Edgar Filing: BLUCORA, INC.

BCOR 10-Q Q3 2014

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 September 30, 2014



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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):



Large accelerated filer	ý	Accelerated filer	o

Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	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		October 30, 2014
Common Stock, Par Value $0.0001		41,002,763

Table of Contents

BLUCORA, INC.

FORM 10-Q

TABLE OF CONTENTS



	PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Unaudited Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013	3
	Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months ended September 30, 2014 and 2013	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2014 and 2013	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	35

	PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 3.	Defaults Upon Senior Securities	54
Item 4.	Mine Safety Disclosures	54
Item 5.	Other Information	54
Item 6.	Exhibits	54
Signatures		55

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BLUCORA, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)



	September 30, 2014			December 31, 2013
ASSETS
Current assets:
Cash and cash equivalents	$	60,194		$	130,225
Available-for-sale investments	220,200			203,480
Accounts receivable, net of allowance of $62 and $62	31,806			48,081
Other receivables	4,143			8,292
Inventories	27,759			28,826
Prepaid expenses and other current assets, net	8,967			9,774
Total current assets	353,069			428,678
Property and equipment, net	16,347			16,108
Goodwill	364,054			348,957
Other intangible assets, net	180,330			178,064
Other long-term assets	5,274			6,223
Total assets	$	919,074		$	978,030
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	42,886		$	61,268
Accrued expenses and other current liabilities	18,699			31,109
Deferred revenue	6,945			7,510
Short-term portion of long-term debt, net	7,917			7,903
Convertible senior notes, net	—			181,583
Total current liabilities	76,447			289,373
Long-term liabilities:
Long-term debt, net	55,261			113,193
Convertible senior notes, net	184,254			—
Deferred tax liability, net	41,341			56,861
Deferred revenue	2,331			1,814
Other long-term liabilities	2,610			2,719
Total long-term liabilities	285,797			174,587
Total liabilities	362,244			463,960
Commitments and contingencies (Note 7)
Stockholders’ equity:
Common stock, par value, $0.0001 - authorized, 900,000 shares; issued and outstanding, 40,977 and 42,083 shares	4			4
Additional paid-in capital	1,476,148			1,466,043
Accumulated deficit	(919,491		)	(951,977		)
Accumulated other comprehensive income	169			—
Total stockholders’ equity	556,830			514,070
Total liabilities and stockholders’ equity	$	919,074		$	978,030

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

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BLUCORA, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)



	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
Revenues:
Services revenue	$	76,885		$	109,491		$	362,199		$	392,010
Product revenue, net	37,970			14,630			110,408			14,630
Total revenues	114,855			124,121			472,607			406,640
Operating expenses:
Cost of revenues:
Services cost of revenue	49,754			72,935			177,280			219,274
Product cost of revenue	25,605			10,622			73,771			10,622
Total cost of revenues	75,359			83,557			251,051			229,896
Engineering and technology	5,970			2,905			14,922			7,951
Sales and marketing	18,152			18,230			96,275			71,409
General and administrative	9,495			8,421			28,552			21,362
Depreciation	1,085			697			3,278			1,738
Amortization of intangible assets	6,118			4,184			17,463			10,521
Total operating expenses	116,179			117,994			411,541			342,877
Operating income (loss)	(1,324		)	6,127			61,066			63,763
Other loss, net	(3,208		)	(13,118		)	(11,001		)	(20,427		)
Income (loss) before income taxes	(4,532		)	(6,991		)	50,065			43,336
Income tax benefit (expense)	2,294			510			(17,579		)	(17,803		)
Net income (loss)	$	(2,238	)	$	(6,481	)	$	32,486		$	25,533
Net income (loss) per share:
Basic	$	(0.05	)	$	(0.16	)	$	0.78		$	0.62
Diluted	$	(0.05	)	$	(0.16	)	$	0.75		$	0.60
Weighted average shares outstanding:
Basic	41,034			41,088			41,589			41,048
Diluted	41,034			41,088			43,303			42,878
Other comprehensive income (loss):
Net income (loss)	$	(2,238	)	$	(6,481	)	$	32,486		$	25,533
Unrealized gain (loss) on available-for-sale investments, net of tax	(1,917		)	(23		)	173			13
Unrealized gain on derivative instrument, net of tax	—			57			—			266
Reclassification adjustment for realized gain on available-for-sale investments, net of tax, included in net income	(4		)	—			(4		)	(1		)
Other comprehensive income (loss)	(1,921		)	34			169			278
Comprehensive income (loss)	$	(4,159	)	$	(6,447	)	$	32,655		$	25,811

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

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BLUCORA, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



	Nine months ended September 30,
	2014			2013
Operating Activities:
Net income	$	32,486		$	25,533
Adjustments to reconcile net income to net cash provided by operating activities:
Stock-based compensation	8,974			8,490
Depreciation and amortization of intangible assets	27,298			19,413
Excess tax benefits from stock-based award activity	(29,801		)	(24,596		)
Deferred income taxes	(15,621		)	(8,209		)
Amortization of premium on investments, net	3,095			2,154
Amortization of debt issuance costs	853			841
Accretion of debt discounts	2,753			1,972
Loss on debt extinguishment and modification expense	—			1,593
Loss on derivative instrument	—			5,931
Impairment loss on equity investment in privately-held company	—			3,711
Other	72			608
Cash provided (used) by changes in operating assets and liabilities:
Accounts receivable	16,212			(8,756		)
Other receivables	4,134			1,090
Inventories	1,067			900
Prepaid expenses and other current assets	849			6,694
Other long-term assets	43			(2,296		)
Accounts payable	(18,382		)	1,873
Deferred revenue	(48		)	2,563
Accrued expenses and other current and long-term liabilities	17,174			27,176
Net cash provided by operating activities	51,158			66,685
Investing Activities:
Business acquisitions, net of cash acquired	(44,927		)	(180,500		)
Purchases of property and equipment	(4,247		)	(3,066		)
Change in restricted cash	—			2,491
Equity investment in privately-held company	—			(4,000		)
Proceeds from sales of investments	26,620			25,812
Proceeds from maturities of investments	195,296			150,277
Purchases of investments	(237,063		)	(234,771		)
Net cash used by investing activities	(64,321		)	(243,757		)
Financing Activities:
Proceeds from issuance of convertible notes, net of debt issuance costs of $6,432	—			194,818
Proceeds from credit facilities	4,000			—
Repayment of credit facilities	(62,000		)	(10,000		)
Debt issuance costs on credit facility	—			(28		)
Stock repurchases	(29,923		)	(3,525		)
Excess tax benefits from stock-based award activity	29,801			24,596
Proceeds from stock option exercises	2,447			1,700
Proceeds from issuance of stock through employee stock purchase plan	1,376			1,065
Tax payments from shares withheld upon vesting of restricted stock units	(2,569		)	(2,011		)
Net cash provided (used) by financing activities	(56,868		)	206,615
Net increase (decrease) in cash and cash equivalents	(70,031		)	29,543
Cash and cash equivalents, beginning of period	130,225			68,278
Cash and cash equivalents, end of period	$	60,194		$	97,821
Supplemental disclosure of non-cash investing activities:
Purchases of property and equipment through leasehold incentives	$	120		$	1,006
Cash paid for:
Income taxes	$	2,536		$	1,637
Interest	$	6,336		$	6,512

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 three primary businesses: an internet search and content business, an online tax preparation business, and an e-commerce business. The Search and Content business, InfoSpace, provides search services to users of its owned and operated and distribution partners' web properties, as well as online content. The Tax Preparation business consists of the operations of TaxACT, Inc. (“TaxACT”) and provides online tax preparation service for individuals, tax preparation software for individuals and professional tax preparers, and ancillary services. The E-Commerce business consists of the operations of Monoprice, Inc. (“Monoprice”), which the Company acquired on August 22, 2013, and provides self-branded electronics and accessories to both consumers and businesses primarily through its website, www.monoprice.com.

On May 30, 2014, InfoSpace acquired the assets of HowStuffWorks (“HSW”), which constituted a business, pursuant to the terms of the Asset Purchase Agreement dated April 18, 2014. HSW provides online content through various websites, including www.HowStuffWorks.com. HSW generates revenue primarily through advertisements appearing on its websites.

Segments: The Company has three reportable segments: Search and Content (formerly known as Search), Tax Preparation, and E-Commerce. The Search and Content segment is the InfoSpace business, which now includes HSW, the Tax Preparation segment is the TaxACT business, and the E-Commerce segment is the Monoprice business. Unless the context indicates otherwise, the Company uses the term “Search and Content” to represent search and content services, the term “Tax Preparation” to represent services and software sold through the TaxACT business, and the term “E-Commerce” to represent products sold through the Monoprice business (see “Note 9: 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.

Reclassifications: Certain prior period amounts have been reclassified to conform to the current period presentation.

