific holdings can vary from period to period depending upon the Company's cash requirements. Such investments are included in "Cash and cash equivalents" and "Available-for-sale investments" on the consolidated balance sheets and reported at fair value with unrealized gains and losses included in "Accumulated other comprehensive loss" on the consolidated balance sheets. Amounts reclassified out of comprehensive income into net income are determined on the basis of specific identification.
The Company reviews its available-for-sale investments for impairment and classifies the impairment of any individual available-for-sale investment as either temporary or other-than-temporary. The differentiating factors between temporary and other-than-temporary impairments are primarily the length of the time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. An impairment classified as temporary is recognized in "Accumulated other comprehensive loss" on the consolidated balance sheets. An

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impairment classified as other-than-temporary is recognized in "Other loss, net" on the consolidated statements of comprehensive income.
Business combinations and intangible assets including goodwill: The Company accounts for business combinations using the acquisition method. The acquisition-date fair value of total consideration includes cash and contingent consideration. Since the Company is contractually obligated to pay contingent consideration upon the achievement of specified objectives, a contingent consideration liability is recorded at the acquisition date. The Company reviews its assumptions related to the fair value of the contingent consideration liability each reporting period and, if there are material changes, revalues the contingent consideration liability based on the revised assumptions, until such contingency is satisfied through payment upon the achievement of the specified objectives. 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. Payment up to the acquisition-date fair value of the contingent consideration liability is classified as a financing activity on the consolidated statements of cash flows, and any amount paid in excess of the acquisition-date fair value of that liability is classified as an operating activity.
Goodwill is calculated as the excess of the acquisition-date fair value of total consideration over the acquisition-date fair value of net assets, including the amount assigned to identifiable intangible assets, and is assigned to reporting units that are expected to benefit from the synergies of the business combination as of the acquisition date. Reporting units are consistent with reportable segments. Identifiable intangible assets with finite lives are amortized over their useful lives on a straight-line basis, except for advisor relationships, which are amortized proportional to expected revenue. Acquisition-related costs, including advisory, legal, accounting, valuation, and other similar costs, are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.
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.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Cash equivalents and debt securities are classified within Level 2 of the fair value hierarchy because the Company values its cash equivalents and debt securities utilizing market observable inputs. 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 of the fair value hierarchy because the Company values the liability 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 Company accounts for contingent consideration in accordance with applicable accounting guidance pertaining to business combinations, as disclosed in the accounting policy "Business combinations and intangible assets including goodwill."
Redeemable noncontrolling interests: Noncontrolling interests that are redeemable at the option of the holder and not solely within the control of the issuer are classified outside of stockholders' equity. In connection with the acquisition of HD Vest, management of that business has retained an ownership interest. The Company is party to put and call arrangements with respect to these interests. These put and call arrangements allow HD Vest management to require the Company to purchase their interests or allow the Company to acquire such interests, respectively. The put arrangements do not meet the definition of a derivative instrument as the put agreements do not provide for net settlement. To the extent that the redemption value of these interests exceeds the value determined by adjusting the carrying value for the subsidiary's attribution of net income (loss), the value of such interests is adjusted to the redemption value with a corresponding adjustment to additional paid-in capital.
Foreign currency: The financial position and operating results of the Company's foreign operations are consolidated using the local currency as the functional currency. Assets and liabilities recorded in local currencies are translated at the exchange rate on the balance sheet date, while revenues and expenses are translated at the average exchange rate for the applicable period. Translation adjustments resulting from this process are recorded in "Accumulated other comprehensive loss" on the consolidated balance sheets. The gain or loss on foreign currency transactions, calculated as the difference between the historical exchange rate and the exchange rate at the applicable measurement date, are recorded in "Other loss, net" on the consolidated statements of comprehensive income.

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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 considering 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 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. The Company expects to have its preliminary evaluation, including the selection of an adoption method, completed by the end of the first half 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:
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). For the three months

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ended March 31, 2017, the Company recognized an estimated $7.4 million decrease to the income tax provision, which resulted in a $7.4 million increase to income from continuing operations and net income attributable to Blucora, Inc., a $0.17 increase to basic earnings per share, and a $0.16 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 months ended March 31, 2016, this amount was $16.9 million. 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.
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 explain 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, Inc. 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 acquisition was funded by a combination of cash on hand and the new TaxAct - HD Vest 2015 credit facility, under which the Company borrowed $400.0 million at the date of acquisition (see "Note 8: Debt").

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Valuations were as follows (in thousands):
Tangible assets acquired
$
78,681

Liabilities assumed
(21,212
)
Identifiable net assets acquired
$
57,469

Fair value adjustments for intangible assets:
 
Advisor relationships
$
240,300

Sponsor relationships
16,500

Curriculum
800

Proprietary technology
13,600

Trade name
52,500

Fair value of intangible assets acquired
$
323,700

Purchase price allocation:
 
Cash paid
$
612,288

Plus: promissory note
6,400

Plus: noncontrolling interest
15,038

Less: escrow receivable
(20,000
)
Purchase price
613,726

Less: identifiable net assets acquired
(57,469
)
Less: fair value of intangible assets acquired
(323,700
)
Plus: deferred tax liability related to intangible assets
123,484

Excess of purchase price over net assets acquired, allocated to goodwill
$
356,041

The primary areas of the acquisition accounting that were not finalized at the acquisition date related to income and non-income based taxes, certain contingent liability matters, indemnification assets, and residual goodwill. In the third and fourth quarters of 2016, the Company recorded a combined $2.1 million increase to net assets acquired and a corresponding decrease to goodwill, predominantly related to the finalization of federal and state tax returns and associated analyses for pre-acquisition tax periods. Acquisition accounting was closed in the fourth quarter of 2016.
The promissory note is with the former President of HD Vest and will be paid over a three-year period. The current portion was recorded in "Current portion of long-term debt, net," and the long-term portion was recorded in "Long-term debt, net." The note bears interest at a rate of 5% per year, with a principal amount that approximates its fair value. See "Note 8: Debt" for additional information on the "Note payable, related party."
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 October 14, 2015, the Company announced its plans to focus on the technology-enabled financial solutions market, as more fully described in "Note 1: The Company and Basis of Presentation." The Strategic Transformation included plans to divest the Search and Content and E-Commerce businesses. Financial condition, results of operations, cash flows, and the notes to financial statements reflect the Search and Content and E-Commerce businesses as discontinued operations for all periods presented. Amounts in discontinued operations include previously unallocated depreciation, amortization, stock-based compensation, income taxes, and other corporate expenses that were attributable to the Search and Content and E-Commerce businesses.

