The following discussion provides an analysis of the Company's financial condition, cash flows, and results of operations from management's perspective and should be read in conjunction with our condensed consolidated financial statements and accompanying notes thereto included under Part I, Item 1 and the section titled "Cautionary Statement Regarding Forward-Looking Statements" in this Form 10-Q, as well as with our consolidated financial statements, accompanying notes thereto, and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
Overview
Blucora, Inc. (the "Company," "Blucora ," "we," "our," or "us") is a leading provider of integrated tax-focused wealth management services and software, assisting consumers, small business owners, tax professionals, financial professionals, and certified public accounting ("CPA") firms. Our mission is to enable financial success by changing the way individuals and families plan and achieve their goals through tax-advantaged solutions. We conduct our operations through two primary businesses: (1) the Wealth Management business and (2) theTax Software business. Our common stock is listed on the NASDAQ Global Select Market under the symbol "BCOR."
Wealth Management
Our Wealth Management business consists of the operations of
Avantax Wealth Management provides tax-focused wealth management solutions for financial professionals, tax professionals, CPA firms, and their clients. Avantax Wealth Management offers its services through its registered broker-dealer, registered investment advisor ("RIA"), and insurance agency subsidiaries and is a leadingU.S. tax-focused independent broker-dealer. Avantax Wealth Management works with a nationwide network of financial professionals that operate as independent contractors. Avantax Wealth Management provides these financial professionals with an integrated platform of technical, practice, compliance, operations, sales, and product support tools that enable them to offer tax-advantaged planning, investing, and wealth management services to their clients.Avantax Planning Partners is an in-house/employee-based RIA, insurance agency, and wealth management business that partners with CPA firms in order to provide their consumer and small business clients with holistic financial planning and advisory services, as well as retirement plan solutions through Avantax Retirement Plan Services.Avantax Planning Partners formerly operated asHonkamp Krueger Financial Services, Inc. ("HKFS"). We acquired HKFS inJuly 2020 (the "HKFS Acquisition") and subsequently rebranded it in order to create tighter brand alignment through one common and recognizable brand. Any reference toAvantax Planning Partners in this Form 10-Q is inclusive of HKFS.
OurTax Software business consists of the operations ofTaxAct, Inc. ("TaxAct ," the "Tax Software business," or the "Tax Software segment") and provides digital tax preparation services and ancillary services for consumers, small business owners, and tax professionals through its website www.TaxAct.com and its mobile applications. COVID-19 Pandemic The extended COVID-19 pandemic has had a significant negative impact on theU.S. and global economy and caused substantial disruption in theU.S. and global securities markets, and as a result, has negatively impacted both our Wealth Management andTax Software businesses. In our Wealth Management business, the amount of cash sweep revenue we generate continues to be affected by the low interest rate environment. In response to the economic and market disruption associated with the COVID-19 pandemic, theFederal Reserve decreased the federal funds rate in 2020 and maintained a low-interest rate environment in 2021, causing a significant decline in cash sweep revenue. TheFederal Reserve has signaled adjustments to monetary policy that would increase the federal funds rates, which we expect would positively impact cash sweep revenue. If theFederal Reserve does not increase, or further decreases, the federal funds rates, cash sweep revenue would continue to be negatively impacted.Blucora, Inc. | Q1 2022 Form 10-Q 19 -------------------------------------------------------------------------------- In ourTax Software segment, the typical seasonality of ourTax Software business has been affected by recent changes to tax filing deadlines. The Internal Revenue Service ("IRS") delayed the start of the tax year 2020 tax season and extended the filing and payment deadline for tax year 2020 federal tax returns fromApril 15, 2021 toMay 17, 2021 as a result of the COVID-19 pandemic. In addition, theIRS extended the federal filing and payment deadline forTexas ,Louisiana , andOklahoma toJune 15, 2021 . Beyond federal filings, the majority of states also extended their filing and payment deadlines for tax year 2020 state tax returns. This extension resulted in the shifting of a significant portion ofTax Software segment revenue that would typically have been expected to be earned in the first quarter to the second quarter of 2021. This change in seasonality caused significant fluctuations in our quarterly financial results and has affected the comparability of our financial results. As a result, the results of operations for theTax Software segment are not as comparable for the three months endedMarch 31, 2022 and 2021 as they would have been in previous years. For additional information on the effects of the COVID-19 pandemic on our results of operations for the selected periods, see "Results of Operations" below. For more information related to the COVID-19 pandemic and its impact to our businesses, see Part I, Item 1A and Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2021 .Blucora, Inc. | Q1 2022 Form 10-Q 20 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS Summary ($ in thousands) Three Months Ended March 31, Change 2022 2021 $ % Revenue: Wealth Management$ 166,403 $ 154,491 $ 11,912 7.7 % Tax Software 141,150 123,892 17,258 13.9 % Total revenue 307,553 278,383 29,170 10.5 % Operating income (loss): Wealth Management 16,421 19,396 (2,975) (15.3) % Tax Software 58,030 50,888 7,142 14.0 % Corporate-level activity (29,408) (33,055) 3,647 11.0 % Total operating income 45,043 37,229 7,814 21.0 % Interest expense and other, net (7,841) (7,883) 42 0.5 % Income before income taxes 37,202 29,346 7,856 26.8 % Income tax expense (2,582) (1,700) (882) (51.9) % Net income$ 34,620 $ 27,646 $ 6,974 25.2 % For the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , net income increased$7.0 million primarily due to the following factors: •Wealth Management segment operating income decreased$3.0 million primarily due to higher payout ratios to financial professionals and incremental personnel costs.