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, and 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, valuation of the Warrant (see “Note 8: Stockholders’ Equity”) and interest rate swap derivatives, revenue recognition, the estimated allowance for sales returns and doubtful accounts, the estimated allowance for obsolete, slow moving, and nonsalable inventory, internally developed software, accrued contingencies, stock option valuation, and valuation allowance for deferred tax assets. Actual amounts may differ from estimates.

Seasonality: Blucora’s Tax Preparation segment is highly seasonal, with the significant majority 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 at relatively consistent levels. Revenue from the E-Commerce segment also is seasonal, with revenues historically being the lowest in the second quarter, a period that does not include consumer back-to-school or holiday-related spending.

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, 2013. Interim results are not necessarily indicative of results for a full year.

Short-term investments: The Company principally invests its available cash in fixed income debt and marketable equity securities. Fixed income debt securities include investment-grade income securities, AAA-rated money market funds, and

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insured time deposits with commercial banks. Equity securities include common stock in a publicly traded company. 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 income” 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 the impairments of its available-for-sale investments 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.

Inventories: Inventories, consisting of merchandise available for sale in the E-Commerce business, are accounted for using the first-in-first-out (“FIFO”) method of accounting and are valued at the lower of cost or market and include the related inbound shipping and handling costs. Inventory quantities on hand are reviewed regularly, and allowances are maintained for obsolete, slow moving, and nonsalable inventory.

Business combinations and intangible assets including goodwill: The Company accounts for business combinations using the acquisition method, and, accordingly, the identifiable assets acquired and liabilities assumed are recorded at their acquisition date fair values. Goodwill is calculated as the excess of the purchase price over the fair value of net assets, including the amount assigned to identifiable intangible assets. Identifiable intangible assets with finite lives are amortized over their useful lives on a straight-line basis, except for the installed code base technology which is 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.

Derivative instruments and hedging: The Company recognized derivative instruments as either assets or liabilities at their fair value. The Company recorded changes in the fair value of the derivative instruments as gains or losses either in “Other loss, net” on the consolidated statements of comprehensive income, for those not designated as a hedging instrument (the Warrant – see “Note 8: Stockholders’ Equity”), or in “Accumulated other comprehensive income” on the consolidated balance sheets, for those used in a hedging relationship (the interest rate swap – see “Note 6: Debt”). The Warrant and interest rate swap were settled in the last half of 2013.

The change in the fair value of the Warrant resulted in losses of $4.0 million and $5.9 million for the three and nine months ended September 30, 2013, respectively.

The interest rate swap agreement was used for the purpose of minimizing exposure to changes in interest rates and was accounted for as a cash flow hedge. The hedge was perfectly effective through termination, and no ineffectiveness was recorded in the consolidated statements of comprehensive income.

Fair value of financial instruments: The Company measures its cash equivalents, available-for-sale investments, and derivative instruments at fair value. The Company considers the carrying values of accounts receivable, other receivables, inventories, prepaid expenses, other current assets, accounts 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. Marketable equity securities are classified within Level 1 of the fair value hierarchy because the Company values its marketable equity securities using quoted prices in active markets for identical securities. 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 classified its interest rate swap derivative within Level 2 as the valuation inputs were based on quoted prices and market observable data of similar instruments. As previously discussed, the interest rate swap was terminated in 2013. The Company classified the Warrant derivative within Level 3, because it was valued using the Black-Scholes-Merton valuation model, which had significant unobservable inputs related to historical stock price volatility. This unobservable input reflected the Company’s assumptions, consistent with reasonably available assumptions made by other market participants. This valuation required significant judgment. As previously discussed, the Warrant was settled in 2013.

Supplier concentration: A material part of Monoprice’s business is dependent on two vendors. These unrelated vendors accounted for 15% and 18% of Monoprice’s inventory purchases during the three and nine months ended September 30, 2014,

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respectively, and 19% of Monoprice's inventory purchases during the period from August 22, 2013 (the date which Monoprice was acquired) to September 30, 2013. As of September 30, 2014 and December 31, 2013, these unrelated vendors accounted for 21% and 20% of Monoprice’s related accounts payable, respectively.

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.

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, 2016. Earlier adoption is not permitted. The Company currently is evaluating the impact of this guidance on its consolidated financial statements.

In July 2013, the FASB issued guidance on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. The Company adopted this guidance in the first quarter of 2014, and the adoption did not have a material impact on the Company’s consolidated financial statements.

Note 3: Business Combinations

HSW: On May 30, 2014, InfoSpace acquired HSW, a provider of online content (see "Note 1: The Company and Basis of Presentation"), for $44.9 million in cash, which was funded from available cash. The acquisition of HSW is strategic to InfoSpace and intended to expand its operations. HSW is included in the Search and Content segment. The identifiable net assets acquired amounted to approximately $4.5 million, consisting primarily of marketable equity securities, and intangible assets acquired amounted to approximately $25.4 million, consisting of $18.2 million in content, $1.3 million in proprietary technology, and $5.9 million in trade names. The Company estimates the economic lives of the content and proprietary technology to be 10 years and 4 years, respectively, and the trade names are estimated to have indefinite lives. Goodwill amounted to $15.1 million and is expected to be deductible for income tax purposes. Goodwill consists largely of the ability to attract new customers through utilization of current content and to develop new content post-acquisition, neither of which qualify for separate recognition. Pro forma results of operations have not been presented because the effects of this acquisition were not material to the Company’s consolidated results of operations.

Balance Financial: On October 4, 2013, TaxACT acquired all of the equity of Balance Financial, Inc. (“Balance Financial”), a provider of web and mobile-based financial management software, for $4.9 million in cash which includes a $0.7 million escrow amount recorded in “Accrued expenses and other current liabilities” for indemnifications related to general representations and warranties. The escrow period expires on April 4, 2015, at which time the amount, net of any indemnifiable losses, will be released. The acquisition of the Balance Financial business is strategic to TaxACT and was funded from the revolving credit loan under the TaxACT 2013 credit facility. See “Note 6: Debt” for further discussion of the TaxACT 2013 credit facility. Balance Financial is included in the Tax Preparation segment. The identifiable net assets acquired amounted to $1.0 million, consisting primarily of deferred tax assets, and intangible assets acquired amounted to $0.8 million, consisting primarily of internally-developed software and customer relationships both of which have finite lives. Goodwill amounted to $3.1 million. Pro forma results of operations have not been presented because the effects of this acquisition were not material to the Company’s consolidated results of operations.

Monoprice: On August 22, 2013, the Company acquired all of the outstanding stock of Monoprice, an online provider of self-branded electronics and accessories for both consumers and businesses (see “Note 1: The Company and Basis of Presentation”). The Company paid $182.9 million, which was funded from available cash, after a $0.4 million working capital adjustment in the fourth quarter of 2013. The acquisition was intended to diversify the Company’s business model and expand its operations.

Valuations were as follows (in thousands):

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	Fair Value
Tangible assets acquired	$	49,714
Liabilities assumed	(23,623		)
Identifiable net assets acquired	$	26,091
Fair value adjustments to intangible assets:
Customer relationships	$	30,900
Trade name	38,000
Fair value of intangible assets acquired	$	68,900
Purchase price:
Cash paid	$	182,909
Less identifiable net assets acquired	(26,091		)
Plus deferred tax liability related to intangible assets	27,683
Less fair value of intangible assets acquired	(68,900		)
Excess of purchase price over net assets acquired, allocated to goodwill	$	115,601

The Company incurred acquisition costs of $0.7 million in 2013, which were recognized in “General and administrative expense.” The Company did not assume any equity awards or plans from Monoprice. Following the completion of the acquisition, the Company issued 27,152 options and 126,259 restricted stock units (“RSUs”), which are at levels consistent with other awards to Blucora subsidiary employees, and 243,750 performance-based RSUs to Monoprice’s employees. In addition, the sellers of Monoprice are entitled to federal and state tax refunds related to pre-acquisition tax periods pursuant to the purchase agreement. During the three months ended September 30, 2014, the Company adjusted the refunds due to the sellers after finalizing Monoprice's 2013 federal and state tax returns. As a result, the Company recorded a $0.7 million gain within "Other loss, net."

The Company’s estimates of the economic lives of the acquired assets are 2 years for the business-to-consumer customer relationships, 7 years for the business-to-business customer relationships, approximately 6 years for the personal property assets, and the trade name is estimated to have an indefinite life. Goodwill consists largely of the ability to attract new customers and develop new technologies post-acquisition, which do not qualify for separate recognition. The Company does not expect that any of this goodwill will be deductible for income tax purposes.

The gross contractual amount of trade accounts receivable acquired was $3.2 million, all of which the Company has collected. The Company recorded deferred revenue at a fair value of $1.3 million as of the acquisition date. Prior to the acquisition, Monoprice had recorded deferred revenue at $2.0 million.