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On November 17, 2016, the Company closed on an agreement with 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 included in investing activities from discontinued operations in the consolidated statements of cash flows, and the remaining $1.0 million is expected to be received in the first half of 2017. 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, 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. Under a separate agreement, the Company is subleasing to InfoSpace the office space that InfoSpace has historically occupied. That sublease agreement will terminate in May 2017 in connection with a sublease of the entire Bellevue facility as further discussed in "Note 5: Restructuring."
Summarized financial information for discontinued operations is as follows (in thousands):
 
Three months ended March 31,
 
2017
 
2016
Major classes of items in net income (loss):
 
 
 
Revenues
$

 
$
79,330

Operating expenses

 
(75,031
)
Other loss, net

 
(232
)
Discontinued operations, before income taxes

 
4,067

Income tax expense

 
(1,545
)
Discontinued operations, net of income taxes
$

 
$
2,522

Note 5: Restructuring
On October 27, 2016, the Company announced plans to relocate its corporate headquarters by June 2017 from Bellevue, Washington to Irving, Texas as part of the Strategic Transformation and “One Company” operating model. The actions to relocate corporate headquarters are intended to drive efficiencies and improve operational effectiveness.
In connection with this plan, the Company expects to incur restructuring costs of approximately $7.0 million, which includes all costs associated with our non-cancelable operating lease. These costs will be recorded in "Restructuring" on the consolidated statements of comprehensive income and within corporate-level activity for segment purposes. While the relocation and the related costs are expected to be substantially completed by June 2017, the Company expects some costs through the fourth quarter of 2017, primarily related to employees who will continue to provide service through that time period.
The following table summarizes the activity in the restructuring liability (in thousands):
 
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
209

 
(241
)
 
1,878

 
443

 

 
2,289

Non-cash

 
1,457

 
(1,878
)
 
(443
)
 

 
(864
)
Balance as of March 31, 2017
$
4,443

 
$
1,216

 
$

 
$

 
$

 
$
5,659

Total amount expected to be incurred
$
4,691

 
$
(241
)
 
$
1,878

 
$
602

 
$
43

 
$
6,973

Cumulative amount incurred to date
$
4,443

 
$
(241
)
 
$
1,878

 
$
79

 
$

 
$
6,159

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

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primarily includes the impact of equity award modifications associated with employment contracts for 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 Bellevue facility, which the Company will occupy until May 2017. In March 2017, the Company agreed to a sublease for the entire Bellevue facility, which is 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 10: 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.
Note 6: Goodwill and Other Intangible Assets
The following table presents goodwill by reportable segment (in thousands):
 
Wealth Management
 
Tax Preparation
 
Total
Balance as of December 31, 2016
$
356,041

 
$
192,700

 
$
548,741

Foreign currency translation adjustment

 
37

 
37

Balance as of March 31, 2017
$
356,041

 
$
192,737

 
$
548,778


Intangible assets other than goodwill consisted of the following (in thousands):
 
March 31, 2017
 
December 31, 2016
 
Gross carrying amount
 
Accumulated
amortization
 
Net
 
Gross carrying amount
 
Accumulated
amortization
 
Net
Definite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
$
101,693

 
$
(65,561
)
 
$
36,132

 
$
101,690

 
$
(62,381
)
 
$
39,309

Advisor relationships
240,300

 
(21,406
)
 
218,894

 
240,300

 
(17,138
)
 
223,162

Sponsor relationships
16,500

 
(1,146
)
 
15,354

 
16,500

 
(917
)
 
15,583

Curriculum
800

 
(250
)
 
550

 
800

 
(200
)
 
600

Technology
43,860

 
(32,943
)
 
10,917

 
43,855

 
(32,331
)
 
11,524

Total definite-lived intangible assets
403,153

 
(121,306
)
 
281,847

 
403,145

 
(112,967
)
 
290,178

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Trade names
72,000

 

 
72,000

 
72,000

 

 
72,000

Total
$
475,153

 
$
(121,306
)
 
$
353,847

 
$
475,145

 
$
(112,967
)
 
$
362,178

Amortization expense was as follows (in thousands):
 
Three months ended March 31,
 
2017
 
2016
Statement of comprehensive income line items:
 
 
 
Cost of revenue
$
48

 
$
667

Amortization of other acquired intangible assets
8,288

 
8,316

Total
$
8,336

 
$
8,983


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Expected amortization of definite-lived intangible assets held as of March 31, 2017 is as follows (in thousands):
 
2017
 
2018
 
2019
 
2020
 
2021
 
Thereafter
 
Total
Statement of comprehensive income line items:
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenue
$
143

 
$
95

 
$

 
$

 
$

 
$

 
$
238

Amortization of other acquired intangible assets
24,864

 
32,844

 
32,608

 
20,255

 
17,424

 
153,614

 
281,609

Total
$
25,007

 
$
32,939

 
$
32,608

 
$
20,255

 
$
17,424

 
$
153,614

 
$
281,847

The weighted average amortization periods for definite-lived intangible assets are as follows: 34 months for customer relationships, 225 months for advisor relationships, 201 months for sponsor relationships, 33 months for curriculum, 56 months for technology, and 192 months for total definite-lived intangible assets.
Note 7: Fair Value Measurements
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
 
March 31, 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
$
11,527


$


$
11,527


$

Total cash equivalents
11,527




11,527



Available-for-sale investments:
 

 

 

 
Debt securities:
 
 
 
 
 
 
 
Time deposits
160




160



Total debt securities
160

 

 
160

 

Total assets at fair value
$
11,687


$


$
11,687


$

 
 
 
 
 
 
 
 
Acquisition-related contingent consideration liability
$
2,531

 
$

 
$

 
$
2,531

Total liabilities at fair value
$
2,531

 
$

 
$

 
$
2,531


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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

The Company also had financial instruments that were not measured at fair value. See "Note 8: Debt" for details.
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
56

Balance as of March 31, 2017
$
2,531

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 based on a probability-weighted discounted cash flow analysis, which included assumptions related to estimating revenues, the probability of payment, and a discount rate. The related payments are contingent upon product availability and revenue performance over a three-year period 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. As of March 31, 2017, $1.2 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 March 31, 2017 and 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 March 31, 2017
$
160