•Tax Software segment operating income increased
•Expenses within corporate-level activity decreased
•The Company recorded income tax expense of$2.6 million , an effective tax rate of 6.9%, for the three months endedMarch 31, 2022 , compared to income tax expense of$1.7 million , an effective tax rate of 5.8%, for the three months endedMarch 31, 2021 . Blucora, Inc. | Q1 2022 Form 10-Q 21 -------------------------------------------------------------------------------- SEGMENT REVENUE & OPERATING INCOME The revenue and operating income amounts in this section are presented on a basis consistent with accounting principles generally accepted inthe United States ("GAAP") and include certain reconciling items attributable to our segments. We have two reportable segments: (1) the Wealth Management segment and (2) theTax Software segment. Segment information is presented on a basis consistent with our current internal management financial reporting. We do not allocate certain general and administrative costs (including personnel and overhead costs), stock-based compensation, acquisition and integration costs, depreciation, amortization of acquired intangible assets, or contested proxy and other legal and consulting costs to the reportable segments. Such amounts are reflected under the heading "Corporate-level activity." In addition, we do not allocate interest expense and other, net, or income taxes to the reportable segments. Wealth Management ($ in thousands) Three Months Ended March 31, Change 2022 2021 $ % Revenue$ 166,403 $ 154,491 $ 11,912 7.7 % Operating income$ 16,421 $ 19,396 $ (2,975) (15.3) % Segment margin 9.9 % 12.6 %
For the three months ended
•Wealth Management revenue increased$11.9 million primarily due to a$16.1 million increase in advisory revenue, partially offset by a$4.9 million decrease in commission revenue. The increase in advisory revenue was primarily from increased client asset levels compared toMarch 31, 2021 . Commission revenue was negatively impacted by unfavorable transaction activity and volatility in global markets primarily as a result ofRussia's invasion ofUkraine and the measures taken in response, including sanctions imposed by governments. •Wealth Management operating expenses increased$14.9 million primarily due to a$10.8 million increase in cost of revenue resulting from increased advisory fees and commissions paid, coupled with$4.1 million of incremental personnel costs. Increased payout ratios correlate with increased asset levels, the timing of certain quarterly billings relative to the market impacts fromRussia's invasion ofUkraine , and the exit of lower producing financial professionals who were concentrated at lower payout levels. Increased personnel costs reflect our strategic investments to drive growth through enhanced service capabilities that support our financial and tax professionals. •Segment margin compression for the three months endedMarch 31, 2022 , was primarily due to the increase in operating expenses discussed above, coupled with the impact of market volatility on our higher margin service offerings. For the remainder of the year, we expect to incur incremental travel and conference costs associated with reduced COVID-19 travel restrictions; however, we expect for segment margin to increase as a result of the recently announced increase in the federal funds rate.Blucora, Inc. | Q1 2022 Form 10-Q 22 --------------------------------------------------------------------------------
Sources of Revenue
Wealth Management revenue is derived from multiple sources. We track sources of revenue, primary drivers of each revenue source, and recurring revenue. In addition, we focus on several business and key financial metrics in evaluating the success of our business relationships, our resulting financial position, and operating performance. A summary of our sources of revenue and business and financial metrics is as follows: ($ in thousands) Three Months Ended March 31, Change Sources of Revenue Primary Drivers 2022 2021 $ % Advisory - Advisory asset levels$ 107,169 $ 91,119 $ 16,050 17.6 % Financial professional-driven - Transactions Commission - Asset levels - Product mix 47,655 52,534 (4,879) (9.3) % - Cash balances Asset-based - Interest rates - Number of accounts - Client asset levels 5,663 5,329 334 6.3 % Other revenue - Account activity - Number of financial Transaction and fee professionals - Number of clients - Number of accounts 5,916 5,509 407 7.4 % Total revenue$ 166,403 $ 154,491 $ 11,912 7.7 % Total recurring revenue$ 143,737 $ 130,755 $ 12,982 9.9 % Recurring revenue rate 86.4 % 84.6 % Recurring revenue consists of advisory fees, trailing commissions, fees from cash sweep programs, and certain transaction and fee revenue, all as described further under the headings "Advisory revenue," "Commission revenue," "Asset-based revenue," and "Transaction and fee revenue," respectively. Certain recurring revenues are associated with asset balances and fluctuate depending on market values and current interest rates. Accordingly, our recurring revenue can be negatively impacted by adverse external market conditions. However, we believe recurring revenue is meaningful 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) Three Months Ended March 31, Change 2022 2021 $ % Client assets balances: Total client assets (1)$ 86,144,055 $ 84,776,191 $ 1,367,864 1.6 % Brokerage assets (1)$ 45,222,763 $ 48,001,320 $ (2,778,557) (5.8) % Advisory assets (1)$ 40,921,292 $ 36,774,871 $ 4,146,421 11.3 % Advisory assets as a percentage of total client assets 47.5 %
43.4 %
Number of financial professionals (in ones): Independent financial professionals (2) 3,376 3,691 (315) (8.5) % In-house/employee financial professionals (3) 33 27 6 22.2 % Total number of financial professionals 3,409 3,718 (309) (8.3) % Advisory and commission revenue per financial professional (4) $ 45.4$ 38.6 $ 6.8 17.6 % ___________________________ (1)In connection with our ongoing integration of acquisitions, we refined the methodology by which we calculate client assets to align the methodologies within our Wealth Management segment for calculating such metrics. Specifically, such changes to the methodology include alignment to one third party data aggregator for assets not placed in custody with our clearing firm and to one consistent set of logic for all assets and transaction types. We have not recast client assets for prior periods to conform to our current presentation as we believe the changes to the calculation to be immaterial. (2)The number of independent financial professionals includes licensed financial professionals that work with Avantax Wealth Management and operate as independent contractors, as well as licensed referring representatives at CPA firms (approximately 162) that partner withAvantax Planning Partners . (3)The number of in-house/employee financial professionals includes licensed financial planning consultants, all of which are affiliated withAvantax Planning Partners . (4)Calculation based on advisory and commission revenue for the three months endedMarch 31, 2022 and 2021, respectively. Blucora, Inc. | Q1 2022 Form 10-Q 23 -------------------------------------------------------------------------------- Client Assets. Total client assets include assets that we hold directly or indirectly on behalf of clients under a safekeeping or custody arrangement or for which we provide administrative services for clients. To the extent that we provide more than one service for a client's assets, the value of the asset is only counted once in the total amount of total client assets. Total client assets include advisory assets, non-advisory brokerage accounts, annuities, and mutual fund positions held directly with fund companies. These assets are not reported on the Company's condensed consolidated balance sheets. Advisory assets include client assets for which we provide investment advisory and management services as a fiduciary under the Investment Advisers Act of 1940. Our compensation for providing such services is typically a fee-based on the value of the advisory assets for each advisory client. These assets are not reported on the Company's condensed consolidated balance sheets.