Pro Forma Financial Information (unaudited)

The financial information in the table below summarizes the combined results of operations of Blucora and Monoprice on a pro forma basis for the three and nine months ended September 30, 2013, as though they had been combined as of the beginning of the periods presented. This pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition occurred at the beginning of the periods presented. The pro forma condensed combined consolidated statements of operations for the three and nine months ended September 30, 2013 combines the historical results of operations of Blucora and the historical results of operations of Monoprice. The following amounts are in thousands:



	Three months ended September 30, 2013			Nine months ended September 30, 2013
Revenue	$	145,852		$	496,559
Net income (loss)	$	(6,017	)	$	26,771

Note 4: Goodwill and Other Intangible Assets

The following table presents goodwill by reportable segment (in thousands):

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		Search and Content		Tax Preparation		E-Commerce		Total
Goodwill as of	December 31, 2013	$	44,815	$	188,541	$	115,601	$	348,957
Addition		15,097		—		—		15,097
Goodwill as of	September 30, 2014	$	59,912	$	188,541	$	115,601	$	364,054

The goodwill addition related to the acquisition of HSW as described in "Note 3: Business Combinations."

Intangible assets other than goodwill consisted of the following (in thousands):



	September 30, 2014							December 31, 2013
	Gross carrying amount		Accumulated amortization			Net		Gross carrying amount		Accumulated amortization			Net
Definite-lived intangible assets:
Customer relationships	$	132,500	$	(44,491	)	$	88,009	$	132,500	$	(27,740	)	$	104,760
Technology	44,805		(33,698		)	11,107		43,535		(27,951		)	15,584
Content	18,200		(606		)	17,594		—		—			—
Other	6,705		(6,667		)	38		6,705		(6,667		)	38
Total definite-lived intangible assets	202,210		(85,462		)	116,748		182,740		(62,358		)	120,382
Indefinite-lived intangible assets:
Trade names	63,399		—			63,399		57,499		—			57,499
Other	183		—			183		183		—			183
Total indefinite-lived intangible assets	63,582		—			63,582		57,682		—			57,682
Total	$	265,792	$	(85,462	)	$	180,330	$	240,422	$	(62,358	)	$	178,064

Amortization expense was as follows (in thousands):



	Three months ended September 30,				Nine months ended September 30,
	2014		2013		2014		2013
Statement of comprehensive income line item:
Services cost of revenue	$	1,875	$	1,906	$	5,641	$	5,773
Amortization of intangible assets	6,118		4,184		17,463		10,521
Total	$	7,993	$	6,090	$	23,104	$	16,294

Expected amortization of definite-lived intangible assets held as of September 30, 2014 is presented in the table below (in thousands):



	2014		2015		2016		2017		2018		Thereafter		Total
Services cost of revenue	$	1,872	$	7,450	$	621	$	—	$	—	$	—	$	9,943
Amortization of intangible assets	6,118		21,880		17,206		17,155		16,970		27,476		106,805
Total	$	7,990	$	29,330	$	17,827	$	17,155	$	16,970	$	27,476	$	116,748

The weighted average amortization periods for definite-lived intangible assets are as follows: 61 months for customer relationships, 19 months for technology, 116 months for content, and 65 months for total definite-lived intangible assets.

Note 5: Fair Value Measurements

The fair value hierarchy of the Company’s financial assets carried at fair value and measured on a recurring basis was as follows (in thousands):

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			Fair value measurements at the reporting date using
	September 30, 2014		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	$	14,012	$	—	$	14,012	$	—
Commercial paper	5,200		—		5,200		—
Time deposits	1,246		—		1,246		—
Corporate bonds	1,206		—		1,206		—
Taxable municipal bonds	5,675		—		5,675		—
Total cash equivalents	27,339		—		27,339		—
Available-for-sale investments:
Debt securities:
U.S. government securities	84,693		—		84,693		—
International government securities	6,619		—		6,619		—
Commercial paper	18,092		—		18,092		—
Time deposits	29,618		—		29,618		—
Corporate bonds	1,533		—		1,533		—
Taxable municipal bonds	75,054		—		75,054		—
Total debt securities	215,609		—		215,609		—
Equity securities	4,591		4,591		—		—
Total available-for-sale investments	220,200		4,591		215,609		—
Total assets at fair value	$	247,539	$	4,591	$	242,948	$	—

			Fair value measurements at the reporting date using
	December 31, 2013		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	$	6,400	$	—	$	6,400	$	—
Money market and other funds	9,391		—		9,391		—
Commercial paper	17,999		—		17,999		—
Time deposits	499		—		499		—
Taxable municipal bonds	21,215		—		21,215		—
Total cash equivalents	55,504		—		55,504		—
Available-for-sale investments:
U.S. government securities	58,114		—		58,114		—
Commercial paper	14,496		—		14,496		—
Time deposits	9,880		—		9,880		—
Taxable municipal bonds	120,990		—		120,990		—
Total available-for-sale investments	203,480		—		203,480		—
Total assets at fair value	$	258,984	$	—	$	258,984	$	—

The Company also had financial instruments that were not measured at fair value. See “Note 6: Debt” for details.

The contractual maturities of the debt securities classified as available-for-sale at September 30, 2014 and December 31, 2013 were less than one year.

The cost and fair value of available-for-sale investments were as follows (in thousands):

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		Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
Available-for-sale investments as of	September 30, 2014
Debt securities		$	215,607	$	26	$	(24	)	$	215,609
Equity securities		4,424		167		—			4,591
Total		$	220,031	$	193	$	(24	)	$	220,200
Available-for-sale investments as of	December 31, 2013	$	203,479	$	24	$	(23	)	$	203,480

Available-for-sale investments as of December 31, 2013 included only debt securities.

Note 6: Debt

The Company’s debt consisted of the following (in thousands):



	September 30, 2014							December 31, 2013
	Principal amount		Unamortized discount			Net carrying value		Principal amount		Unamortized discount			Net carrying value
Monoprice 2013 credit facility	$	44,000	$	(206	)	$	43,794	$	50,000	$	(288	)	$	49,712
TaxACT 2013 credit facility	19,384		—			19,384		71,384		—			71,384
Convertible Senior Notes	201,250		(16,996		)	184,254		201,250		(19,667		)	181,583
Total debt	$	264,634	$	(17,202	)	$	247,432	$	322,634	$	(19,955	)	$	302,679

Monoprice 2013 credit facility: On November 22, 2013, Monoprice entered into an agreement with a syndicate of lenders for the purposes of post-transaction financing of the Monoprice acquisition and providing future working capital flexibility for Monoprice. The credit facility consists of a $30.0 million revolving credit loan—which includes up to $5.0 million under a letter of credit and up to $5.0 million in swingline loans—and a $40.0 million term loan for an aggregate $70.0 million credit facility. The final maturity date of the credit facility is November 22, 2018. Monoprice’s obligations under the credit facility are guaranteed by Monoprice Holdings, Inc. and are secured by the assets of the Monoprice business.

Monoprice borrowed $50.0 million under the credit facility, which was used to pay a dividend to Blucora and to pay certain expenses and fees related to the credit facility. Monoprice repaid $6.0 million in 2014. Monoprice has 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 $1.0 million or any whole multiple of $1.0 million in excess thereof (for swingline loans, the aggregate principal amount is not less than $0.1 million and any whole multiple of $0.1 million in excess thereof). The interest rate on amounts borrowed under the credit facility is variable, based upon, at the election of Monoprice, either LIBOR plus a margin of between 2.75% and 3.25%, payable as of the end of each interest period, or a variable rate plus a margin of between 1.75% and 2.25%, payable quarterly in arrears. In each case, the applicable margin within the range depends upon Monoprice’s ratio of leverage to EBITDA over the previous four quarters. The credit facility includes financial and operating covenants with respect to certain ratios, including leverage ratio and fixed charge coverage ratio, which are defined further in the agreement. As of September 30, 2014, Monoprice was in compliance with all of the financial and operating covenants. As of September 30, 2014, 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.

TaxACT 2013 credit facility: On August 30, 2013, TaxACT entered into an agreement with a syndicate of lenders to refinance a 2012 credit facility on more favorable terms. Under that 2012 credit facility, TaxACT borrowed $100.0 million, of which $25.5 million was repaid in 2012, $10.0 million in April 2013, and the remaining $64.5 million in August 2013, the latter amount in connection with the refinancing of this credit agreement. The interest rate on amounts borrowed under the 2012 credit facility was variable. The Company hedged a portion of the interest rate risk through an interest rate swap, which was terminated at break-even on September 10, 2013.

The new 2013 credit facility consists of revolving credit loans, up to $10.0 million in swingline loans, and up to $5.0 million under a letter of credit, which in the aggregate represented a $100.0 million revolving credit commitment that reduced to $90.0 million on August 30, 2014 and will reduce to $80.0 million on August 30, 2015 and $70.0 million on August 30, 2016. The final maturity date of the credit facility is August 30, 2018. TaxACT’s obligations under the credit facility are guaranteed by TaxACT Holdings, Inc. and are secured by the assets of the TaxACT business.

