Stacy Ybarra - Director of Corporate Communications William J. Ruckelshaus - Chief Executive Officer, President, Director and Member of Mergers & Acquisitions Committee Eric M. Emans - Chief Financial Officer, Principal Accounting Officer and Treasurer

Gil B. Luria - Wedbush Securities Inc., Research Division Joseph D. Janssen - Barrington Research Associates, Inc., Research Division Daniel L. Kurnos - The Benchmark Company, LLC, Research Division

Good day, everyone, and welcome to the Blucora Third Quarter Earnings Results Conference Call. This call is being recorded. With us today from the company is the President and Chief Executive Officer, Bill Ruckelshaus; Chief Financial Officer, Eric Emans; and Senior Director of Investor Relations, Stacy Ybarra. At this time, I would like to turn the call over to Stacy Ybarra. Please go ahead, ma'am.

Good afternoon, and welcome to Blucora's investor conference call to discuss third quarter 2013 earnings. Before we begin, I'd like to remind you that during the course of this call, Blucora representatives will make forward-looking statements including, but not limited to, statements regarding Blucora's expectations about its products and services, outlook for the future of our business and growth initiatives and anticipated financial performance for the fourth quarter 2013 and for tax season result in 2014. Other statements that refer to our beliefs, plans, expectations or intentions, which may be made in response to questions, are also forward-looking statements for purposes of the Safe Harbor provided by the Private Securities Litigation Reform Act. Because these statements pertain to future events, they are subject to various risks and uncertainties, and actual results could differ materially from our current expectations and beliefs. Factors that could cause or contribute to such differences include, but are not limited to, the risks and other factors discussed in Blucora's most recent quarterly report on Form 10-Q on file with the Securities and Exchange Commission. Blucora assumes no obligation to update any forward-looking statements, which speak only as of the date the statement is made. In addition, during this call, our management will discuss GAAP and non-GAAP financial measures. In the press release, which has been posted on our website and filed with the SEC on Form 8-K, we present GAAP and non-GAAP results along with reconciliation tables and the reasons for our presentation of non-GAAP information. We have also provided supplemental financial information to our results through the Investor Relations section of our corporate website at www.blucora.com and filed with the SEC on Form 8-K. Now I'll turn the call over to Bill Ruckelshaus. Following his comments, Eric Emans will review the third quarter results and fourth quarter outlook. Then we'll open up the call to your questions. William J. Ruckelshaus: Thanks, Stacy. And good afternoon, everyone. In the third quarter, we continued to build on our momentum and execute. We delivered growth in our operating segments and we were thrilled to add Monoprice to our portfolio. Our performance in the quarter reflects the strength of our individual businesses, the benefits of our diversity and the focus of our team. Search revenue for the quarter was up 18% over the prior year, driven by growth in our owned and operated properties and new partners in our B2B distribution network. Our software partners continued to adjust to the revised Google guideline, and revenue has declined overall in this segment as expected. We anticipate some, though not all, of our partners in the software space will be successful under the new policies and growth will resume for them in the next quarter or so. In other areas of search, we've had a number of pleasant surprises, including better-than-expected pipeline revenue and growth in our owned and operated sites. We have continued to improve the user experience on our O&O site and remained committed to further investments in marketing to ensure this progress continues. At InfoSpace, we remain focused on consistent revenue growth and profitability. We still see opportunities to grow in this market and we continue to deliver content from multiple engines to a diversified partner network. Turning now to our tax prep business. We are pleased with the progress that TaxACT has made in preparation for the upcoming tax season. This year, TaxACT celebrated its 15th anniversary. Since its founding, TaxACT has developed a loyal customer base and established a track record of sustained revenue growth and profitability. Today, the team is focusing on enhancing its core product in DDIY and building out its offerings in the assisted channel. Last off-season, we invested in site content and usability, mobile applications and new offerings around tax filing. This year, we continue to invest in these areas: building online tools, mobile applications and integrated solutions that benefit TaxACT customers year around. So we believe we are... [Audio Gap] for a successful season. Last season, consumers continue to shift to DDIY into TaxACT in particular. We expect further migration to DDIY, driven by better software, mobility, enhanced service and content and favorable demographic shifts in the filer population. We believe overall filers will grow about 1% this coming season and expect DDIY units to grow in the range of 4% and 6%. Our goals continue to center around growing our share position in DDIY and bringing more value to our customers. Moving to e-commerce. During the quarter, we completed our acquisition of Monoprice, bringing us significant opportunities in the large and growing online markets for consumer electronics and tech accessories. Monoprice performed according to expectations for the quarter, and our integration is proceeding on schedule. We like the team and we are excited about the growth prospects of this business. The focus at Monoprice is on growing product assortment and increasing communication with customers through social media, email and other channels. We look forward to sharing more with you about future growth and market opportunities on our next call. Before I turn the call over to Eric for more details on the financials, I want to thank our employees at all levels, InfoSpace, TaxACT, Monoprice and Blucora. I am impressed every day by the hard work, passion and dedication of our teams across the board. I'm proud of our achievements and confident that Blucora is well positioned for the future. With that, I'll turn it over to Eric. Eric M. Emans: Thanks, Bill. We have lot to cover today as it was a busy quarter. I will start off my comments with third quarter performance, then move to fourth quarter guidance and end with financial expectation for our tax preparation segment in the first half of 2014. With that, let's get started. Consolidated revenue for the quarter was $124.1 million and adjusted EBITDA