Brokerage assets represent total client assets other than advisory assets.
Total client assets increased
Advisory assets as a percentage of total client assets increased to 47.5% atMarch 31, 2022 , compared to 43.4% atMarch 31, 2021 . This increase was primarily driven by net client inflows of$3.4 billion , relating in part to our focus on converting off platform, direct to fund assets when appropriate for the client, to fee-based advisory platforms that include ongoing management and which incur higher margins. Financial Professionals. The number of our financial professionals decreased 8.3% atMarch 31, 2022 compared toMarch 31, 2021 , with the decrease primarily due to attrition related to lower revenue-producing financial professionals. This attrition led to a 17.6% increase in advisory and commission revenue per financial professional for the comparable periods. The decrease in the number of financial professionals was partially offset by our continued recruitment and onboarding of independent financial professionals. Advisory Revenue. Advisory revenue primarily includes fees charged to clients in advisory accounts for which we are the RIA. These fees are based on the value of assets within these advisory accounts. For advisory revenues generated by Avantax Wealth Management, advisory fees are typically billed quarterly, in advance, and the related advisory revenues are deferred and recognized ratably over the period in which our performance obligations have been completed. For advisory revenue generated byAvantax Planning Partners , advisory fees are typically billed quarterly, in arrears, and the related advisory revenues are accrued and recognized ratably over the period in which our performance obligations were completed. Because advisory fees are based on advisory assets on the last day of each quarter, our revenues are impacted, in part, by the timing of market movements relative to when clients are billed.
Advisory asset balances were as follows (in thousands):
Three Months Ended March 31, Change 2022 2021 $ %
Advisory assets-independent financial professionals
$ 31,712,984 $ 2,680,375 8.5 % Advisory assets-in-house/employee financial professionals 5,163,741 3,794,739 1,369,002 36.1 % Retirement advisory assets-in-house financial professionals 1,364,192 1,267,148 97,044 7.7 % Total advisory assets$ 40,921,292 $ 36,774,871 $ 4,146,421 11.3 %
Blucora, Inc. | Q1 2022 Form 10-Q 24 --------------------------------------------------------------------------------
The activity within our advisory assets was as follows (in thousands):
Three Months Ended March 31, 2022 2021 Balance, beginning of the period$ 42,179,051 $ 35,603,557 Net new advisory assets 1,166,673 368,863 Market impact and other (2,424,432) 802,451 Balance, end of the period$ 40,921,292 $ 36,774,871 Advisory revenue$ 107,169 $ 91,119 Average advisory fee rate (1) 25 bps 26 bps
_________________________
(1)For the three months ended
Compared toMarch 31, 2021 , advisory assets increased$4.1 billion , driven by a$3.4 billion increase in net new advisory assets, and reinvestment levels of$0.7 billion . Net new advisory assets benefited from a focus on converting off platform, direct to fund assets when appropriate for the client, to fee-based advisory platforms that include ongoing management and which incur higher margins. This increase in advisory assets resulted in a$16.1 million increase in advisory revenue compared to the three months endedMarch 31, 2021 . The average advisory fee rates between the two periods were relatively flat. For the three months endedMarch 31, 2022 , advisory assets declined$1.3 billion primarily due to volatility in global markets as a result ofRussia's invasion ofUkraine and the measures taken in response, including sanctions imposed by governments. Commission Revenue. The Wealth Management segment generates two types of commissions: (1) transaction-based commissions and (2) trailing commissions. Transaction-based commissions, which occur when clients trade securities or purchase investment products, represent gross commissions generated by our financial professionals. The level of transaction-based commissions can vary from period-to-period based on the overall economic environment, number of trading days in the reporting period, market volatility, interest rate fluctuations, and investment activity of our financial professionals' clients. We earn trailing commissions (a commission or fee that is paid periodically over time) on certain 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 type of commission revenue, was as follows (in thousands):
Three Months Ended March 31, Change 2022 2021 $ % By product category: Mutual funds$ 19,383 $ 23,694 $ (4,311) (18.2) % Variable annuities 16,297 18,022 (1,725) (9.6) % Insurance 3,724 5,625 (1,901) (33.8) % General securities 8,251 5,193 3,058 58.9 % Total commission revenue$ 47,655 $ 52,534 $ (4,879) (9.3) % By type of commission: Transaction-based$ 20,624 $ 22,367 $ (1,743) (7.8) % Trailing 27,031 30,167 (3,136) (10.4) % Total commission revenue$ 47,655 $ 52,534 $ (4,879) (9.3) % For the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 transaction-based commission revenue and trailing commission revenue decreased$1.7 million and$3.1 million , respectively. These decreases were primarily due to unfavorable transaction activity and volatility in global markets as a result ofRussia's invasion ofUkraine and the measures taken in response, including sanctions imposed by governments. Blucora, Inc. | Q1 2022 Form 10-Q 25 --------------------------------------------------------------------------------
Asset-Based Revenue. Asset-based revenue primarily includes fees from financial product manufacturer sponsorship programs, cash sweep programs, asset-based retirement plan service fees, and other asset-based revenues.