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TaxACT borrowed approximately $71.4 million under the 2013 credit facility, of which $65.4 million was used to pay off the 2012 credit facility, accrued interest, and certain expenses and fees related to the refinancing and an additional $6.0 million was borrowed in October 2013. TaxACT had net repayment activity of $52.0 million in 2014. TaxACT has 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 $3.0 million or any whole multiple of $1.0 million in excess thereof. The interest rate on amounts borrowed under the credit facility is variable, based upon, at the election of TaxACT, either LIBOR plus a margin of between 1.75% and 2.5%, or a Base Rate plus a margin of between 0.75% and 1.5%, and payable as of the end of each interest period. In each case, the applicable margin within the range depends upon TaxACT’s ratio of leverage to EBITDA over the previous four quarters. The credit facility includes financial and operating covenants with respect to certain ratios, including leverage ratio and fixed charge coverage ratio, which are defined further in the agreement. As of September 30, 2014, the Company was in compliance with all of the financial and operating covenants. As of September 30, 2014, 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.

On August 30, 2013, the Company performed an analysis by creditor to determine whether the refinancing would be recorded as an extinguishment or a modification of debt and, as a result of this analysis, recognized a loss on partial extinguishment of debt comprised of the following (in thousands):



Refinancing fees paid to creditors, including arrangement fee, classified as extinguishment	$	567
Deferred financing costs on extinguished debt	726
Debt discount on extinguished debt	300
Total	$	1,593

In connection with amounts classified as an extinguishment, the Company recorded deferred debt issuance costs, which are being amortized as an adjustment to interest expense over the term of the new credit facility using the effective interest method. The remaining portion of the refinancing was a modification, and the Company determined a new effective interest rate based on the carrying amount of the original debt and the revised cash flows. Deferred financing costs and unamortized debt discount related to the prior credit agreement are being amortized as an adjustment to interest expense over the term of the new credit facility using the effective interest method. Similarly, additional creditor-related fees related to the modification are being amortized over the term of the new credit facility using the effective interest method. In total, approximately $0.7 million is being amortized over the term of the new credit facility using the effective interest method.

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 September 30, 2014, 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.

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•	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. The Company’s intention is 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.

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 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.

The following table sets forth total interest expense for the three and nine months ended September 30, 2014 and 2013 related to the Notes (in thousands):

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	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
Contractual interest expense (Cash)	$	2,138		$	2,139		$	6,415		$	4,657
Amortization of debt issuance costs (Non-cash)	232			216			684			465
Accretion of debt discount (Non-cash)	907			843			2,671			1,816
Total interest expense	$	3,277		$	3,198		$	9,770		$	6,938
Effective interest rate of the liability component	7.32		%	7.32		%	7.32		%	7.32		%

The fair value of the principal amount of the Notes as of September 30, 2014 was $202.0 million, based on the last quoted active trading price, a Level 1 fair value measurement, as of that date.

Note 7: Commitments and Contingencies

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 9: Commitments and Contingencies” in Part II Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Litigation: From time to time, the Company is subject to various legal proceedings or claims that arise in the ordinary course of business. Following is a brief description of the more significant legal proceedings. 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. Although the Company believes that resolving claims against it, individually or in aggregate, will not have a material adverse impact on its financial statements, these matters are subject to inherent uncertainties.

On May 12, 2014, a putative class action complaint was filed in the U.S. District Court for the Western District of Washington against the Company and certain of its officers. The complaint asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. This case purported to be brought on behalf of a class of persons who purchased the Company’s common stock during the period between November 5, 2013 and February 20, 2014. On November 3, 2014, the plaintiff agreed to voluntarily dismiss this case without prejudice, and a stipulation of dismissal is currently pending.

Note 8: Stockholders’ Equity

Stock-based compensation: The Company included the following amounts for stock-based compensation expense, which related to stock options, RSUs, and the Company’s employee stock purchase plan (“ESPP”), in the consolidated statements of comprehensive income (in thousands):



	Three months ended September 30,				Nine months ended September 30,
	2014		2013		2014		2013
Cost of revenues	$	101	$	94	$	373	$	541
Engineering and technology	568		370		1,312		942
Sales and marketing	74		649		1,715		1,652
General and administrative	1,865		2,139		5,574		5,355
Total	$	2,608	$	3,252	$	8,974	$	8,490
Excluded and capitalized as part of internal-use software	$	26	$	34	$	80	$	68

In May 2012, the Company granted 190,000 stock options to certain employees who perform acquisition-related activities. The awards' vestings were predicated on completing "qualified acquisitions" under the terms of the awards. The completions of the HSW acquisition on May 30, 2014 and the Monoprice acquisition on August 22, 2013 constituted qualified acquisitions under the terms of the awards. The vestings of the awards resulted in charges of $0.3 million to stock-based compensation expense in the nine months ended September 30, 2014 and $0.5 million to stock-based compensation expense in the three and nine months ended September 30, 2013, both of which were classified in "General and administrative" expense.

Total net shares issued for stock options exercised, RSUs vested, and shares purchased pursuant to the ESPP were as follows (in thousands):

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	Three months ended September 30,		Nine months ended September 30,
	2014	2013	2014	2013
Stock options exercised	74	39	214	157
RSUs vested	79	70	284	294
Shares purchased pursuant to ESPP	49	48	85	84
Total	202	157	583	535

Warrant: On August 23, 2011, the Company issued a warrant (the “Warrant”) to purchase 1.0 million shares of Blucora common stock, exercisable at a price of $9.62 per share. The Warrant originally was considered stock-based compensation and was scheduled to expire on August 23, 2014, but the completion of the TaxACT acquisition on January 31, 2012 was an event under the Warrant’s terms that extended the expiration date to the earlier of August 23, 2017 or the effective date of a change of control of Blucora. Subsequent to the extension, the Company treated the award as a derivative instrument (see “Note 2: Summary of Significant Accounting Policies”), and the Warrant’s fair value was determined each reporting period with gains or losses related to the change in fair value recorded in “Other loss, net.” On November 21, 2013, the Warrant was exercised and 1.0 million shares of Blucora common stock were purchased for an aggregate exercise price of $9.6 million.

Stock repurchase program: In February 2013, the Company’s Board of Directors approved a stock repurchase program whereby the Company may purchase its common stock in open-market transactions. In May 2014, the Board of Directors increased the repurchase authorization, such that the Company may repurchase up to $85.0 million of its common stock, and extended the repurchase period through May 2016. Repurchased shares will be retired and resume the status of authorized but unissued shares of common stock. During the nine months ended September 30, 2014, the Company purchased 1.7 million shares in open-market transactions at a total cost of approximately $29.9 million and an average price of $17.68 per share, exclusive of purchase and administrative costs. As of September 30, 2014, the Company may repurchase an additional $45.2 million, which also takes into consideration share repurchases during 2013 of $10.0 million, of its common stock under the repurchase program.

Note 9: Segment Information

The Company changed its segment reporting structure as a result of the Monoprice acquisition on August 22, 2013. The Search and Content segment (formerly known as the Search segment) is the InfoSpace business, which now includes HSW, the Tax Preparation segment is the TaxACT business, and the E-Commerce segment is the Monoprice business. 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, and amortization of intangible assets 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.

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):

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	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
Revenues:
Search and Content	$	74,416		$	107,742		$	260,999		$	302,840
Tax Preparation	2,469			1,749			101,200			89,170
E-Commerce	37,970			14,630			110,408			14,630
Total revenues	114,855			124,121			472,607			406,640
Operating income (loss):
Search and Content	12,709			21,319			45,971			57,501
Tax Preparation	(1,859		)	(1,605		)	52,754			43,617
E-Commerce	3,336			906			9,192			906
Corporate-level activity	(15,510		)	(14,493		)	(46,851		)	(38,261		)
Total operating income (loss)	(1,324		)	6,127			61,066			63,763
Other loss, net	(3,208		)	(13,118		)	(11,001		)	(20,427		)
Income tax benefit (expense)	2,294			510			(17,579		)	(17,803		)
Net income (loss)	$	(2,238	)	$	(6,481	)	$	32,486		$	25,533

Note 10: Net Income (Loss) Per Share

“Basic net income (loss) per share” is computed using the weighted average number of common shares outstanding during the period. “Diluted net income (loss) per share” is computed using the weighted average number of common shares outstanding plus the number of dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of the incremental common shares issuable upon the exercise of outstanding stock options, vesting of unvested RSUs, exercise of the Warrant (for the three and nine months ended September 30, 2013), 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.