 
$

 
$

 
$
160

Balance as of December 31, 2016
$
7,102

 
$

 
$
(1
)
 
$
7,101


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The Company had non-recurring Level 3 fair value measurements in 2016 related to the repurchase of its Convertible Senior Notes. See "Note 8: Debt" for details.
Note 8: Debt
The Company’s debt consisted of the following (in thousands):
 
March 31, 2017
 
December 31, 2016
 
Principal
amount
 
Discount
 
Debt issuance costs
 
Net 
carrying
value
 
Principal
amount
 
Discount
 
Debt issuance costs
 
Net 
carrying
value
TaxAct - HD Vest 2015 credit facility
$
222,000

 
$
(5,952
)
 
$
(4,424
)
 
$
211,624

 
$
260,000

 
$
(7,124
)
 
$
(5,295
)
 
$
247,581

Convertible Senior Notes
172,859

 
(5,979
)
 
(1,530
)
 
165,350

 
172,859

 
(6,913
)
 
(1,770
)
 
164,176

Note payable, related party
3,200

 

 

 
3,200

 
3,200

 

 

 
3,200

Total debt
$
398,059

 
$
(11,931
)
 
$
(5,954
)
 
$
380,174

 
$
436,059

 
$
(14,037
)
 
$
(7,065
)
 
$
414,957

TaxAct - HD Vest 2015 credit facility: On December 31, 2015, TaxAct and HD Vest entered into an agreement with a syndicate of lenders for the purposes of financing the HD Vest acquisition and providing future working capital flexibility for TaxAct and HD Vest. The credit facility consists of a $25.0 million revolving credit loan--which includes a letter of credit and swingline loans--and a $400.0 million term loan for an aggregate $425.0 million credit facility. The final maturity dates of the revolving credit loan and term loan are December 31, 2020 and December 31, 2022, respectively. Obligations under the credit facility are guaranteed by TaxAct Holdings, Inc. and HD Vest Holdings, Inc. and are secured by the equity of the TaxAct and HD Vest businesses. While Blucora is not a party to the agreement, it has guaranteed the obligations of TaxAct and HD Vest under the credit facility, secured by its equity in TaxAct Holdings, Inc.
TaxAct and HD Vest initially borrowed $400.0 million under the term loan and had repayment activity of $38.0 million and $40.0 million during the three months ended March 31, 2017 and 2016, respectively. Principal payments on the term loan are payable quarterly and will be between 0.625% and 1.875% of outstanding principal, depending upon TaxAct and HD Vest's combined net leverage of EBITDA ratio. 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 of 6.00%, payable at the end of each interest period.
TaxAct and HD Vest 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 (for swingline loans, the aggregate principal amount is not less than $0.5 million or any whole multiple of $0.1 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 5.00%. Subsequent draws on the revolving credit loan also have variable interest rates, based upon LIBOR plus a margin of between 2.75% and 5.00%. In each case, the applicable margin within the range depends upon TaxAct and HD Vest's combined net leverage to EBITDA ratio over the previous four quarters. Interest is payable at the end of each interest period. TaxAct and HD Vest have not borrowed any amounts under the revolving credit loan.
TaxAct and HD Vest have the right to permanently reduce, without premium or penalty, the entire credit facility at any time or portions of the credit facility in an aggregate principal amount not less than $5.0 million or any whole multiple of $1.0 million in excess thereof, except for permanent reductions through December 31, 2016 which carried a premium of 1.00% of the total principal amount outstanding just prior to prepayment. TaxAct and HD Vest prepaid portions of the credit facility during the three months ended March 31, 2017 and 2016, which were included in the repayment activity for 2017 and 2016 and resulted in the write-down of a portion of the unamortized discount and debt issuance costs. The write-down of the unamortized discount and debt issuance costs were recorded in "Other loss, net" on the consolidated statements of comprehensive income.
The credit facility includes financial and operating covenants, including a net leverage to EBITDA ratio, which are defined further in the agreement. As of March 31, 2017, TaxAct and HD Vest were in compliance with all of the financial and operating covenants.
As of March 31, 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.

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Convertible Senior Notes: On March 15, 2013, the Company issued $201.25 million aggregate principal amount of its Convertible Senior Notes (the “Notes”), inclusive of the underwriters’ exercise in full of their over-allotment option of $26.25 million. The Notes mature on April 1, 2019, unless earlier purchased, redeemed, or converted in accordance with the terms, and bear interest at a rate of 4.25% per year, payable semi-annually in arrears beginning on October 1, 2013. The Company received net proceeds from the offering of approximately $194.8 million after adjusting for debt issuance costs, including the underwriting discount.
The Notes were issued under an indenture dated March 15, 2013 (the “Indenture”) by and between the Company and The Bank of New York Mellon Trust Company, N.A., as Trustee. There are no financial or operating covenants relating to the Notes.
Beginning July 1, 2013 and prior to the close of business on September 28, 2018, holders may convert all or a portion of the Notes at their option, in multiples of $1,000 principal amount, under the following circumstances:
 
During any fiscal quarter commencing July 1, 2013, if the last reported sale price of the Company’s common stock for at least 20 trading days during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day. As of March 31, 2017, the Notes were not convertible.
During the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of the Notes for each trading day of the measurement period was less than 98% of the product of the last reported sales price of the Company’s common stock and the conversion rate on each trading day.
If the Company calls any or all of the Notes for redemption.
Upon the occurrence of specified corporate events, including a merger or a sale of all or substantially all of the Company’s assets.
The convertibility of the Notes is determined at the end of each reporting period. If the Notes are determined to be convertible, they remain convertible until the end of the subsequent quarter and are classified in "Current liabilities" on the balance sheet; otherwise, they are classified in "Long-term liabilities." Depending upon the price of the Company’s common stock or the trading price of the Notes within the reporting period, pursuant to the first two criteria listed above, the Notes could be convertible during one reporting period but not convertible during a comparable reporting period.
On or after October 1, 2018 and until the close of business on March 28, 2019, holders may convert their Notes, in multiples of $1,000 principal amount, at the option of the holder.
The conversion ratio for the Notes is initially 0.0461723, equivalent to an initial conversion price of approximately $21.66 per share of the Company’s common stock. The conversion ratio is subject to customary adjustment for certain events as described in the Indenture.
At the time the Company issued the Notes, the Company was only permitted to settle conversions with shares of its common stock. The Company received shareholder approval at its annual meeting in May 2013 to allow for “flexible settlement,” which provided the Company with the option to settle conversions in cash, shares of common stock, or any combination thereof. Through March 31, 2017, the Company’s intention was to satisfy conversion of the Notes with cash for the principal amount of the debt and shares of common stock for any related conversion premium. As discussed in more detail in "Note 14: Subsequent Event," the Company expects to redeem all of the outstanding Notes through a new proposed long-term senior secured credit facility in June 2017.
Beginning April 6, 2016, the Company may, at its option, redeem for cash all or part of the Notes plus accrued and unpaid interest. If the Company undergoes a fundamental change (as described in the Indenture), holders may require the Company to repurchase for cash all or part of their Notes in principal amounts of $1,000 or an integral multiple thereof. The fundamental change repurchase price will be equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest. However, if a fundamental change occurs and a holder elects to convert the Notes, the Company will, under certain circumstances, increase the applicable conversion rate for the Notes surrendered for conversion by a number of additional shares of common stock based on the date on which the fundamental change occurs or becomes effective and the price paid per share of the Company’s common stock in the fundamental change as specified in the Indenture. The Strategic Transformation did not qualify as a fundamental change under the Indenture.