For the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , asset-based revenue increased$0.3 million , primarily a result of incremental revenue generated from financial product manufacturer sponsorship programs. Interest rates during the two comparable periods were consistent, resulting in flat cash sweep revenue between the periods.
Transaction and Fee Revenue. Transaction and fee revenue primarily includes support fees charged to financial professionals, fees charged for executing certain transactions in client accounts, and other fees related to services provided and other account charges as generally outlined in agreements with financial professionals, clients, financial institutions, and retirement plan sponsors.
For the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , transaction and fee revenue increased$0.4 million , primarily due to incremental revenue generated from financial professional support fees.Tax Software ($ in thousands) Three Months Ended March 31, Change 2022 2021 $ % Revenue$ 141,150 $ 123,892 $ 17,258 13.9 % Operating income$ 58,030 $ 50,888 $ 7,142 14.0 % Segment margin 41.1 % 41.1 % For the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 ,Tax Software operating income increased$7.1 million due to the following factors: •Tax Software revenue increased$17.3 million due to a$14.7 million increase in consumer revenue and a$2.6 million increase in professional revenue. Revenue during the three months endedMarch 31, 2022 benefited primarily from higher revenue per unit, which we expect to continue into the second quarter of 2022.
•Tax Software operating expenses increased
Sources of Revenue
Tax Software revenue is derived primarily from the sale of tax preparation digital services, ancillary services, packaged tax preparation software, and multiple element arrangements that may include a combination of these items. Ancillary services primarily include refund payment transfer, audit defense, e-file concierge services, and Xpert Assist. We classifyTax Software revenue into two different categories: consumer revenue and professional revenue. Consumer revenue is derived from products and services sold to directly customers primarily for the preparation of individual or business tax returns. Professional revenue representsTax Software revenue derived from products sold to tax return preparers who utilize our offerings to service end-user customers.
Revenue by category was as follows (in thousands):
Three Months Ended March 31, Change 2022 2021 $ % Consumer$ 125,261 $ 110,567 $ 14,694 13.3 % Professional 15,889 13,325 2,564 19.2 %Total Tax Software revenue$ 141,150 $ 123,892 $ 17,258 13.9 %
Blucora, Inc. | Q1 2022 Form 10-Q 26 --------------------------------------------------------------------------------
Business Metrics
We measure the performance of ourTax Software business using three sets of non-financial metrics, which we consider to be important indicators of the performance of ourTax Software business and are especially relevant through the end of a completed tax season. These non-financial metrics include key performance indicators for our totalTax Software business, in addition to the consumer and professional tax software portions of theTax Software business: •We measure our total tax software customers using the total number of accepted federal tax e-files completed by both our consumer tax software customers and our professional tax software customers.
•We measure our consumer tax software customers using the number of accepted federal tax e-files made through our software and digital services.
•We measure our professional tax software customers using three metrics: (1) the number of accepted federal tax e-files made through our software, (2) the number of units sold, and (3) the number of e-files per unit sold. Quantitative information on the number of consumer e-files, professional e-files, professional units sold, and professional e-files per unit sold has been excluded because we do not view the comparison of these metrics to the prior year comparable period as meaningful due to the extension of the filing and payment deadline for tax year 2020 federal tax returns fromApril 15, 2021 toMay 17, 2021 , as well as the extension of the federal filing and payment deadlines forTexas ,Louisiana , andOklahoma toJune 15, 2021 .
Corporate-Level Activity
Certain corporate-level activity, including certain general and administrative costs (such as personnel and overhead costs), stock-based compensation, acquisition and integration costs, depreciation, amortization of acquired intangible assets, and contested proxy and other legal and consulting costs, is not allocated to our reportable segments.
Corporate-level activity by category was as follows (in thousands):
Three Months Ended March 31, Change 2022 2021 $ % Unallocated corporate-level general and administrative expenses $ 7,292$ 5,694 $ 1,598 28.1 % Stock-based compensation 6,225 5,610 615 11.0 % Acquisition and integration 1,666 8,103 (6,437) (79.4) % Depreciation 4,674 3,243 1,431 44.1 % Amortization of acquired intangible assets 6,631 7,175 (544) (7.6) % Contested proxy and other legal and consulting costs 2,920 3,230 (310) (9.6) % Total corporate-level activity$ 29,408 $ 33,055 $ (3,647) (11.0) % For the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , corporate-level activity decreased$3.6 million primarily due to the following factors: •Acquisition and integration expenses decreased$6.4 million , primarily due to a$4.6 million decrease in the fair value adjustment recorded for the HKFS Contingent Consideration liability, and a$1.8 million decrease in professional services and other expenses due to a reduction in integration activities.