Weighted average shares were as follows (in thousands):



	Three months ended September 30,		Nine months ended September 30,
	2014	2013	2014	2013
Weighted average common shares outstanding, basic	41,034	41,088	41,589	41,048
Dilutive potential common shares	—	—	1,714	1,830
Weighted average common shares outstanding, diluted	41,034	41,088	43,303	42,878
Shares excluded	5,302	5,893	940	946

Shares excluded primarily related to shares excluded due to the antidilutive effect of a net loss (for the three months ended September 30, 2014 and 2013), stock options with an exercise price greater than the average price during the applicable periods, and awards with performance conditions not completed during the applicable periods.

As more fully discussed in “Note 6: 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. The Company intends, 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 includes the impact of the premium feature in its dilutive potential common shares when the average stock price during the quarter exceeds the conversion price of the Notes, which did not occur during the three months ended September 30, 2014 and 2013.

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-

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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 plans to expand, develop, or acquire particular operations, businesses, or assets; 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, prospects, and other characterizations of future events or circumstances, 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.

Overview

Blucora (the “Company”, “Blucora”, or “we”) operates a portfolio of leading internet businesses: an internet search and content business, an online tax preparation business, and an e-commerce business. The Search and Content business, InfoSpace, provides search services to users of our owned and operated and distribution partners' web properties, as well as online content. The Tax Preparation business consists of the operations of TaxACT and provides online tax preparation service for individuals, tax preparation software for individuals and professional tax preparers, and ancillary services. The E-Commerce business consists of the operations of Monoprice, which we acquired on August 22, 2013, and provides self-branded electronics and accessories to both consumers and businesses.

Our Businesses

Search and Content

The majority of our revenues are generated by our Search and Content segment (formerly known as our Search segment). The InfoSpace business provides search services to users of our owned and operated and distribution partners' web properties, as well as online content. Our owned and operated properties include Dogpile.com, WebCrawler.com, Zoo.com, and HowStuffWorks.com (acquired May 30, 2014, see below). InfoSpace has a network of over 100 distribution partners and provides services to users through the respective web properties of those distribution partners, which are generally private-labeled and customized to address the unique requirements of each distribution partner.

The Search and Content segment's revenue primarily consists of advertising revenue, which is generated through the display of paid listings in response to search queries, as well as from advertisements appearing on our HowStuffWorks.com website. Our Search and Content revenues are generated predominantly through search queries originating from desktop and laptop computers. The paid listings, as well as algorithmic search results, primarily are supplied by Google and Yahoo!, whom we refer to as our Search Customers. When a user submits a search query through one of our owned and operated or distribution partner sites and clicks on a paid listing displayed in response to the query, the Search Customer bills the advertiser that purchased the paid listing directly and shares a portion of its related paid listing fee with us. If the paid listing click occurred on one of our distribution partners' properties, we pay a significant share of our revenue to the distribution partner. Revenues are recognized in the period in which such clicks on paid listings occur and are based on the amounts earned and remitted to us by our Search Customers.

We derive a significant portion of our revenue from Google, and we expect this concentration to continue in the foreseeable future. For the three and nine months ended September 30, 2014, Search and Content revenue from Google accounted for approximately 79% and 81%, respectively, of our Search and Content segment revenue and 51% and 45%, respectively, of our total revenue. For further discussion of this concentration risk, see the paragraph in our Risk Factors (Part II Item 1A of this report) under the heading "Most of our search services revenue is attributable to Google, and the loss of, or a payment dispute with, Google or any other significant Search Customer would harm our business and financial results.”

On May 30, 2014, InfoSpace acquired HowStuffWorks (“HSW”), a provider of online content through various websites, including www.HowStuffWorks.com.

Tax Preparation

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Our TaxACT business consists of an online tax preparation service for individuals, tax preparation software for individuals and professional tax preparers, and ancillary services. TaxACT generates revenue primarily through its online service at www.taxact.com. The TaxACT business’s basic federal tax preparation online software service is “free for everyone,” meaning that any taxpayer can use the services to e-file his or her federal income tax return without paying for upgraded services and may do so for every form that the IRS allows to be e-filed. This free offer differentiates TaxACT’s offerings from many of its competitors who limit their free software and/or services offerings to certain categories of customers or certain forms. The TaxACT business generates revenue from a percentage of these “free” users who purchase a state form or choose to upgrade for a fee to the Deluxe or Ultimate offering, which includes additional support, tools, or state forms in the case of the Ultimate offering. In addition, revenue is generated from the sale of ancillary services, which include, among other things, tax preparation support services, data archive services, bank services (including reloadable pre-paid debit card services), and additional e-filing services. TaxACT is the recognized value player in the digital do-it-yourself space, offering comparable software and/or services at a lower cost to the end user compared to larger competitors. This, coupled with its “free for everyone” offer, provides TaxACT a valuable marketing position. TaxACT’s professional tax preparer software allows professional tax preparers to file individual returns for their clients. Revenue from professional tax preparers historically has constituted a relatively small percentage of the TaxACT business’s overall revenue and requires relatively modest incremental development costs as the basic software is substantially similar to the consumer-facing software and online service.

E-Commerce

Our E-Commerce business, Monoprice, is an online retailer of self-branded electronics and accessories to both consumers and businesses. Monoprice offers its products for sale through the www.monoprice.com website, where the majority of our E-Commerce revenue is derived, and fulfills those orders from our warehouse in Rancho Cucamonga, California. We also sell our products through distributor, reseller, and marketplace agreements. Monoprice has built a well-respected consumer brand by delivering products with premium quality on par with well-known national brands, selling these products at prices far below the prices for those well-known brands, and providing top-tier service and rapid product delivery. The Monoprice website showcases 14 product categories and over 6,700 individual products. Monoprice has developed an efficient product cost structure that is enabled by a direct import supply chain solution that eliminates traditional layers of mark-ups imposed by intermediaries. Consumers are able to access and purchase products 24 hours a day from the convenience of a computer or a mobile device. Monoprice’s team of customer service representatives assists customers primarily by online chat or email. Nearly all sales are to customers located in the United States.

Seasonality

Our Tax Preparation segment is highly seasonal, with the significant majority 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 at relatively consistent levels. Revenue from our E-Commerce segment also is seasonal, with revenues historically being the lowest in the second quarter, a period that does not include consumer back-to-school or holiday-related spending.

Acquisition

On May 30, 2014, InfoSpace acquired HSW for $44.9 million in cash. HSW is included in our financial results beginning on May 30, 2014, the acquisition date.

On August 22, 2013, we acquired Monoprice for $182.9 million in cash, after a $0.4 million working capital adjustment in the fourth quarter of 2013. Monoprice is included in our financial results beginning on August 22, 2013, the acquisition date. Accordingly, the results discussed below were impacted by the timing of this acquisition, in which 2014 included a full year of results as compared to a partial year of results in 2013.

Comparability

Certain prior period amounts have been reclassified to conform to the current period presentation.

RESULTS OF OPERATIONS

Summary

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(In thousands, except percentages)	Three months ended September 30,							Nine months ended September 30,
	2014			2013		Percentage Change		2014		2013		Percentage Change
Services revenue	$	76,885		$	109,491	(30	)%	$	362,199	$	392,010	(8	)%
Product revenue, net	37,970			14,630		160	%	110,408		14,630		655	%
Total revenues	$	114,855		$	124,121	(7	)%	$	472,607	$	406,640	16	%
Operating income (loss)	$	(1,324	)	$	6,127	(122	)%	$	61,066	$	63,763	(4	)%

Three months ended September 30, 2014 compared with three months ended September 30, 2013

Total revenues decreased approximately $9.3 million due to a decrease of $33.3 million in revenue related to our Search and Content business, offset by increases of $23.3 million in product revenue from the Monoprice business that we acquired in August 2013 and $0.7 million in revenue related to our Tax Preparation business.

Operating income decreased approximately $7.5 million, consisting of the $9.3 million decrease in revenue and offset by a $1.8 million decrease in operating expenses. Key changes in operating expenses were:


•	$24.7 million decrease in the Search and Content segment’s operating expenses primarily as a result of lower revenue share to our distribution partners with the decrease in Search and Content distribution revenue, decreased content costs, and lower spending on our online marketing, offset by higher personnel expenses due to increased headcount.


•	$1.0 million increase in the Tax Preparation segment’s operating expenses primarily due to higher personnel expenses due to increased headcount.


•	$20.9 million increase in the E-Commerce segment's operating expenses primarily due to the timing of the Monoprice acquisition.


•	$1.0 million increase in corporate-level expense activity primarily as a result of amortization expense associated with the acquisitions of Monoprice and HSW and depreciation expense on fixed assets attributable to Monoprice.

Segment results are discussed in the next section.

Nine months ended September 30, 2014 compared with nine months ended September 30, 2013

Total revenues increased approximately $66.0 million due to increases of $95.8 million in product revenue from the Monoprice business that we acquired in August 2013 and $12.0 million in revenue related to our Tax Preparation business, offset by a decrease of $41.8 million in revenue related to our Search and Content business.