was $16.6 million. Non-GAAP net income was a $13 million or $0.30 per diluted share. During the quarter, we recorded a GAAP net loss of $6.5 million or a loss per share of $0.16. The net loss was driven by the following: first, due to continued depreciation of our stock price, we recorded a noncash loss on derivative of $4 million or $0.10 per share. Second, we recorded a onetime other-than-temporary impairment of an equity investment in the amount of $3.7 million or $0.09 per share. And lastly, we recognized debt extinguishment costs of $1.6 million or $0.04 per share related to the refinancing of our TaxACT subsidiary debt. Normalizing for these changes and excluding subperiod revenue and segment income from Monoprice, which we will cover in a moment, we would have exceeded our net income and diluted EPS expectations for the quarter on the strength of our search segment performance. Our balance sheet remained strong. We ended the quarter with cash, cash equivalents and short-term investments of $248.4 million and net debt of $18.3 million. During the quarter, we repurchased approximately 124,000 shares for approximately $2.5 million. Turning to our search segment. Revenue for the third quarter was $107.7 million and the segment income was $21.3 million, up 18% and 30%, respectively, from the same quarter last year. The search business growth was driven by better-than-expected performance from both distribution and owned and operated. Distribution revenue growth for the quarter was driven by new distribution partners launched in 2013 of $11.6 million, partially offset by declines in revenue from our existing partners. This trend was expected as our partner network continues to diversify as a result of the downloadable application policy changes instituted in the first quarter of this year. We have been pleasantly surprised with the business' ability to secure new partner relationships during the year and the ability of those partners to grow. Owned and operated revenue gained momentum in the quarter and was up $9.7 million versus the prior year as we continue to invest in marketing to acquire new users. Segment margin for the quarter was 19.8%, benefiting from the growth of owned and operated revenue, which has a higher contribution margin as well as mix shifts in our distributor partner network. Now let's move on to our Monoprice. We closed the Monoprice acquisition on August 22, 2013, and the results of this business will be reported in our new e-commerce segment. Revenue and segment income for the stub period August 22 through September 30 were $14.6 million and $900,000, respectively. It is worth noting that the stub period segment income was materially impacted by fair value purchase accounting... [Audio Gap] As such, it is best to look at this business on a pro forma basis, which we have supplied in our supplemental information release and can be found on our IR section of our corporate website. On a pro forma basis, for the third quarter, revenue was $37 million and segment income was $4.2 million, both up 23% from the comparable prior period. Segment margin was north of 11% and in line with prior year. Touching quickly on our tax preparation segment. Revenue for the third quarter was $1.7 million and consistent with the seasonality of the business, we recorded a segment loss of $1.6 million. Closing on the third quarter, unallocated corporate operating expenses for the quarter were $4 million, which included approximately $650,000 of transaction expenses related to Monoprice. Before we move on to guidance, I wanted to touch on how Blucora continues to transform and grow through business segment execution and through acquisitions. In the supplemental information provided on our website, we've included a schedule showing a pro forma view of the 12 months ending September 30, 2013, for the consolidated company. We provided a snapshot of our financial profile, including the results from Monoprice as if it was owned for the 12-month period. Some highlights: revenue of $629.4 million, adjusted EBITDA of $120.6 million and non-GAAP net income of $98.7 million or $2.31 per diluted share. Couple this with pro forma leverage free cash flow of approximately $100 million and the overall result, we think reflects the progress we are making in executing our strategy. With that, let's move on to guidance. Starting with search. We expect fourth quarter revenue of $114 million to $120 million and segment income margin of 18.5% to 19.5%. We are encouraged by our third quarter performance, which thus far has carried into the fourth quarter. With that being said, the search marketplace has evolved and continues to evolve, which can have positive and negative impacts on our search business. Thinking long term about search, we remain focused on growing absolute segment income dollars. And while we are pleased with the business' rebound in the second half and the momentum we have entering the fourth quarter, we expect 2014 revenue growth in the low double-digits, given our current line of sight. As has been the case historically, our search segment results can vary, especially quarterly and may be impacted by unforeseen external factors. Turning to our e-commerce segment. We expect fourth quarter revenue of $40 million to $42 million and segment margin of around 11%. This represents 20%-plus year-over-year growth for both revenue and segment income, while maintaining segment income margin. For our tax preparation segment, we expect fourth quarter revenue to be a bit north of our third quarter performance and segment loss of $3 million to $2.5 million. These expectations include the impact of a small strategic acquisition completed in the fourth quarter, as well as the ramping of marketing expenses we prepared for the 2013 tax season. We expect unallocated operating expenses of approximately $3.5 million and are likely to increase modestly into 2014 as we invest to support our growing portfolio of businesses. On a consolidated basis, we expect fourth quarter revenue between $156 million and $164 million, adjusted EBITDA between $19.5 million and $22 million, non-GAAP income of $15 million to $17.5 million or $0.34 to $0.39 per diluted share, and net income of $2 million to $3.5 million or $0.04 to $0.08 per diluted share. Please note that our GAAP net loss and EPS guidance did not include an expectation for noncash gains or losses related to mark-to-market derivative instruments. Also note that the impacts of such gains or losses are excluded from our non-GAAP financial measures. Before I turn the call over for questions, I wanted to provide some color around our financial expectations for the 2013 tax season. We expect tax preparation revenue for the first half of 2014 of $95 million to $97 million and segment margin in the neighborhood of 52%. Okay, I think that's enough for me. Let's turn the call over to the operator, and we'll take your questions.