•Unallocated general and administrative expenses increased
•Depreciation expense increased
Blucora, Inc. | Q1 2022 Form 10-Q 27 --------------------------------------------------------------------------------
OPERATING EXPENSES Cost of Revenue ($ in thousands) Three Months Ended March 31, Change 2022 2021 $ % Wealth Management$ 119,874 $ 108,623 $ 11,251 10.4 % Tax Software 9,426 5,578 3,848 69.0 % Total cost of revenue$ 129,300 $ 114,201 $ 15,099 13.2 % Percentage of revenue 42.0 % 41.0 % Cost of revenue consists of costs related to our Wealth Management andTax Software businesses, which include commissions and advisory fees paid to independent financial professionals, payments made to CPA firms under fee sharing arrangements, amortization of forgivable loans issued to our financial professionals, third-party costs, and costs associated with the technical support team and the operation of our data centers. Data center costs include personnel expenses, the cost of temporary help and contractors, professional services fees, software support and maintenance, bandwidth and hosting costs, and depreciation (including depreciation related to software development costs in theTax Software segment). Cost of revenue does not include compensation paid to in-house/employee financial professionals in our Wealth Management business. The compensation of our in-house/employee financial professionals is reflected in "Sales and marketing" expense. For the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , cost of revenue increased$15.1 million , primarily due to an increase in advisory fees and commissions paid to financial professionals associated with incremental Wealth Management revenues. Payout ratios for the same period also increased due to the number of financial professionals earning higher payout levels, the exit of lower producing financial professionals who were concentrated at lower payout levels, and the alignment of our payout grids. Higher payout ratios are expected to continue in the near term as we continue to grow and scale our business. Furthermore, theTax Software business had increased personnel costs and depreciation of capitalized software during such period. Continued investments in internally developed software for theTax Software segment are expected to result in increased depreciation in future periods. Engineering and Technology ($ in thousands) Three Months Ended March 31, Change 2022 2021 $ % Engineering and technology$ 8,504 $ 7,128 $ 1,376 19.3 % Percentage of revenue 2.8 % 2.6 % Engineering and technology expenses are associated with the research, development, support, and ongoing enhancements of our offerings, which include personnel expenses, the cost of temporary help and contractors, software support and maintenance, bandwidth and hosting, and professional services fees. Engineering and technology expenses do not include the costs of computer hardware and software that are capitalized, depreciated over their useful lives, and recognized on the consolidated statements of operations as either "Cost of Revenue" or "Depreciation." For more information, see the "Cost of Revenue" and "Depreciation and Amortization of Acquired Intangible Assets" sections contained within this discussion of "Operating Expenses." For the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , engineering and technology expenses increased$1.4 million primarily due to increases in personnel expenses in ourTax Software segment. Sales and Marketing ($ in thousands) Three Months Ended March 31, Change 2022 2021 $ % Sales and marketing$ 84,403 $ 77,562 $ 6,841 8.8 % Percentage of revenue 27.4 % 27.9 % Sales and marketing expenses primarily consist of marketing expenses associated with ourTax Software business (including expenses related to marketing agencies and media companies) and our Wealth Management business, personnel expenses, compensation paid toAvantax Planning Partners in-house/employee financial professionals, the cost of temporary help and contractors, and back-office processing support expenses for our Wealth Management business. Blucora, Inc. | Q1 2022 Form 10-Q 28 -------------------------------------------------------------------------------- For the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , sales and marketing expenses increased$6.8 million primarily due to a$3.6 million increase in personnel costs across both segments, and a$2.6 million increase in strategic advertising and marketing costs in ourTax Software business. General and Administrative ($ in thousands) Three Months Ended March 31, Change 2022 2021 $ % General and administrative$ 29,075 $ 24,685 $ 4,390 17.8 % Percentage of revenue 9.5 % 8.9 %
General and administrative ("G&A") expenses primarily consist of personnel expenses, the cost of temporary help and contractors, professional services fees, general business development and management expenses, occupancy and general office expenses, business taxes, and insurance expenses.
For the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , G&A expenses increased$4.4 million primarily due to incremental personnel costs and hardware and software support and maintenance fees. Acquisition and Integration ($ in thousands) Three Months Ended March 31, Change 2022 2021 $ % Change in the fair value of HKFS Contingent Consideration$ 1,700 $ 6,300 $ (4,600) (73.0) % Professional services and other expenses (34) 1,803 (1,837) (101.9) % Total acquisition and integration$ 1,666 $ 8,103 $ (6,437) (79.4) % Percentage of revenue 0.5 % 2.9 % Acquisition and integration expenses primarily relate to costs incurred for the acquisitions ofAvantax Planning Partners and 1st Global and consist of employee-related expenses, professional services fees, changes in the fair value of contingent consideration, and other expenses. For the three months endedMarch 31, 2022 , acquisition and integration expenses decreased$6.4 million , primarily due to a$4.6 million decrease in the fair value adjustment recorded for the HKFS Contingent Consideration liability, and a$1.8 million decrease in professional services and other expenses due to a reduction in integration activities. Depreciation and Amortization of Acquired Intangible Assets ($ in thousands) Three Months Ended March 31, Change 2022 2021 $ % Depreciation$ 2,931 $ 2,300 $ 631 27.4 % Amortization of acquired intangible assets 6,631 7,175 (544) (7.6) % Total depreciation and amortization of acquired intangible assets$ 9,562 $ 9,475 $ 87 0.9 % Percentage of revenue 3.1 % 3.4 %
Depreciation of property, equipment, and software, net includes depreciation of computer equipment and software (including internally developed software), office equipment and furniture, and leasehold improvements. Amortization of acquired intangible assets primarily includes the amortization of financial professional, sponsor, and customer relationships, which are amortized over their estimated lives.