Operating income decreased approximately $2.7 million, consisting of the $66.0 million increase in revenue and offset by a $68.7 million increase in operating expenses. Key changes in operating expenses were:


•	$30.3 million decrease in the Search and Content segment’s operating expenses primarily as a result of lower revenue share to our distribution partners with the decrease in Search and Content distribution revenue and decreased content costs, offset by higher spending on our online marketing and higher personnel expenses due to increased headcount.


•	$2.9 million increase in the Tax Preparation segment’s operating expenses primarily due to higher personnel expenses due to increased headcount and higher spending on marketing campaigns for the current tax season.


•	$87.5 million increase in the E-Commerce segment's operating expenses primarily due to the timing of the Monoprice acquisition.


•	$8.6 million increase in corporate-level expense activity primarily as a result of amortization expense associated with the acquisitions of Monoprice and HSW, depreciation expense on fixed assets attributable to

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Monoprice, higher stock-based compensation related to the issuance of equity awards to Monoprice and Balance Financial employees, and employee separation costs.

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 GAAP and include certain reconciling items attributable to each of the segments. Segment information appearing in “Note 9: 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 do not allocate certain general and administrative costs (including personnel and overhead costs), stock-based compensation, depreciation, amortization of intangible assets, other loss, net, and income taxes to segment operating results. We analyze these separately.

Following the acquisition of Monoprice, we determined that we have three reportable segments: Search and Content, Tax Preparation, and E-Commerce.

Search and Content

Ongoing challenges in the Search and Content business: In our Quarterly Reports on Form 10-Q for the first and second quarters of 2014, we disclosed that our Search and Content business was experiencing significant volatility, resulting in decreased revenue and margin compression due to a number of factors. These factors included a technology change, changes to our mobile advertising offering as a result of our new agreement with Google, and suspended or limited access to our services for certain distribution partners due to regular monitoring of policy and compliance requirements. In our Form 10-Q for the second quarter of 2014, we also disclosed that segment margin might compress further in future quarters and that we expected year-over-year quarterly declines in our results through the first quarter of 2015. We noted further that, while ongoing results in future quarters could be further impacted by existing or new volatility factors, we believed that the Search and Content segment results for the second quarter of 2014 could be representative of the expected results going forward. Following the filing of our Form 10-Q for the second quarter of 2014, we continued to experience downward pressure on both our owned and operated and distribution businesses, beyond what we expected at the time of that filing. As the result of this continued downward pressure, we experienced a sequential quarterly decline in the third quarter and now expect additional sequential quarterly declines in the fourth quarter, likely continuing into 2015.

The increased downward pressure in our owned and operated business is the result of our inability to increase online marketing expenditures, and thus earn revenue, without a negative impact to our desired rate of return, despite an already lowered expectation for that rate of return for the third quarter of 2014. Our inability to profitably scale our online marketing expenditures in the third quarter was due to a decrease in the revenue earned for this traffic without a corresponding decrease in cost to acquire traffic. We believe that this decrease is related to volatility with respect to the quality scores that are applied by our Search Customers to certain of our sites. Quality scores are one of the factors that dictate the economic conditions under which we operate with our Search Customers and are intended to represent a measure of quality for their advertisers and for end users of our search services. Our Search Customers regularly update these scores and have the ability to unilaterally change both how scores are calculated and how they are applied to traffic, and we can correlate the downward pressure to volatility in quality scores and to changes in their application. However, the factors impacting these scores, or how these scores impact revenue and cost, are proprietary to our Search Customers, and we have limited visibility into those elements. As a result, we believe that we can sustain our third quarter owned and operated revenue performance, within a reasonable range, into the fourth quarter of 2014, but we expect to remain challenged in our ability to increase marketing expenditures while maintaining our desired rate of return.

We are also experiencing downward pressure in our distribution business. This business experienced monthly sequential declines in revenue throughout the first half of the year but saw sequential growth in July 2014. As a result of this sequential growth, we believed that we had stabilized this business to a level that could be sustained within a reasonable range. Unfortunately, in mid-August, we began to see a number of factors that were adversely affecting our distribution business, including the loss of certain distribution partner traffic due to increased competition, continued difficulty in adding new distribution partners, changes in interpretation and enforcement of our Search Customers' policies and requirements, and our own compliance efforts. Of the approximately $7.5 million sequential decline in distribution revenue, we believe that about $2.2 million, or 30%, was due to the loss of certain distribution partner traffic to competitors. The remainder was due to a variety of factors but primarily was driven by the effects of changes in interpretation and enforcement of policies and requirements, and our own compliance efforts related to those policies and requirements. As we have previously noted, our Search Customers have broad discretion to unilaterally revise their policies and requirements, and their interpretations of thos

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e policies and requirements may differ from ours. Recent changes in the interpretation and enforcement of policies and requirements by our Search Customers have significantly impacted the operations of some of our larger and more tenured distribution partners and also have impacted our ability to bring new partners into our network. These changes generally impact models that have historically been permitted by our Search Customers, but we believe our Search Customers now wish to deemphasize these models in their networks. The most significant changes take the form of restrictions on marketing, traffic acquisition, and distribution methodologies by certain partners, restrictions on certain content displayed by partners, and changes in categorization of certain traffic, all of which have resulted in decreased revenue. As a result of these changes in interpretation and enforcement, and the other factors noted above, we saw monthly sequential declines in distribution revenue in August 2014 and September 2014, and we expect these declines to continue into the fourth quarter of 2014. We are working with our distribution partners to help them adapt their business models to these changes, but ultimately we are dependent upon our partners' ability, financial viability, or desire to adapt, each of which is proprietary to our distribution partners and beyond our control.

We have recently seen significantly increased frequency in the changes in the interpretation and enforcement of our Search Customers' requirements and policies. If our Search Customers continue to revise their interpretation and enforcement of their requirements and policies, our Search and Content business will continue to experience volatility. In anticipation of such possibility, we are taking immediate action to reduce our cost structure by approximately $2.5 million annually and to redeploy resources toward initiatives that we believe will better align with our Search Customers' vision, which should drive longer-term and more sustainable segment income. These initiatives will be driven by new leadership that we recently brought to this business, with the intention to provide product and service diversification and stabilize revenue. Since these initiatives will take time to develop and scale, we expect further downward pressure on revenues for the fourth quarter of 2014. Specifically, we expect fourth quarter segment revenue to be down $9.4 million to $18.4 million from the third quarter of 2014, resulting in a fourth quarter guidance range of $56.0 million to $65.0 million. We also expect segment margin to decline in the fourth quarter between $3.2 million and $6.0 million, as compared to the third quarter of 2014, for a segment margin guidance range of $6.7 million to $9.5 million, which includes non-recurring expenses associated with cost reductions of approximately $1.0 million. We expect that our Search and Content business will continue to be subject to adverse headwinds into 2015, but we are currently unable to quantify the likely effects on our business due to the fact that the factors at play are fluid, are largely controlled by our Search Customers, and result in changes to the financial viability of our distribution partners, which we do not control and into which we have limited insight.

Search and Content operating results: The following table presents our Search and Content operating results:



(In thousands, except percentages)	Three months ended September 30,								Nine months ended September 30,
	2014			2013			Percentage Change		2014			2013			Percentage Change
Revenue	$	74,416		$	107,742		(31	)%	$	260,999		$	302,840		(14	)%
Operating income	$	12,709		$	21,319		(40	)%	$	45,971		$	57,501		(20	)%
Segment margin	17		%	20		%			18		%	19		%

Search and Content revenue: Our ability to increase Search and Content revenue is dependent on our ability to attract and retain distribution partners and users of our owned and operated properties, which relies on providing a satisfying end user experience. In addition, providing an attractive monetization proposition, as well as support and service, for distribution partners continues to be a key driver in our ability to grow distribution revenue.

Search and Content operating income: Because we share revenue with our distribution partners, the Search and Content segment’s cost of revenue will increase or decrease if search services revenue generated through our distribution partners’ web properties increases or decreases, respectively. The cost of revenue can be impacted by the mix of revenue generated by our distribution partners. We manage our online marketing by projecting a desired return on our marketing expenditures and attempting to market according to that projected return.