[Operator Instructions] The first question comes from Gil Luria with Wedbush Securities. Gil B. Luria - Wedbush Securities Inc., Research Division: So first on search. Given the change -- you've talked a lot about the changes that Google did early in the year and how you've gone past them in spite of the impact that they've had on some of your partners, but the growth in owned and operated is a little more surprising, given some of the changes they've made to the algorithms. Can you give us a little bit of detail about how you could be growing owned and operated so well in spite of those algorithm changes? William J. Ruckelshaus: Yes, Gil, it's Bill. I'll take that one. Eric, feel free to jump in. Though I think one of the things -- before getting into the specific question around owned and operated and some of the changes there is that I think that something we've said throughout the last year in the face of some of the downloadable applications, policies and anticipating their impact on the industry and our business is, we've maintained for several years now, a model that has multiple components to it. So we don't work with 1 search engine partner and nor do we go to market in 1 specific format. So we have a B2B network, obviously, and we have an owned and operated business. Historically, it's been considerably smaller. It's been predominately a B2B story for InfoSpace over the years. The flip side, of which is that I think there's upside. And you're starting to see evidence of our taking advantage of that on the owned and operated side, which is really reverting back to where the company had its origins, which is as a consumer-facing provider of search solutions that are differentiated in their nature. And so what we have done from the get-go is bring a set of meta search results or composite results to users that we think are, in fact, distinct. What you're seeing in recent periods is our ability to not just bring that product to market, but also to market it and promote it in a way that we think is a benefit to consumers and also a benefit to us. And so I really do think that we're going to be exposed to the same market dynamics as anybody else who's participating in this market. And certainly, we saw evidence of some of the things we've heard, discussed in the last week or so, but I think, all credit to the team, they're executing through it. Gil B. Luria - Wedbush Securities Inc., Research Division: Got it. And then would you mind giving us an update in terms of what you feel you have available to spend on another -- on the fourth piece to the puzzle? I think it was $288 million last we spoke after you closed Monoprice. What -- how do think about what you have available as of today? William J. Ruckelshaus: Well, I'll let Eric take that one. Eric M. Emans: Gil, the $288 million, it assumed a Monoprice financing, which we're still working on, and we hope to have some news about that, but exited the quarter with $248 million of gross cash. And assuming we get the to the... [Audio Gap] price, then, we'll have a little bit more than that $288 million. And of course, similar to what we're looking to Monoprice and what we've done historically with TaxACT, we would hope to bring leverage to play in an acquisition. So depending on the size and the type of business what we feel is appropriate, therefore, operating that business. So I think we're somewhere in that $290 million to $300 million range with -- assuming we get to the finish line on Monoprice -- on a Monoprice debt arrangement. And so I think we sit similar places we talked about last quarter.