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The Notes are unsecured and unsubordinated obligations of the Company and rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Notes, and equal in right of payment to any of the Company’s existing and future unsecured indebtedness that is not subordinated. The Notes are effectively junior in right of payment to any of the Company’s secured indebtedness (to the extent of the value of assets securing such indebtedness) and structurally junior to all existing and future indebtedness and other liabilities, including trade payables, of the Company’s subsidiaries. The Indenture does not limit the amount of debt that the Company or its subsidiaries may incur.
The Notes may be settled in a combination of cash or shares of common stock given the flexible settlement option. As a result, the Notes contain liability and equity components, which were bifurcated and accounted for separately. The liability component of the Notes, as of the issuance date, was calculated by estimating the fair value of a similar liability issued at a 6.5% effective interest rate, which was determined by considering the rate of return investors would require in the Company’s debt structure. The amount of the equity component was calculated by deducting the fair value of the liability component from the principal amount of the Notes, resulting in the initial recognition of $22.3 million as the debt discount recorded in additional paid-in capital for the Notes. The carrying amount of the Notes is being accreted to the principal amount over the remaining term to maturity, and the Company is recording corresponding interest expense. The Company incurred debt issuance costs of $6.4 million related to the Notes and allocated $5.7 million to the liability component of the Notes. These costs are being amortized to interest expense over the six-year term of the Notes or the date of conversion, if any.
During the three months ended March 31, 2016, the Company repurchased $28.4 million of the Notes' principal for cash of $20.7 million. The Company allocated the cash paid first to the liability component of the Notes based on the fair value of the repurchased 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 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.
The following table sets forth total interest expense related to the Notes (in thousands):
 
Three months ended March 31,
 
2017
 
2016
Contractual interest expense (Cash)
$
1,837

 
$
2,109

Amortization of debt issuance costs (Non-cash)
240

 
247

Accretion of debt discount (Non-cash)
934

 
963

Total interest expense
$
3,011

 
$
3,319

Effective interest rate of the liability component
7.32
%
 
7.32
%
The fair value of the principal amount of the Notes as of March 31, 2017 was $173.7 million, based on the last quoted active trading price, a Level 1 fair value measurement, as of that date.
Proposed Senior Secured Credit Facility: On April 4, 2017, the Company announced that it intends to syndicate a new proposed long-term senior secured credit facility and to use the proceeds to repay all amounts outstanding under the TaxAct - HD Vest 2015 credit facility and to redeem all of the outstanding Notes. See "Note 14: Subsequent Event" for additional information.
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. See "Note 3: Business Combinations" for additional information on the acquisition of HD Vest. 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.

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Note 9: 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
126

Balance as of March 31, 2017
$
15,822

The redemption amount at March 31, 2017 was $11.3 million.
Note 10: Commitments and Contingencies
Except for the debt repayments (as discussed further in "Note 8: Debt"), payment of a portion of the acquisition-related contingent consideration liability (as discussed further in "Note 7: Fair Value Measurements"), and estimated total sublease income of $4.9 million (primarily related to the sublease agreement for the Bellevue facility as discussed further in "Note 5: Restructuring," which replaces the sublease income under the sublease agreement with InfoSpace), there have been no material changes during the period covered by this Quarterly Report on Form 10-Q, outside of the ordinary course of the Company’s business, to the contractual obligations and commitments specified in "Note 10: Commitments and Contingencies" in Part II Item 8 of 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 March 5, 2015, Remigius Shatas filed a shareholder derivative action against Andrew Snyder, a director of the Company, certain companies affiliated with Mr. Snyder, as well as nominal defendant Blucora, in the Superior Court of the State of Washington in and for King County.  Although the Company is a nominal defendant, the plaintiff purports to bring the action on behalf of the Company and thus does not seek monetary damages from the Company.  Instead, the plaintiff alleges improper use of inside information in certain sales of the Company's common stock and seeks to recover from Andrew Snyder and those companies affiliated with Mr. Snyder profits resulting from those allegedly improper sales. On May 15, 2015, the Superior Court granted the Company's motion to dismiss the Complaint based on the plaintiffs’ failure to file this matter in the proper court. Subsequently, the plaintiff moved for reconsideration of the Superior Court's decision to grant the motion to dismiss, and on June 5, 2015, that motion for reconsideration was denied.  
On June 30, 2015, the plaintiff filed a Notice of Appeal with the Superior Court, indicating plaintiff's intention to appeal to the Washington Court of Appeals, Division I. After appellate briefing and oral argument, on October 17, 2016, the Court of Appeals issued an opinion reversing the Superior Court’s decision and remanding for further proceedings. The Court of Appeals stated that the record was not sufficiently developed to allow for consideration of the Company’s alternate grounds for affirmance or its argument that the plaintiff lacked standing. The Court of Appeals indicated that the parties could litigate those issues on remand. On March 10, 2017, a stipulated motion for order of voluntary dismissal was granted, and the case was dismissed without prejudice and without fees or costs to any party.
On December 12, 2016, Jeffrey I. Tilden, the attorney for Mr. Shatas in the Washington action, filed a shareholder derivative action on his own behalf against the same defendants named in the Washington suit, as well as George Allen, GCA Savvian Advisors, LLC (“GCA Savvian”), and 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 the same claims alleged in the Shatas action, as well as claims for breaches of fiduciary duty against 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 also asserts a claim against GCA Savvian, the Company’s financial advisor, for aiding and abetting breaches of fiduciary duty associated with the acquisitions. As with the Shatas action, the California 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 claim in Delaware. Other defendants also filed motions to quash the summons due to a lack of personal jurisdiction over them. On April 10, 2017, plaintiff filed memoranda in opposition to the motions. The Company's and the