The following table presents our Search and Content revenue by source and as a percentage of total Search and Content revenue:

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(In thousands, except percentages)	Three months ended September 30,								Nine months ended September 30,
	2014		Percentage of Revenue		2013		Percentage of Revenue		2014		Percentage of Revenue		2013		Percentage of Revenue
Revenue from existing distribution partners (launched prior to the then-current year)	$	55,830	75	%	$	75,749	70	%	$	204,823	78	%	$	238,901	79	%
Revenue from new distribution partners (launched during the then-current year)	3,204		4	%	11,585		11	%	4,495		2	%	17,469		6	%
Revenue from distribution partners	59,034		79	%	87,334		81	%	209,318		80	%	256,370		85	%
Revenue from owned and operated properties	15,382		21	%	20,408		19	%	51,681		20	%	46,470		15	%
Total Search and Content revenue	$	74,416			$	107,742			$	260,999			$	302,840

Three months ended September 30, 2014 compared with three months ended September 30, 2013

Search and Content revenue decreased approximately $33.3 million, or 31%, primarily due to a decrease in revenue from distribution partners. Revenue from distribution partners decreased $28.3 million, or 32%, driven by decreases of $19.9 million and $8.4 million in revenue from existing partners and new partners (both defined in table above), respectively. We generated 37% and 31% of our Search and Content revenue through our top five distribution partners in the three months ended September 30, 2014 and 2013, respectively. The web properties of our top five distribution partners for the three months ended September 30, 2014 generated 22% of our Search and Content revenue in the three months ended September 30, 2013.

The decrease in distribution revenue primarily was driven by a previously disclosed factor that occurred in the first quarter of 2014 related to changes in our mobile advertising offering as a result of our new agreement with Google and the additional factors that occurred during the third quarter of 2014 as further explained above in "Ongoing challenges in the Search and Content business."

Revenue generated by our owned and operated properties (which includes HSW) decreased $5.0 million, or 25%, primarily due to decreased investment in online marketing as further explained above in "Ongoing challenges in the Search and Content business." This decrease was offset by the revenue contribution from HSW.

Search and Content operating income decreased approximately $8.6 million, consisting of the $33.3 million decrease in revenue, offset by a decrease of $24.7 million in operating expenses. The decrease in Search and Content segment operating expenses primarily was due to a $22.4 million, or 33%, decrease in Search and Content services cost of revenue, which was mainly driven by the decrease in distribution revenue and the resulting revenue share to our distribution partners and decreased content costs, and a $3.6 million decrease in spending on our online marketing, offset by increased personnel expenses due to higher headcount primarily as a result of the HSW acquisition. Segment margin decreased primarily due to increased personnel expenses and flat non-personnel operating expenses on declining revenues, as well as a lower return on our online marketing expenditures.

Nine months ended September 30, 2014 compared with nine months ended September 30, 2013

Search and Content revenue decreased approximately $41.8 million, or 14%. Revenue from distribution partners decreased each quarter in 2014 over the prior year, for a total of $47.1 million, or 18%, driven by decreases of $34.1 million and $13.0 million in revenue from existing partners and new partners (both defined in table above), respectively. The decrease in distribution revenue was affected by the same factors described above that impacted the quarterly period and the technology change previously disclosed in the first and second quarters of 2014. Revenue generated by our owned and operated properties (which includes HSW) increased $5.2 million, or 11%, primarily due to increased investment in online marketing in the first quarter of 2014 as compared to the first quarter of 2013, which was partially offset by decreased investment in the third quarter of 2014, as explained above, coupled with the revenue contribution from HSW. These increases were offset by a decrease in revenue from our legacy owned and operated properties.

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Search and Content operating income decreased approximately $11.5 million, consisting of the $41.8 million decrease in revenue, offset by a decrease of $30.3 million in operating expenses. The decrease in Search and Content segment operating expenses primarily was due to a $39.9 million, or 20%, decrease in Search and Content services cost of revenue, which was mainly driven by the decrease in distribution revenue and the resulting revenue share to our distribution partners and decreased content costs. This decrease was offset by a $7.5 million increase in spending on our online marketing, as well as increased personnel expenses due to higher headcount primarily as a result of the HSW acquisition. Segment margin decreased primarily due to the same factors described above that impacted the quarterly period.

Tax Preparation



(In thousands, except percentages)	Three months ended September 30,								Nine months ended September 30,
	2014			2013			Percentage Change		2014			2013			Percentage Change
Revenue	$	2,469		$	1,749		41	%	$	101,200		$	89,170		13	%
Operating income (loss)	$	(1,859	)	$	(1,605	)	16	%	$	52,754		$	43,617		21	%
Segment margin	(75		)%	(92		)%			52		%	49		%

Our ability to generate tax preparation revenue largely is driven by our ability to effectively market our consumer tax preparation software and online services and our ability to sell the related Deluxe and ancillary services to our customers. 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 returns for their clients. Revenue from the professional tax preparation software is derived in two ways: from per-unit licensing fees for the software and from amounts that we charge to e-file through the software. Revenue from professional tax preparers historically has constituted a relatively small percentage of the overall revenue for the TaxACT business.

Consumer tax preparation revenue is largely driven by our ability to acquire new users of the service, retain existing users, and upsell users to paid products and services. We measure our individual tax preparation customers using the number of accepted federal tax e-filings made through our software and services. We refer to such tax filings as “e-files.” We consider growth in the number of e-files to be the most important non-financial metric in measuring the performance of the tax preparation business.

Three months ended September 30, 2014 compared with three months ended September 30, 2013

Tax Preparation revenue increased primarily due to increasing payments over the past couple years related to data archive services that are recognized as revenue over the related contractual term.

Tax Preparation operating loss was comparable to the prior period.

Nine months ended September 30, 2014 compared with nine months ended September 30, 2013

Tax Preparation revenue increased approximately $12.0 million primarily due to a 4% increase in consumer e-files, growth in average revenue per user, increased sales of bank services in the current year, and increasing payments over the past couple years related to data archive services that are recognized as revenue over the related contractual term. Revenue derived from professional tax preparers also contributed to the increase, with a 12% increase in preparer e-files coupled with an increase in the number of professional preparer units sold.

Tax Preparation operating income increased approximately $9.1 million due to the $12.0 million increase in revenue, offset by an increase of $2.9 million in operating expenses. The increase in Tax Preparation segment operating expenses primarily was due to an increase in personnel expenses mainly due to higher headcount supporting all functions and, to a lesser extent, increased spending on marketing campaigns for the current tax season.

E-Commerce

The E-Commerce segment was new as of August 22, 2013 due to our acquisition of Monoprice.

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(In thousands, except percentages)	Three months ended September 30,								Nine months ended September 30,
	2014			2013			Percentage Change		2014			2013			Percentage Change
Revenue	$	37,970		$	14,630		160	%	$	110,408		$	14,630		655	%
Operating income	$	3,336		$	906		268	%	$	9,192		$	906		915	%
Segment margin	9		%	6		%			8		%	6		%

The E-Commerce segment generates revenue by importing and selling self-branded consumer electronics and accessories for both consumers and businesses. Substantially all of our products are sold via the internet at www.monoprice.com. E-Commerce revenue growth largely is driven by our ability to increase the number of orders to new and existing consumer and business customers. While order growth slowed for the current period as compared to the prior period, it was offset by an increase in the average order value. Order numbers decreased for the three and nine months ended September 30, 2014 as compared to the comparable prior periods as follows:



	Three months ended September 30, 2014		Nine months ended September 30, 2014
Order numbers	(5	)%	(5	)%

Three months ended September 30, 2014 compared with three months ended September 30, 2013

E-Commerce revenue and operating income increased approximately $23.3 million and $2.4 million, respectively, primarily due to the timing of the Monoprice acquisition.

Nine months ended September 30, 2014 compared with nine months ended September 30, 2013

E-Commerce revenue and operating income increased approximately $95.8 million and $8.3 million, respectively, primarily due to the timing of the Monoprice acquisition. In addition, E-Commerce segment operating expenses included a $1.2 million charge triggered by the resignation of Ajay Kumar, the President of Monoprice. On June 24, 2014, the Company accepted the resignation of Mr. Kumar, and, under the circumstances of that resignation, Mr. Kumar was entitled to receive payment under the terms of the Restricted Cash Agreement that was entered into in connection with our acquisition of Monoprice. The amount that Mr. Kumar was entitled to under the Restricted Cash Agreement was the deferred amount that he otherwise would have been entitled to receive at the time of the 2013 sale of Monoprice to Blucora. Refer to our Current Report on Form 8-K dated June 24, 2014 for additional information. Discussion of the employee separation costs paid to Mr. Kumar is covered under Corporate-Level Activity below.

Corporate-Level Activity



(In thousands)	Three months ended September 30,							Nine months ended September 30,
	2014		2013		Change			2014		2013		Change
Operating expenses	$	3,524	$	4,025	$	(501	)	$	10,579	$	10,358	$	221
Stock-based compensation	2,608		3,252		(644		)	8,974		8,490		484
Depreciation	1,385		1,126		259			4,194		3,119		1,075
Amortization of intangible assets	7,993		6,090		1,903			23,104		16,294		6,810
Total corporate-level activity	$	15,510	$	14,493	$	1,017		$	46,851	$	38,261	$	8,590

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, and amortization of intangible assets. For further detail, refer to segment information appearing in “Note 9: Segment Information” of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report.

Three months ended September 30, 2014 compared with three months ended September 30, 2013

Operating expenses included in corporate-level activity decreased primarily due to transaction expenses associated with the Monoprice acquisition in August 2013.