The next question comes from Joe Janssen from Barrington Research. Joseph D. Janssen - Barrington Research Associates, Inc., Research Division: My first question, you kind of slipped in there in the prepared remarks about a small little acquisition in the tax space. I'm just curious what that was. William J. Ruckelshaus: Yes, so there's a company called Balance Financial. They're located here in Seattle. It's a great little company that I think is going to bring a lot of expertise as it relates to a Personal Finance management offering, as well as a way to connect an offering like that into the paper payer market. And we're already seeing really good signs post the acquisition closing, of the team contributing a lot to this coming season for TaxACT, but also long-range planning. So we're excited about that. Joseph D. Janssen - Barrington Research Associates, Inc., Research Division: Okay, great. And then on your -- I heard the commentary you're expecting overall volumes within TaxACT to be up 1%. You expect the digital DIY space to be up 4% to 6%. And based on your kind of guidance on the tax season, kind of implies for you on a revenue basis, of about 10% growth. Just curious, how much of a function of that do you think is -- you taking market share versus maybe increasing ARPU. Eric M. Emans: This is Eric. I think that both of those play a part of it. I mean, we are looking to hopefully be at the high end, if not take a little market share like we did again last year, but then also looking to gain some ARPU gains, and I wouldn't translate that exactly to raising prices. But as we've always said, being focused on bringing as much value to the consumer as possible and having people opt in for more of our services, whether you start out a free-filer and then upgrade into one of our deluxe packages in the next year or you opt for one of our bank products. So we certainly focused on growing both market share and ARPU, and that's really underlying what our guidance is. Joseph D. Janssen - Barrington Research Associates, Inc., Research Division: Okay. And then, within tax and I know this question has come in the past just -- and I know it doesn't have an impact on the upcoming tax season, but with ObamaCare, there's this general thesis out there that it's kind of creating an overall tailwind for the overall industry. Given that typical client that you serve, do you feel that this is going to have an overall impact on your results or does this, do you think, benefit more the assisted side disproportionately than it does the DDIY space? William J. Ruckelshaus: Yes, Joe, this is Bill. So I think we would agree with the observations that if not immediately, then over the years, the linkages between healthcare, health insurance, health insurance enrollment and tax preparation and tax filing are going to grow and strengthen, and that I think is pretty self-evident. The DDIY category, we've long maintained that there's -- it's not an accident that the people who are doing taxes on their own without the assistance of a third-party have a lot of confidence in their ability to navigate changes, because one thing is true of every tax season is it's different than the prior. And I think the ACA is going to be no different than that. It is going to represent mechanically some added steps around the filing itself, as well as thinking through how the intersection of healthcare enrollment and the filing are going to work, in particular in coming seasons beyond the current one. But I think TaxACT has navigated through these types of changes before quite successfully and grown share through them. And so I think we view that in the same way. We really don't view this as an opportunity or window to charge our filers more. I think that it's an important distinction, which is in some cases, that is I think a component of the sort of a bullish view on paper payers as it relates to the ACA as an additional revenue opportunity, which is as you probably know, completely contrary to the whole premise of TaxACT and its promise to filers. And so that's not how we're viewing it. We're viewing it as an additional opportunity to engage with filers over time and become more relevant to their personal lives and we view that as an opportunity. Joseph D. Janssen - Barrington Research Associates, Inc., Research Division: Okay. And then just one more question if I could sneak it in there and just on Monoprice. I saw that the pro forma results -- given you've only had a few months to digest this acquisition, any thoughts on how that's performing versus maybe what your internal expectations were going into the deal? William J. Ruckelshaus: No, I think it's performing as we've expected and we are very excited as the more that we, post acquisition, have sat down with the team and understood forward plans and been at the table with them we're -- we get more excited because we think the market is big, as we talked about when we announced the deal. There's a lot that they're already doing and there's a lot more that they can do. So we want to be a good partner with them and identify areas where they can further invest and continue the growth because it's impressive.