For the three months ended
Blucora, Inc. | Q1 2022 Form 10-Q 29 --------------------------------------------------------------------------------
INTEREST EXPENSE AND OTHER, NET ($ in thousands) Three Months Ended March 31, Change 2022 2021 $ % Interest expense$ 7,130 $ 7,183 $ (53) (0.7) % Amortization of debt issuance costs 389 363 26 7.2 % Amortization of debt discount 292 277 15 5.4 % Total interest expense 7,811 7,823 (12) (0.2) % Interest income and other 30 60 (30) (50.0) % Interest expense and other, net$ 7,841 $ 7,883 $ (42) (0.5) %
For the three months ended
INCOME TAXES We recorded income tax expense of$2.6 million and$1.7 million for the three months endedMarch 31, 2022 , and 2021, respectively. The prior period interim tax provision was prepared by applying a year-to-date effective tax rate to income before income taxes. The current period interim tax provision was prepared by applying an estimated annual effective tax rate to income before income taxes and by calculating the tax effect of discrete items recognized during the quarter (if applicable). Our effective income tax rate for the three months endedMarch 31, 2022 , andMarch 31, 2021 differed from the 21% statutory rate primarily due to the release of valuation allowances and the effect of state income taxes. We maintain a valuation allowance for federal net operating loss carryforwards that we have concluded it is more likely than not that the related deferred tax benefits will not be realized. This valuation allowance does not prevent us from utilizing unexpired net operating losses to offset taxable income in future periods. The majority of these net operating losses will either be utilized or expire between 2022 and 2024.Blucora, Inc. | Q1 2022 Form 10-Q 30 -------------------------------------------------------------------------------- NON-GAAP FINANCIAL MEASURES
Adjusted EBITDA
We define Adjusted EBITDA as net income (loss), determined in accordance with GAAP, excluding the effects of stock-based compensation, depreciation and amortization of acquired intangible assets, interest expense and other, net, acquisition and integration costs, contested proxy and other legal and consulting costs, and income tax expense. Interest expense and other, net primarily consists of interest expense, net. Acquisition and integration costs primarily relate to the acquisitions ofAvantax Planning Partners and 1st Global. We believe that Adjusted EBITDA provides meaningful supplemental information regarding our performance. We use this non-GAAP financial measure for internal management and compensation purposes, when publicly providing guidance on possible future results, and as a means to evaluate period-to-period comparisons. We believe that Adjusted EBITDA is a common measure used by investors and analysts to evaluate our performance, that it provides a more complete understanding of the results of operations and trends affecting our business when viewed together with GAAP results, and that management and investors benefit from referring to this non-GAAP financial measure. Items excluded from Adjusted EBITDA are significant and necessary components to the operations of our business and, therefore, Adjusted EBITDA should be considered as a supplement to, and not as a substitute for or superior to, GAAP net income (loss). Other companies may calculate Adjusted EBITDA differently and, therefore, our Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
A reconciliation of GAAP net income (loss), which we believe to be the most comparable GAAP measure, to Adjusted EBITDA, is presented below:
Three Months Ended March 31, ($ in thousands) 2022 2021 Net income$ 34,620 $ 27,646 Stock-based compensation 6,225 5,610 Depreciation and amortization of acquired intangible assets 11,305 10,418 Interest expense and other, net 7,841 7,883
Acquisition and integration-Excluding change in the fair value of HKFS Contingent Consideration
(34) 1,803
Acquisition and integration-Change in the fair value of HKFS Contingent Consideration
1,700 6,300 Contested proxy and other legal and consulting costs 2,920 3,230 Income tax expense 2,582 1,700 Adjusted EBITDA$ 67,159 $ 64,590
Non-GAAP Net Income (Loss) and Non-GAAP Net Income (Loss) Per Share
We define Non-GAAP Net Income (Loss) as net income (loss), determined in accordance with GAAP, excluding the effects of stock-based compensation, amortization of acquired intangible assets, acquisition and integration costs, contested proxy and other legal and consulting costs, the related cash tax impact of those adjustments, and non-cash income tax (benefit) expense. We exclude the non-cash portion of income taxes because of our ability to offset a substantial portion of our cash tax liabilities by using deferred tax assets, which primarily consist ofU.S. federal net operating losses. The majority of these net operating losses will expire, if not utilized, between 2022 and 2024. We believe that Non-GAAP Net Income (Loss) and Non-GAAP Net Income (Loss) per share provide meaningful supplemental information to management, investors, and analysts regarding our performance and the valuation of our business by excluding items in the statement of operations that we do not consider part of our ongoing operations or that have not been, or are not expected to be, settled in cash. Additionally, we believe that Non-GAAP Net Income (Loss) and Non-GAAP Net Income (Loss) per share are common measures used by investors and analysts to evaluate our performance and the valuation of our business. Non-GAAP Net Income (Loss) and Non-GAAP Net Income (Loss) per share should be evaluated in light of our financial results prepared in accordance with GAAP and should be considered as a supplement to, and not as a substitute for or superior to, GAAP net income (loss) and GAAP net income (loss) per share. Other companies may calculate Non-GAAP Net Income (Loss) and Non-GAAP Net Income (Loss) per share differently, and, therefore, these measures may not be comparable to similarly titled measures of other companies.Blucora, Inc. | Q1 2022 Form 10-Q 31 -------------------------------------------------------------------------------- A reconciliation of GAAP net income (loss) and GAAP net income (loss) per share, which we believe to be the most comparable GAAP measures, to Non-GAAP Net Income (Loss) and Non-GAAP Net Income (Loss) per share, respectively, is presented below: ($ in thousands)
Three Months Ended
2022 2021 Net income$ 34,620 $ 27,646 Stock-based compensation 6,225 5,610 Amortization of acquired intangible assets 6,631 7,175
Acquisition and integration-Excluding change in the fair value of HKFS Contingent Consideration
(34) 1,803
Acquisition and integration-Change in the fair value of HKFS Contingent Consideration
1,700 6,300 Contested proxy and other legal and consulting costs 2,920 3,230 Cash tax impact of adjustments to GAAP net income (959) (543) Non-cash income tax (benefit) expense 1,506 (269) Non-GAAP Net Income$ 52,609 $ 50,952 Per diluted share: Net income (1) $ 0.70$ 0.56 Stock-based compensation 0.13 0.11 Amortization of acquired intangible assets 0.13 0.15