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other defendant’s memoranda in support of the motions were filed April 28, 2017. The Company believes that the plaintiffs’ claims are without merit and will vigorously defend this lawsuit.
The Company has entered into indemnification agreements in the ordinary course of business with its officers and directors, and the agreements entered into with GCA Savvian in connection with the acquisitions of HD Vest and Monoprice also contained indemnification provisions. Pursuant to these indemnification agreements/provisions, 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 11: 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 March 31,
 
2017
 
2016
Cost of revenue
$
46

 
$
42

Engineering and technology
285

 
411

Sales and marketing
691

 
601

General and administrative
1,543

 
3,175

Restructuring
443

 

Total in continuing operations
3,008

 
4,229

Discontinued operations

 
1,571

Total
$
3,008

 
$
5,800

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 March 31,
 
2017
 
2016
Stock options exercised
567

 
125

RSUs vested
147

 
89

Shares purchased pursuant to ESPP
76

 
77

Total
790

 
291

Note 12: Segment Information
The Company has two reportable segments: the Wealth Management segment and the Tax Preparation segment. As a result of the Strategic Transformation and planned divestitures of the Search and Content and E-Commerce segments, those former 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.
The Company does not allocate certain general and administrative costs (including personnel and overhead costs), stock-based compensation, depreciation, amortization of acquired intangible assets, and restructuring to the reportable segments. Such amounts are reflected in the table under the heading "Corporate-level activity." In addition, the Company does not allocate other loss, net and income taxes to the reportable segments. The Company does not account for, and does not report to management, its assets or capital expenditures by segment other than goodwill and intangible assets used for impairment analysis purposes.

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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 March 31,
 
2017
 
2016
Revenue:
 
 
 
Wealth Management
$
82,667

 
$
77,291

Tax Preparation
99,708

 
88,474

Total revenue
182,375

 
165,765

Operating income:
 
 
 
Wealth Management
11,853

 
10,906

Tax Preparation
53,133

 
47,573

Corporate-level activity
(21,097
)
 
(19,033
)
Total operating income
43,889

 
39,446

Other loss, net
(9,708
)
 
(7,514
)
Income tax expense
(3,471
)
 
(11,643
)
Discontinued operations, net of income taxes

 
2,522

Net income
$
30,710

 
$
22,811

Revenues by major category within each segment are presented below (in thousands):
 
Three months ended March 31,
 
2017
 
2016
Wealth Management:
 
 
 
Commission
$
39,595

 
$
36,856

Advisory
33,576

 
31,532

Asset-based
5,966

 
5,818

Transaction and fee
3,530

 
3,085

Total Wealth Management revenue
$
82,667

 
$
77,291

Tax Preparation:
 
 
 
Consumer
$
88,242

 
$
77,471

Professional
11,466

 
11,003

Total Tax Preparation revenue
$
99,708

 
$
88,474

Note 13: Net Income Per Share
"Basic net income per share" is computed using the weighted average number of common shares outstanding during the period. "Diluted net income 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, vesting of unvested RSUs, and conversion or maturity of the Notes. 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 per share attributable to Blucora, Inc. is as follows (in thousands):
 
Three months ended March 31,
 
2017
 
2016
Numerator:
 
 
 
Income from continuing operations
$
30,710

 
$
20,289

Net income attributable to noncontrolling interests
(126
)
 
(144
)
Income from continuing operations attributable to Blucora, Inc.
30,584

 
20,145

Income from discontinued operations attributable to Blucora, Inc.

 
2,522

Net income attributable to Blucora, Inc.
$
30,584

 
$
22,667

Denominator:
 
 
 
Weighted average common shares outstanding, basic
42,145

 
41,171

Dilutive potential common shares
3,283

 
439

Weighted average common shares outstanding, diluted
45,428

 
41,610

Net income per share attributable to Blucora, Inc. - basic:
 
 
 
Continuing operations
$
0.73

 
$
0.49

Discontinued operations

 
0.06

Basic net income per share
$
0.73

 
$
0.55

Net income per share attributable to Blucora, Inc. - diluted:
 
 
 
Continuing operations
$
0.67

 
$
0.48

Discontinued operations

 
0.06

Diluted net income per share
$
0.67

 
$
0.54

Shares excluded
2,062

 
7,773

Shares excluded primarily related to stock options with an exercise price greater than the average price during the applicable periods.
As more fully discussed in "Note 8: Debt," in March 2013, the Company issued the Notes, which are convertible and mature in April 2019. In May 2013, the Company received shareholder approval for “flexible settlement,” which provided the Company with the option to settle conversions in cash, shares of common stock, or any combination thereof. Through March 31, 2017, the Company intended, upon conversion or maturity of the Notes, to settle the principal in cash and satisfy any conversion premium by issuing shares of its common stock. As a result, the Company only included the impact of the premium feature in its dilutive potential common shares when the average stock price during the quarter exceeded the conversion price of the Notes, which did not occur during the three months ended March 31, 2017 and 2016. As discussed in more detail in "Note 14: Subsequent Event," the Company expects to redeem all of the outstanding Notes through a new proposed long-term senior secured credit facility in June 2017.
Note 14: Subsequent Event
On April 4, 2017, the Company announced that it was hosting a bank meeting on April 5, 2017 for the purpose of syndicating its new proposed long-term senior secured credit facility consisting of a new $375.0 million senior secured term loan facility and a new $50.0 million revolving credit facility (together the “Proposed Senior Secured Credit Facility”). On April 21, 2017, the Company received commitment allocations for the Proposed Senior Secured Credit Facility, which is expected to close in May 2017 and will bear interest at LIBOR, subject to a floor of 1.00%, plus a margin of 3.75%. The Company intends to use the proceeds of the senior secured term loan facility to repay all amounts outstanding under the TaxAct - HD Vest 2015 credit facility and to redeem all of the outstanding Notes, as well as to pay fees and expenses incurred in connection with the foregoing. Related to the Notes, the Company provided an irrevocable notice of redemption on April 21, 2017, that the Notes will become due and payable in cash on June 5, 2017.