The next question comes from Dan Kurnos from The Benchmark Company. Daniel L. Kurnos - The Benchmark Company, LLC, Research Division: Well, I want to dig back into the search side of the business because as much fun as I had answering all these questions last week, hopefully, I will give you guys a chance to maybe elaborate a bit further on the search side as to why, for example, we saw significant CPC weakness. I know, Bill, you addressed this a little bit in terms of alternative monetization. But maybe explain to people why the CPC weakness was not as impactful, not only with your O&O business, but also why there is no bleed through to the affiliate business, and I'll follow-up with a few others. William J. Ruckelshaus: The one thing I was alluding to earlier is that the materiality of that business to our overall search business as it relates to the O&O component and the direct marketing where you'd see evidence of some of the CPC weaknesses has historically not been there. That's been a much a smaller mix of our business, which is not to say that we haven't experienced it. So we're participating in the market just like everybody else, and it fluctuates. And so the important thing in the face of that is to have a lot of instrumentation as many people do. And adjust your practices in the face of that changing data. And so we're doing that and -- but at the same time, the other point in my comments was that there are multiple components to the business model, such that when you have dynamics like that impacting one of them, oftentimes, you have other aspects of your business that are offsetting. And I think we experienced that this past quarter. Daniel L. Kurnos - The Benchmark Company, LLC, Research Division: And then, on the affiliate side, I think you mentioned this a little bit briefly in your prepared remarks, but would it be safe to say that possibly as a result of the policy changes that there were some partners that may have come onboard from other competitors or other platforms out there and you might have gained some share this quarter. Was that possibly embedded into results? William J. Ruckelshaus: Well one of the things that I think is important to characterize is that I -- we did reference that there had been pipeline positive surprises for us throughout the year, which is that we've been able to go out and find partners. But it hasn't really been in that space. So there's not a spillover effect where we're soaking up share that's leaving other partners. That's not really consistent with how it is we're viewing getting through these changes, nor is it been the source of growth for us this year. But being able to identify partner types that are growing and are -- have a lot of upside and that are the right type of partners that want to work with, that continues to be the model. And I think we're having some success with that in the middle part of this year, exactly at the time when some of our software partners in the network are declining. So it's coming at a good time. Daniel L. Kurnos - The Benchmark Company, LLC, Research Division: And let me ask a quick follow-up to that then. More specifically, or separately, I guess I should say, have you seen any impact from what Babylon is going through on your results? And maybe at this point, if you could say if there have been any material or noticeable policy changes from the none-Google search engine? William J. Ruckelshaus: Yes, I don't think we're prepared to comment specifically as it relates to policy changes other than what we talked about late last year, early this year. But I think as we've maintained all along, it's a dynamic market environment and as a partner of Google and Yahoo!, we take it upon ourselves to consult with them weekly as to how they are seeing the market generally and specifically our business and how we're going to market together. So that changes quite a bit. It doesn't change as frequently in the materiality that it did earlier this year, but it's constantly changing. Daniel L. Kurnos - The Benchmark Company, LLC, Research Division: And any commentary on the Babylon situation? William J. Ruckelshaus: No. Daniel L. Kurnos - The Benchmark Company, LLC, Research Division: All right. Then let me just ask one last one on Monoprice. You talked a lot about your focus is now to expand product assortment and also to focus on customer marketing. I'm just also curious if there are plans to expand distribution capabilities, so you can maybe better target the East Coast and give them more competitive shipping rates. William J. Ruckelshaus: Yes, I don't think we're prepared to announce any infrastructure build-out plans at this point. As we think about the Monoprice opportunity, expanding the customer base beyond where it currently is, certainly strikes us as one of the top priorities because this is a company that has been performing quite well, profitably growing, but it is also a somewhat early and emerging brand. And so it's not a household name right now, but the team at Monoprice has it on their list of multiyear goals, is to establish itself as a household brand. And those customers that have found their way to Monoprice tend to stick around and be very loyal and ultimately, result in direct traffic -- direct navigation traffic and we hear there's a lot more of those types of customers out there. And some of the comments at the front end of this call were to suggest that we're really giving a lot of thought and attention with the team as to how to best exploit that.