Acquisition and integration-Excluding change in the fair value of HKFS Contingent Consideration
- 0.04
Acquisition and integration-Change in the fair value of HKFS Contingent Consideration
0.03 0.13 Contested proxy and other legal and consulting costs 0.06 0.07 Cash tax impact of adjustments to GAAP net income (0.02) (0.01) Non-cash income tax (benefit) expense 0.03 (0.01) Non-GAAP Net Income per share - Diluted $ 1.06$ 1.04 Diluted weighted average shares outstanding 49,747 49,097
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(1)Any difference in the "per diluted share" amounts between this table and the condensed consolidated statements of operations is due to using different diluted weighted average shares outstanding in the event that there is GAAP net loss but Non-GAAP Net Income and vice versa.Blucora, Inc. | Q1 2022 Form 10-Q 32 -------------------------------------------------------------------------------- LIQUIDITY AND CAPITAL RESOURCES
Cash and Cash Equivalents
Our principal source of liquidity is our cash and cash equivalents. As ofMarch 31, 2022 , we had cash and cash equivalents of$144.2 million . We generally invest our excess cash in money market funds that are made up of securities issued by agencies of theU.S. government. We may invest, from time-to-time, in other vehicles, such as debt instruments issued by theU.S. federal government and its agencies, international governments, municipalities, and publicly held corporations, as well as commercial paper and insured time deposits with commercial banks. Specific holdings can vary from period to period depending upon our cash requirements. Our financial instrument investments held atMarch 31, 2022 had minimal default risk and short-term maturities. Our Avantax Wealth Management 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 on Avantax Wealth Management operations. As ofMarch 31, 2022 , Avantax Wealth Management met all capital adequacy requirements to which it was subject. Historically, we have financed our operations primarily from cash provided by operating activities and access to credit markets. Our historical uses of cash have been funding our operations, servicing our debt obligations, capital expenditures, acquisitions that enhance our strategic position, financial professional loans, contingent consideration associated with our acquisitions, and share repurchases under share repurchase programs. For at least the next twelve months, we plan to finance these cash needs and our regulatory capital requirements at our broker-dealer subsidiary largely through our cash and cash equivalents on hand and cash provided by operating activities. Execution of our growth strategies in our Wealth Management business through strategic asset acquisitions is expected to remain a capital allocation priority during the next twelve months. However, the underlying levels of revenues and expenses that we project may not prove to be accurate, and, from time to time, we may make a determination to draw on the Revolver (as defined below) or increase the principal amount of the Term Loan (as defined below) to meet our capital requirements, subject to customary terms and conditions. Our future investments in our business through capital expenditures or acquisitions, or our return of capital to stockholders through stock repurchases, will be determined after considering the best interests of our stockholders. Since our results of operations are sensitive to various factors, including, among others, the level of competition we face, regulatory and legal impacts, and political and economic conditions, such factors could adversely affect our liquidity and capital resources. In addition, due to the COVID-19 pandemic, we have experienced and may continue to experience near- to mid-term volatility in our results of operations that could further increase our liquidity needs. Due to this volatility, we have taken several measures to ensure proper liquidity levels and are maintaining flexibility in our cash flows. InJuly 2020 , we increased the principal outstanding under our Term Loan to fund the acquisition ofAvantax Planning Partners and provide additional working capital flexibility. In addition, inApril 2021 , we increased the amount available for borrowings under the Revolver from$65.0 million to$90.0 million . Overall, we believe these measures provide us with the capital flexibility to satisfy our obligations, fund our operations, and invest in our business.
Indebtedness
InMay 2017 , we entered into a credit agreement (as the same has been amended, the "Credit Agreement") with a syndicate of lenders that provides for a term loan facility (the "Term Loan") and a revolving line of credit (including a letter of credit sub-facility) (the "Revolver") for working capital, capital expenditures, and general business purposes (as amended, the "Senior Secured Credit Facility"). The Term Loan has a maturity date ofMay 22, 2024 (the "Term Loan Maturity Date"). OnApril 26, 2021 , to ensure adequate liquidity and flexibility to support growth, we entered into Amendment No. 5 to the Credit Agreement (the "Credit Agreement Amendment"). Pursuant to the Credit Agreement Amendment, the Credit Agreement was amended to, among other things, refinance the existing$65.0 million Revolver and add$25.0 million of additional revolving credit commitments, for an aggregate principal amount of$90.0 million in revolving credit commitments (the "New Revolver"). The New Revolver has a maturity date ofFebruary 21, 2024 (the "New Revolver Maturity Date"). As ofMarch 31, 2022 , we had$560.9 million in principal amount outstanding under the Term Loan and no amounts outstanding under the New Revolver. Based on aggregate loan commitments as ofMarch 31, 2022 , approximately$90.0 million was available for future borrowing atMarch 31, 2022 under the Senior Secured CreditBlucora, Inc. | Q1 2022 Form 10-Q 33 -------------------------------------------------------------------------------- Facility, subject to customary terms and conditions. In addition, the Company is required to make principal amortization payments on the Term Loan quarterly on the last business day of each March, June, September, and December, in an amount equal to approximately$0.5 million (subject to reduction for prepayments), with the remaining principal amount of the Term Loan due on the Term Loan Maturity Date. The interest rate on the Term Loan is variable at the London Interbank Offered Rate (subject to a floor of 1.0%), plus the applicable interest rate margin of 4.0% for Eurodollar Rate Loans (as defined in the Credit Agreement) and 3.0% for ABR Loans (as defined in the Credit Agreement). As ofMarch 31, 2022 , the applicable interest rate on the Term Loan was 5.0%. Depending on the Consolidated First Lien Net Leverage Ratio (as defined in the Credit Agreement), the applicable interest rate margin on the New Revolver ranges from 2.0% to 2.5% for Eurodollar Rate Loans and 1.0% to 1.5% for ABR Loans. The Company is required to pay a commitment fee on the undrawn commitment under the New Revolver in a percentage that is dependent on the Consolidated FirstLien Net Leverage Ratio that ranges