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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.
Overview
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 (“HD Vest”). HD Vest provides wealth management solutions for financial advisors and their clients. 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.
Blucora 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 provided search services and online content. The E-Commerce business consisted of the operations of Monoprice, Inc. (“Monoprice”) and sold self-branded electronics and accessories to both consumers and businesses. See further information regarding these businesses under "Strategic Transformation" below.
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 and E-Commerce businesses 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. We also shifted our near-term capital allocation priority and paid down debt, which included using all of the net divestiture proceeds from the sales of the Search and Content and E-Commerce businesses to pay down the TaxAct - HD Vest 2015 credit facility. The elements of our Strategic Transformation are described in more detail below. 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.
Acquisition: On December 31, 2015, we 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. The acquisition was funded by a combination of cash on hand and the TaxAct - HD Vest 2015 credit facility, under which we borrowed $400.0 million at the date of acquisition.

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See "Note 3: Business Combinations" and "Note 8: Debt" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report for additional information on the HD Vest acquisition and the TaxAct - HD Vest 2015 credit facility, respectively.
Business divestitures: On October 14, 2015, we announced plans to divest the Search and Content and E-Commerce businesses. Accordingly, our financial condition, results of operations, and cash flows reflect the Search and Content and E-Commerce businesses as discontinued operations for all periods presented. Unless otherwise specified, disclosures in "Management's Discussion and Analysis of Financial Condition and Results of Operations" reflect continuing operations.
We completed both divestitures in 2016. Specifically, on November 17, 2016, we 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 the remaining $1.0 million is expected to be received in the first half of 2017. On August 9, 2016, we 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. We used all of the proceeds from these sales to pay down debt. See "Note 4: Discontinued Operations" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report for additional information on discontinued operations.
Relocation of corporate headquarters: On October 27, 2016, we announced plans to relocate our corporate headquarters by June 2017 from Bellevue, Washington to Irving, Texas. In connection with this plan, we expect to incur restructuring costs of approximately $7.0 million. 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”).
Our Businesses
Wealth Management
The HD Vest business 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 generates revenue primarily through commissions, quarterly investment advisory fees based on assets under management, and other fees.
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's business model provides an open-architecture investment platform and technology tools to help financial advisors identify investment opportunities for their clients, while the long-standing tax advisory relationships provide a large client base of possible investment clients. This results in an experienced and stable network of financial advisors, who have multiple revenue-generating options to diversify their earnings sources. HD Vest also has a highly experienced home office team that is focused on solutions tailored to the advisor's practice. The home office team provides marketing, practice management, insurance and annuity, wealth management, succession planning, and other support to our advisors.
Our Wealth Management business is directly and indirectly sensitive to several macroeconomic factors and the state of financial markets, particularly in the United States. For additional information regarding the potential impact of these macroeconomic factors on our operations and results, see the Risk Factors "Our financial condition and results of operations may be materially and adversely affected by market fluctuations and by economic, political, and other factors." and "A drop in our investment performance could materially and adversely affect our revenues and profitability." in Part II Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2016.
Our Wealth Management business is subject to certain additional financial industry regulations and supervision, including by the Securities and Exchange Commission, Financial Industry Regulatory Agency, the Department of Labor , state securities and insurance regulators, and other regulatory authorities. For additional information regarding the potential impact of governmental regulation on our operations and results, see the Risk Factor "Increased government regulation of our business may harm our operating results." in Part II Item 1A. of this report.

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Tax Preparation
Our TaxAct business 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.
TaxAct's offerings come with a price lock guarantee, whereby the price at the start of the tax return filing process is the price when the return is filed, rather than pricing the offering at the time that the tax return is filed.
We have three offerings for consumers for tax year 2016, which is the basis for TaxAct's 2017 operating results: a "free" federal and state edition that handles simple returns and includes taxpayer phone support; a "plus" offering that contains all of the features of the free federal edition in addition to import capabilities, tools to maximize credits and deductions, and enhanced reporting; and a "premium" offering that contains all of the plus offering features in addition to tools for self-employed individuals to maximize credits and deductions. For the plus and premium offerings, state returns can be filed through the separately-sold state edition. We also have an offering for small business owners. In addition to these core offerings, TaxAct also offers ancillary services such as refund payment transfer, audit defense, and stored value cards.
TaxAct’s professional tax preparer software allows professional tax preparers to file individual and business returns for their clients. TaxAct offers flexible pricing and packaging options that help tax professionals save money by paying only for what they need.
Seasonality
Our Tax Preparation segment 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 segment typically reports losses because revenue from the segment 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.
RESULTS OF OPERATIONS
Summary
(In thousands, except percentages)
Three months ended March 31,
 
2017
 
2016
 
Percentage
Change
Revenue
$
182,375

 
$
165,765

 
10
%
Operating income
$
43,889

 
$
39,446

 
11
%
Three months ended March 31, 2017 compared with three months ended March 31, 2016
Revenue increased approximately $16.6 million due to increases of $5.4 million and $11.2 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 $4.4 million, consisting of the $16.6 million increase in revenue and offset by a $12.2 million increase in operating expenses. Key changes in operating expenses were:
 
$4.4 million increase in the Wealth Management segment’s operating expenses primarily due to higher commissions 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.

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$5.7 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, to a lesser extent, higher personnel expenses resulting from overall increased headcount supporting most functions.
$2.1 million increase in corporate-level expense activity primarily due to (i) restructuring incurred in connection with the upcoming relocation of our corporate headquarters and (ii) higher operating expenses mainly related to Strategic Transformation Costs and costs associated with leadership changes at HD Vest, offset by (iii) lower stock-based compensation mainly related to higher current year forfeitures as well as higher expense recognized in the prior year related to the initial stock award grants to HD Vest employees and (iv) lower amortization expense associated with concluding the useful life of certain TaxAct acquisition-related intangible assets during 2016.
Segment results are discussed in the next section.
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 12: 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 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 March 31,
 
2017
 
2016
 
Percentage
Change
Revenue
$
82,667

 
$
77,291

 
7
%
Operating income
$
11,853

 
$
10,906

 
9
%
Segment margin
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 and 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 March 31,
 
Sources of Revenue
Primary Drivers
2017
 
2016
 
Percentage
Change
Advisor-driven

Commission
- Transactions
- Asset levels
$
39,595

 
$
36,856

 
7
%
Advisory
- Advisory asset levels
33,576

 
31,532

 
6
%
Other revenue
Asset-based
- Cash balances
- Interest rates
- Number of accounts
- Client asset levels
5,966