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Stock-based compensation decreased primarily due to stock options that vested upon completion of the Monoprice acquisition during the three months ended September 30, 2013 (for further detail, see "Note 8: Stockholders' Equity" of the Notes to Unaudited Condensed Consolidated Financial Statements in Part I Item 1 of this report).

Depreciation increased primarily due to depreciation expense on fixed assets attributable to Monoprice.

Amortization of intangible assets increased primarily due to amortization expense related to intangibles acquired as part of the Monoprice and HSW acquisitions.

Nine months ended September 30, 2014 compared with nine months ended September 30, 2013

Operating expenses included in corporate-level activity increased primarily due to a $0.9 million increase in personnel expenses, which consisted of an increase in employee-related costs attributable to increased headcount in the current year to support operations and employee separation costs of $0.4 million related to Mr. Kumar's employment agreement, and increased business insurance expenses primarily due to the timing of the Monoprice acquisition. These increases were offset by a $0.9 million increase in capitalized internally developed software primarily due to the timing of the Monoprice acquisition. Internally developed software expense is recorded within our segments with the related cost capitalization benefit recorded within corporate-level activity.

Stock-based compensation increased primarily due to the issuance of equity awards to Monoprice and Balance Financial employees.

Depreciation increased primarily due to depreciation expense on fixed assets attributable to Monoprice.

Amortization of intangible assets increased primarily due to amortization expense related to intangibles acquired as part of the Monoprice and HSW acquisitions.

OPERATING EXPENSES

Cost of Revenues



(In thousands, except percentages)	Three months ended September 30,									Nine months ended September 30,
	2014			2013			Change			2014			2013			Change
Services cost of revenue	$	49,754		$	72,935		$	(23,181	)	$	177,280		$	219,274		$	(41,994	)
Product cost of revenue	25,605			10,622			14,983			73,771			10,622			63,149
Total cost of revenues	$	75,359		$	83,557		$	(8,198	)	$	251,051		$	229,896		$	21,155
Percentage of revenues	66		%	67		%				53		%	57		%

We record the cost of revenues for services and products when the related revenue is recognized. Services cost of revenue consists of costs related to our Search and Content and Tax Preparation segments, which includes revenue sharing arrangements with our distribution partners, usage-based content fees, royalties, and bank product service fees. In addition, services cost of revenue includes costs associated with the operation of the data centers that serve our Search and Content and Tax Preparation businesses, which include personnel expenses (including salaries, stock-based compensation, benefits, and other employee-related costs), depreciation, and amortization of intangibles. Product cost of revenue consists of costs related to our E-Commerce segment, which includes product costs, inbound and outbound shipping and handling costs, packaging supplies, and provisions for inventory obsolescence.

Three months ended September 30, 2014 compared with three months ended September 30, 2013

Services cost of revenue decreased primarily due to decreased Search and Content services cost of revenue of $22.4 million, driven by the decrease in revenue generated from distribution partners and the resulting revenue share to our distribution partners and decreased content costs.

Product cost of revenue increased primarily due to the timing of the Monoprice acquisition.

Nine months ended September 30, 2014 compared with nine months ended September 30, 2013

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Services cost of revenue decreased primarily due to decreased Search and Content services cost of revenue of $39.9 million, driven by the decrease in revenue generated from distribution partners and the resulting revenue share to our distribution partners and decreased content costs, and, to a lesser extent, decreased data center expenses related to the migration of the Search data center to the cloud in 2013.

Product cost of revenue increased primarily due to the timing of the Monoprice acquisition.

Engineering and Technology



(In thousands, except percentages)	Three months ended September 30,								Nine months ended September 30,
	2014			2013			Change		2014			2013			Change
Engineering and technology	$	5,970		$	2,905		$	3,065	$	14,922		$	7,951		$	6,971
Percentage of revenues	5		%	2		%			3		%	2		%

Engineering and technology expenses are associated with the research, development, support, and ongoing enhancements of our offerings, including personnel expenses (which include salaries, stock-based compensation, benefits, and other employee-related costs), as well as the cost of temporary help and contractors to augment our staffing, software support and maintenance, bandwidth and hosting, and professional service fees.

Three months ended September 30, 2014 compared with three months ended September 30, 2013

Engineering and technology expenses increased, of which $1.2 million was attributable to Monoprice (excluding stock-based compensation) and primarily related to the timing of the Monoprice acquisition. The remaining increase primarily was due to a $1.6 million increase in personnel expenses mainly due to higher headcount in our Search and Content, primarily as a result of the HSW acquisition, and Tax Preparation businesses.

Nine months ended September 30, 2014 compared with nine months ended September 30, 2013

Engineering and technology expenses increased, of which $4.0 million was attributable to Monoprice (excluding stock-based compensation) and primarily related to the timing of the Monoprice acquisition. The remaining increase primarily was due to a $2.4 million increase in personnel expenses mainly due to higher headcount in our Search and Content, primarily as a result of the HSW acquisition, and Tax Preparation businesses.

Sales and Marketing



(In thousands, except percentages)	Three months ended September 30,									Nine months ended September 30,
	2014			2013			Change			2014			2013			Change
Sales and marketing	$	18,152		$	18,230		$	(78	)	$	96,275		$	71,409		$	24,866
Percentage of revenues	16		%	15		%				20		%	18		%

Sales and marketing expenses consist principally of marketing expenses associated with our TaxACT and Monoprice websites (which include television, radio, online, text, and email channels), our owned and operated web search properties (which consist of traffic acquisition, including our online marketing fees paid to search engines to drive traffic to an owned and operated website, agency fees, brand promotion expense, and market research expense), personnel expenses (which include salaries, stock-based compensation, benefits, and other employee-related costs) for personnel engaged in marketing and selling activities, and fulfillment expenses primarily associated with our E-Commerce business. Fulfillment expenses include direct operating expenses (including personnel) relating to our purchasing, customer and technical support, receiving, inspection and warehouse functions, as well as the cost of temporary help and contractors, and credit card processing fees.

Three months ended September 30, 2014 compared with three months ended September 30, 2013

Sales and marketing expenses were comparable to the prior period, of which the change included $3.8 million attributable to Monoprice (excluding stock-based compensation) and primarily related to the timing of the Monoprice acquisition, offset by a $3.6 million decrease in marketing expenses in our Search and Content segment driven by decreased online marketing.

Nine months ended September 30, 2014 compared with nine months ended September 30, 2013

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Table of Contents

Sales and marketing expenses increased, of which $15.8 million was attributable to Monoprice (excluding stock-based compensation) and primarily related to the timing of the Monoprice acquisition. The remaining increase primarily was due to an $8.0 million increase in marketing expenses in our Search and Content and Tax Preparation businesses and a $0.5 million increase in personnel expenses. The increase in marketing expenses was driven by increased online marketing by our Search and Content segment and, to a lesser extent, increased marketing campaign activity for the current tax season by our Tax Preparation segment. Personnel expenses increased primarily due to higher headcount in our Tax Preparation business.

General and Administrative



(In thousands, except percentages)	Three months ended September 30,								Nine months ended September 30,
	2014			2013			Change		2014			2013			Change
General and administrative	$	9,495		$	8,421		$	1,074	$	28,552		$	21,362		$	7,190
Percentage of revenues	8		%	7		%			6		%	5		%

General and administrative (“G&A”) expenses consist primarily of personnel expenses (which include salaries, stock-based compensation, benefits, and other employee-related costs), as well as the cost of temporary help and contractors to augment our staffing, professional service fees (which include legal, audit, and tax fees), general business development and management expenses, occupancy and general office expenses, and taxes and insurance expenses.

Three months ended September 30, 2014 compared with three months ended September 30, 2013

G&A expenses increased, of which $0.9 million was attributable to Monoprice (excluding stock-based compensation) and primarily related to the timing of the Monoprice acquisition.

Nine months ended September 30, 2014 compared with nine months ended September 30, 2013

G&A expenses increased, of which $4.6 million was attributable to Monoprice (excluding stock-based compensation) and included a $1.2 million charge related to the Restricted Cash Agreement of Mr. Kumar and the impact of the timing of the Monoprice acquisition. The remaining increase primarily was due to a $2.1 million increase in personnel expenses. The increase in personnel expenses consisted of an increase in salaries, benefits, and other employee-related costs attributable to increased headcount in the current year to support operations and employee separation costs of $0.4 million related to Mr. Kumar's employment agreement.

Depreciation and Amortization of Intangible Assets



(In thousands, except percentages)	Three months ended September 30,						Nine months ended September 30,
	2014		2013		Change		2014		2013		Change
Depreciation	$	1,085	$	697	$	388	$	3,278	$	1,738	$	1,540
Amortization of intangible assets	6,118		4,184		1,934		17,463		10,521		6,942
Total depreciation and amortization of intangible assets	$	7,203	$	4,881	$	2,322	$	20,741	$	12,259