from 0.35% to 0.4%. Interest is payable at the end of each interest period, typically quarterly. ByJune 2023 , allU.S. Dollar London Interbank Offered Rate ("LIBOR") tenors will cease to be published and floating rate instruments that usedU.S. Dollar LIBOR will need to shift to a substitute base index. To minimize disruption arising from such transition, the market has begun to shift to alternative fallback rates, such as Secured Overnight Financing Rate ("SOFR") as a replacement benchmark for floating rate LIBOR based loans. Unless (i) such LIBOR tenors cease to be provided at an earlier date or (ii) we and the administrative agent to the Credit Agreement make an "early opt-in election" to replace the rate prior to cessation of LIBOR in accordance with the Credit Agreement, we will continue to have the option under the Credit Agreement to make drawdowns using 1-Day, 1-Month, 3-Month, and 6-Month tenorU.S. Dollar LIBOR untilJune 2023 . The Credit Agreement Amendment provides for a process for transition to a fallback rate consistent with industry practice and permits the administrative agent to the Credit Agreement to apply certain updates to the Credit Agreement to effectuate the fallback rate, including a spread adjustment based on the historical basis between LIBOR and the fallback rate. Obligations under the Senior Secured Credit Facility are guaranteed by certain of the Company's subsidiaries and secured by substantially all the assets of the Company and certain of its subsidiaries (including certain subsidiaries acquired in the acquisition ofAvantax Planning Partners and certain other material subsidiaries). The Senior Secured Credit Facility includes financial and operating covenants (including a Consolidated Total Net Leverage Ratio), which are set forth in detail in the Credit Agreement. Pursuant to the Credit Agreement Amendment, if the Company's usage of the New Revolver exceeds 30% of the aggregate commitments under the New Revolver on the last day of any calendar quarter, the Company shall not permit the Consolidated Total Net Leverage Ratio (as defined in the Credit Agreement) to exceed (i) 4.75 to 1.00 for the period beginning onApril 1, 2021 and ending onDecember 31, 2021 , (ii) 4.25 to 1.00 for the period beginning onJanuary 1, 2022 and ending onSeptember 30, 2022 , (iii) 4.00 to 1.00 for the period beginning onOctober 1, 2022 and ending onDecember 31, 2022 , and (iv) 3.50 to 1.00 for the period beginning onJanuary 1, 2023 and ending on the New Revolver Maturity Date. Except as described above, the New Revolver has substantially the same terms as the previous Revolver, including certain covenants and events of default. The Company was in compliance with the debt covenants of the Senior Secured Credit Facility as ofMarch 31, 2022 .
For additional information on the Term Loan, the New Revolver, and the Credit Agreement, see "Item 1. Financial Statements-Note 5."
Stock Repurchase Plan
As ofDecember 31, 2021 , we had$100.0 million authorized under our stock repurchase plan. Pursuant to the stock repurchase plan, share repurchases may be made through a variety of methods, including open market or privately negotiated transactions. The timing and number of shares repurchased will depend on a variety of factors, including price, general business and market conditions, and alternative investment opportunities. Our repurchase program does not obligate us to repurchase any specific number of shares, may be suspended or discontinued at any time, and does not have a specified expiration date. Any repurchases of our stock pursuant to the stock repurchase plan may materially reduce the amount of cash we have available and may not materially enhance the long-term value of our business or our stock.
For the three months ended
Blucora, Inc. | Q1 2022 Form 10-Q 34 --------------------------------------------------------------------------------
remaining authorized amount under the stock repurchase plan as of
Subsequent toMarch 31, 2022 , and through the date of this filing, we repurchased an additional 0.2 million shares of our common stock under the stock repurchase plan for an aggregate purchase price of approximately$4.5 million . Subject to the terms of our Credit Agreement, a portion of our future capital requirements over the next twelve months may encompass share repurchases under this plan.
Contractual Obligations and Commitments
On
The HKFS Contingent Consideration to be paid is determined based on advisory asset levels and the achievement of certain performance goals (i) for the period beginningJuly 1, 2020 and endingJune 30, 2021 and (ii) for the period beginningJuly 1, 2021 and endingJune 30, 2022 . Pursuant to the Stock Purchase Agreement, dated as ofJanuary 6, 2020 , by and among the Company, HKFS, the selling stockholders named therein (the "Sellers"), andJRD Seller Representative, LLC , as the Sellers' representative (as amended onApril 7, 2020 ,June 30, 2020 , andJune 29, 2021 ) (the "HKFS Purchase Agreement"), the maximum aggregate amount that we would be required to pay for each earn-out period is$30.0 million . If the asset market values on the applicable measurement date fall below certain specified thresholds, no payment of consideration is owed to the Sellers for such period. Based on advisory asset levels and the achievement of performance goals for the first earn-out period specified in the HKFS Purchase Agreement, we paid the full$30.0 million in the third quarter of 2021. The estimated fair value of the HKFS Contingent Consideration liability for the second earn-out period was$30.0 million as ofMarch 31, 2022 and is included within "Accrued expenses and other current liabilities" on the condensed consolidated balance sheets. We expect to pay the full$30.0 million in the third quarter of 2022. In addition, the Company has entered into several asset purchase agreements that are accounted for as asset acquisitions. These acquisitions may include up-front cash consideration, fixed deferred cash consideration, and contingent consideration arrangements. Future fixed payments are recognized as customer relationship intangible assets on the date of acquisition. Contingent consideration arrangements encompass obligations to make future payments to sellers contingent upon the achievement of future financial targets. These contingent payments are not recognized until all contingencies are resolved and the consideration is paid. As ofMarch 31, 2022 , the maximum future fixed and contingent payments associated with these asset acquisitions was$17.0 million , with specified payment dates from 2022 through 2026.Blucora, Inc. | Q1 2022 Form 10-Q 35 --------------------------------------------------------------------------------
Cash Flows
Our cash flows were comprised of the following (in thousands):
Three Months Ended
2022 2021 $ Change Net cash provided by operating activities$ 47,343 $ 53,722 $ (6,379) Net cash used by investing activities (5,482) (9,185) 3,703 Net cash used by financing activities (32,463) (1,255) (31,208)
Net increase in cash, cash equivalents, and restricted cash
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