 
5,818

 
3
%
Transaction and fee
- Account activity
- Number of clients
- Number of advisors
- Number of accounts
3,530

 
3,085

 
14
%
 
Total revenue
$
82,667

 
$
77,291

 
7
%
 
Total recurring revenue
$
63,907

 
$
60,069

 
6
%
 
Recurring revenue rate
77.3
%
 
77.7
%
 
 

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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)
March 31,
 
2017
 
2016
 
Percentage
Change
Total Assets Under Administration (AUA)
$
40,424,515

 
$
36,505,384

 
11
 %
Advisory Assets Under Management (AUM)
$
11,090,767

 
$
9,592,025

 
16
 %
Percentage of total AUA
27.4
%
 
26.3
%
 

Number of advisors (in ones)
4,427

 
4,584

 
(3
)%
Three months ended March 31, 2017 compared with three months ended March 31, 2016
Wealth Management revenue increased approximately $5.4 million as discussed by each source of revenue below.
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 March 31,
 
2017
 
2016
 
Percentage
Change
By product category:
 
 
 
 
 
Mutual funds
$
20,461

 
$
19,039

 
7
 %
Variable annuities
12,211

 
12,640

 
(3
)%
Insurance
3,672

 
2,774

 
32
 %
General securities
3,251

 
2,403

 
35
 %
Total commission revenue
$
39,595

 
$
36,856

 
7
 %
 
 
 
 
 
 
By sales-based and trailing:
 
 
 
 
 
Sales-based
$
17,946

 
$
16,472

 
9
 %
Trailing
21,649

 
20,384

 
6
 %
Total commission revenue
$
39,595

 
$
36,856

 
7
 %
Sales-based commission revenue increased approximately $1.5 million primarily due to increased activity in mutual funds, insurance, and general securities. General securities include equities, exchange traded funds, bonds, and alternative investments. This increase was offset by a decrease in variable annuities. The lack of feature enhancements in that asset class contributed to the decrease.
Trailing commission revenue increased approximately $1.3 million and reflects an increase in the market value of the underlying assets.
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 advisory assets under management. Advisory fees are

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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 advisory assets under management was as follows:
(In thousands)
Three months ended March 31,
 
2017
 
2016
Balance, beginning of the period
$
10,397,071

 
$
9,692,244

Net increase (decrease) in new advisory assets
297,609

 
(144,409
)
Market impact and other
396,087

 
44,190

Balance, end of the period
$
11,090,767

 
$
9,592,025

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 advisory assets under management. The increase in advisory revenue of approximately $2.0 million is consistent with the increase in the beginning-of-period advisory assets under management.
Asset-based revenue: Asset-based revenue primarily includes fees from financial product manufacturer sponsorship programs and cash sweep programs. Asset-based revenue was comparable to the prior period.
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. Transaction and fee revenue increased approximately $0.4 million primarily related to improvements that we implemented in our investment platform and technology tools that are used by our financial advisors.
Wealth Management operating income increased approximately $0.9 million, consisting of the $5.4 million increase in revenue and offset by a $4.4 million increase in operating expenses. The increase in Wealth Management operating expenses primarily was due to an increase in commissions 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.
Tax Preparation
(In thousands, except percentages)
Three months ended March 31,
 
2017
 
2016
 
Percentage
Change
Revenue
$
99,708

 
$
88,474

 
13
%
Operating income
$
53,133

 
$
47,573

 
12
%
Segment margin
53
%
 
54
%
 
 
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 March 31,
 
2017
 
2016
 
Percentage
Change
Consumer
$
88,242

 
$
77,471

 
14
%
Professional
11,466

 
11,003

 
4
%
Total revenue
$
99,708

 
$
88,474

 
13
%

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We measure our consumer tax preparation customers using the number of accepted federal tax e-files made through our software and online services. We consider growth in the number of e-files to be an important non-financial metric in measuring the performance of the consumer side of the Tax Preparation business. E-file metrics were as follows:
(In thousands, except percentages)
Three months ended March 31,
 
Tax seasons ended
 
2017
 
2016
 
Percentage
Change
 
April 18, 2017
 
April 19, 2016
 
Percentage
Change
Online e-files
2,876

 
3,466

 
(17
)%
 
3,958

 
4,613

 
(14
)%
Desktop e-files
122

 
156

 
(22
)%
 
184

 
234

 
(21
)%
Sub-total e-files
2,998

 
3,622

 
(17
)%
 
4,142

 
4,847

 
(15
)%
Free File Alliance e-files (1)
115

 
114

 
1
 %
 
164

 
158

 
4
 %
Total e-files
3,113

 
3,736

 
(17
)%
 
4,306

 
5,005

 
(14
)%
(1) 
Free File Alliance e-files are provided as part of an IRS partnership that provides free electronic tax filing services to taxpayers meeting certain income-based guidelines.
We measure our professional tax preparer customers using three metrics--the number of accepted federal tax e-files made through our software, the number of units sold, and the number of e-files per unit sold. We consider growth in these areas to be important non-financial metrics in measuring the performance of the professional tax preparer side of the Tax Preparation business. Those metrics were as follows:
(In thousands, except percentages and as
Three months ended March 31,
 
Tax seasons ended
otherwise indicated)
2017
 
2016
 
Percentage
Change
 
April 18, 2017
 
April 19, 2016
 
Percentage
Change
E-files
1,302

 
1,269

 
3
 %
 
1,717

 
1,630

 
5
%
Units sold (in ones)
20,327

 
19,794

 
3
 %
 
20,964

 
20,114

 
4
%
E-files per unit sold (in ones)
64.0

 
64.1

 
 %
 
81.9

 
81.0

 
1
%
Three months ended March 31, 2017 compared with three months ended March 31, 2016
Tax Preparation revenue increased approximately $11.2 million primarily due to growth in revenue earned from online consumer users and, to a lesser extent, increased sales of our professional tax preparer software. Online consumer revenue grew, despite a decrease in e-files, due to growth in average revenue per user, primarily resulting from price increases. The decrease in e-files is consistent with our expectations as we are in the early stages of a multi-year pivot toward profitable customers. Revenue derived from professional tax preparers increased primarily due to an increase in the number of professional preparer units sold.
Tax Preparation operating income increased approximately $5.6 million, consisting of the $11.2 million increase in revenue and offset by a $5.7 million increase in operating expenses. The increase in Tax Preparation segment operating expenses primarily was due to increased spending on marketing, increased professional services fees mostly related to marketing and development projects, increased data center costs related to software support and maintenance fees, and, to a lesser extent, a net increase in personnel expenses resulting from overall higher headcount supporting most functions.
Corporate-Level Activity
(In thousands)
Three months ended March 31,
 