[Operator Instructions] The next question comes from Scott Schneeberger from Oppenheimer.

This is Joshua Siber [ph] filling in for Scott. I just wanted to get some color. You guys mentioned overall filers growth about 1%. How does the 1- to 2-week IRS delay affect your expectations for the upcoming tax season? William J. Ruckelshaus: Well, it looks familiar. The impacts last year, I think had a lot to do with the 2-week delay. It had a lot to do with forms availability. It pushed the season back toward the back end and the actual close, mid-April, probably that will have the same impact. I think there's an open question as to forms availability and when that will happen and to what extent they'll be delayed but -- so I think that's an open question and it could adversely impact that number, but I don't think that was the only thing going on last year. Eric M. Emans: Yes, if I could add to that, I would agree to that, that this is what we experienced before and just as recently last year. And I do think that the most likely is you might be a little more back half-loaded, but we're probably talking 100 and 150 basis points of revenue moving from the first quarter into the second quarter.

Okay. And in terms of end marketing, what avenues do you guys plan to use for the upcoming year versus last year? And what channels and media do you anticipate targeting as well? William J. Ruckelshaus: So TaxACT, as you probably know, has been direct response focused and that's both off-line and online. The company has a lot of skills in online. And given the seasonal nature of the business, your ability to get the right message in front of the right prospects at the right time during the tax season is critical. TaxACT has a limited budget, and so being able to be efficient about that is critical. And so some of the investments that we have made with the team over the last 2 seasons around instrumentation and analytics, I think are going to help in that regard. But as it relates to marketing mix, typically we don't talk about that in any specificity. But I think it will look similar to prior seasons.

Okay. And you mentioned ARPU plays a part of the growth. What affects your decision to increase or not increase price in the upcoming tax seasons? William J. Ruckelshaus: So -- and Eric, let me just take a quick stab at that and I'll pass it over to you. The cornerstone of TaxACT's value proposition and its promise to its filers is around free federal. They have a price lock guarantee where it essentially states that any time during the season a filer starts its application or its filing, it can complete it later in the season under the same pricing terms, which is a highly differentiated offer out there in the marketplace. So our decision as it relates to pricing the product has a lot to do with the core value position that we've always maintained. It's pivotal to TaxACT, and I think that will continue to be the case. And what we've always maintained is we want to do is bring more value to our filers. And it's really the value is what we're measuring and price is what we're charging. So to the extent that we feel like we're bringing equal or greater value, then we'll feel perfectly comfortable translating that into price. But that equation, I think, has been kind of the bedrock of the value proposition of TaxACT for over a decade at this point. Eric M. Emans: Yes, Bill, this is Eric. I think that pretty much covers it. I mean, I would say, the one thing is that we are -- we definitely spend a lot of time in instrumentation and understanding pricing and doing a lot more testing last year. And so I think that as pricing decisions come up and as Bill points out, it is only a small component of how we think about ARPU. We feel we're a lot better positioned to make a smart decision about pricing.

I am showing no further questions. Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a great day.