2017
 
2016
 
Change
Operating expenses
$
6,773

 
$
4,699

 
$
2,074

Stock-based compensation
2,565

 
4,229

 
(1,664
)
Depreciation
1,134

 
1,122

 
12

Amortization of acquired intangible assets
8,336

 
8,983

 
(647
)
Restructuring
2,289

 

 
2,289

Total corporate-level activity
$
21,097

 
$
19,033

 
$
2,064

Certain corporate-level activity is not allocated to our segments, including certain general and administrative costs (including personnel and overhead costs), stock-based compensation, depreciation, amortization of acquired intangible assets,

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and restructuring. For further detail, refer to segment information appearing in "Note 12: Segment Information" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report.
Three months ended March 31, 2017 compared with three months ended March 31, 2016
Operating expenses included in corporate-level activity increased primarily due to Strategic Transformation Costs and costs associated with leadership changes at HD Vest.
Stock-based compensation decreased primarily due to activity within our Wealth Management business, which included an increase in current year forfeitures as well as higher expense recognized in the prior year related to the initial stock award grants to HD Vest employees.
Depreciation was comparable to the prior period.
Amortization of acquired intangible assets decreased primarily due to concluding the useful life of certain TaxAct acquisition-related intangible assets during 2016.
Restructuring increased due to our October 27, 2016 announcement to relocate our corporate headquarters by June 2017 from Bellevue, Washington to Irving, Texas. Further detail is provided under the "Operating Expenses - Restructuring" section of the management's discussion and analysis of financial condition and results of operations below.
OPERATING EXPENSES
Cost of Revenue
(In thousands, except percentages)
Three months ended March 31,
 
2017
 
2016
 
Change
Wealth management services cost of revenue
$
55,874

 
$
52,269

 
$
3,605

Tax preparation services cost of revenue
3,818

 
3,207

 
611

Amortization of acquired technology
48

 
667

 
(619
)
Total cost of revenue
$
59,740

 
$
56,143

 
$
3,597

Percentage of revenue
33
%
 
34
%
 
 
We record the cost of revenue for sales of services when the related revenue is recognized. Services cost of revenue consists of costs related to our Wealth Management and Tax Preparation businesses, which include commissions to financial advisors, third-party costs, and costs associated with the technical support team and the operation of our data centers. Data center costs include personnel expenses (salaries, stock-based compensation, benefits, and other employee-related costs), the cost of temporary help and contractors, professional services fees (which include technology project consulting fees), software support and maintenance, bandwidth and hosting costs, and depreciation. Cost of revenue also includes the amortization of acquired technology.
Three months ended March 31, 2017 compared with three months ended March 31, 2016
Wealth management services cost of revenue increased primarily due to an increase in commissions to our financial advisors, which fluctuated in proportion to the change in underlying commission and advisory revenues earned on client accounts.
Tax preparation services cost of revenue increased primarily due to an increase in data center costs related to software support and maintenance fees.
Amortization of acquired technology decreased due to amortization expense associated with concluding the useful life of certain TaxAct acquisition-related intangible assets during 2016.

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Engineering and Technology
(In thousands, except percentages)
Three months ended March 31,
 
2017
 
2016
 
Change
Engineering and technology
$
4,748

 
$
4,295

 
$
453

Percentage of revenue
3
%
 
3
%
 
 
Engineering and technology expenses are associated with the research, development, support, and ongoing enhancements of our offerings, which include personnel expenses (salaries, stock-based compensation, benefits, and other employee-related costs), the cost of temporary help and contractors, software support and maintenance, bandwidth and hosting, and professional services fees.
Three months ended March 31, 2017 compared with three months ended March 31, 2016
Engineering and technology expenses increased primarily due to an increase in professional services fees mostly related to Tax Preparation development projects. Personnel expenses were comparable to the prior period.
Sales and Marketing
(In thousands, except percentages)
Three months ended March 31,
 
2017

2016

Change
Sales and marketing
$
48,998


$
43,837


$
5,161

Percentage of revenue
27
%

26
%


Sales and marketing expenses consist principally of personnel expenses (salaries, stock-based compensation, benefits, and other employee-related costs) and the cost of temporary help and contractors for those engaged in marketing, selling, and sales support operations activities, marketing expenses associated with our HD Vest and TaxAct businesses (which primarily include television, radio, online, text, email, and sponsorship channels), and back office processing support expenses associated with our HD Vest business (occupancy and general office expenses, regulatory fees, and license fees).
Three months ended March 31, 2017 compared with three months ended March 31, 2016
Sales and marketing expenses increased primarily due to a $3.9 million increase in marketing expenses and a $1.1 million increase in personnel expenses. The increase in marketing expenses was driven by increased marketing in our Tax Preparation business. Personnel expenses increased primarily in our Wealth Management business as we continue to standardize employee benefits across our businesses and, to a lesser extent, in our Tax Preparation business due to higher headcount.
General and Administrative
(In thousands, except percentages)
Three months ended March 31,
 
2017
 
2016
 
Change
General and administrative
$
13,483

 
$
12,753

 
$
730

Percentage of revenue
7
%
 
8
%
 
 
General and administrative (“G&A”) expenses consist primarily of personnel expenses (salaries, stock-based compensation, benefits, and other employee-related costs), the cost of temporary help and contractors, professional services fees (which include legal, audit, and tax fees), general business development and management expenses, occupancy and general office expenses, business taxes, and insurance expenses.
Three months ended March 31, 2017 compared with three months ended March 31, 2016
G&A expenses increased primarily due to a $0.9 million net increase in personnel expenses, mainly related to Strategic Transformation Costs and costs associated with leadership changes at HD Vest offset by lower stock-based compensation due to activity within our Wealth Management business, which included an increase in current year forfeitures as well as higher expense recognized in the prior year related to the initial stock award grants to HD Vest employees.

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Depreciation and Amortization of Acquired Intangible Assets
(In thousands, except percentages)
Three months ended March 31,
 
2017
 
2016
 
Change
Depreciation
$
940

 
$
975