Stacy Ybarra - Senior Director, IR & Corporate Communications William Ruckelshaus - President and CEO Eric Emans - CFO and Treasurer

Gil Luria - Wedbush Securities Dan Kurnos - The Benchmark Company

Good day, ladies and gentlemen, and welcome to the Blucora Q3 2015 Earnings Conference Call. At this time all participants are in a listen-mode, later we will conduct a question and answer session and instructions will follow at that time. [Operator Instructions] I would now like to introduce your host for today’s conference Ms. Stacy Ybarra, Vice President of Investor Relations, ma’am please begin.

Good afternoon and welcome to Blucora's investor conference call to discuss third quarter 2015 earnings. Before we begin, I would 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 businesses and growth initiatives and anticipated financial performance for the fourth quarter and future periods. 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 statement, 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've also provided supplemental financial information to our results in 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 third quarter financial results and fourth quarter outlook. Then, we'll open up the call to your questions.

Thank you Stacy, good afternoon and thank you for joining us. On today’s call we will address our operating results, the Q4 outlook and highlight our pending acquisition of HD Vest and the strategic transformation underway at Blucora. First, our operating performance and outlook. Third quarter performance is in line with our expectations. Consolidated revenue was 84.8 million, is driven in large part by continued downward pressure at InfoSpace. On a year-over-year basis, tax revenue increased 16%. Search and content was down 42% and ecommerce was up slightly. Consolidated adjusted EBITDA loss of 1.6 million reflects the top line trends of our businesses and includes a one-time charge associated with our acquisition of HD Vest. Turning first to TaxACT. The TaxACT team continues to gear up this off-season. Focusing on reinforcing its value leadership position in consumer DIY and maximizing opportunities and ancillary services in adjacent markets like SMB and assisted track. On the consumer front, TaxACT is introducing newly aligned product packages and refresh branding this season which will enable filers of all types to more easily identify TaxACT as the best deal in tax. TaxACT's new product packages will include competitive offers for simple return. Additional TaxACT packages for more complicated return will be personalized to specific tax situations. And emphasize easy experiences for filers to access the forms and schedules needed to successfully complete their returns. The comprehensive accuracy, maximum refund, price lock and satisfaction guarantees the TaxACT has long offered will continue. Price well below similar DIY online products, TaxACT's new product packages will continue to make it easy for individuals and business owners to choose a solution to help do their taxes best easily and in fair prices. We're looking forward to the upcoming tax season and excited to now be working with HD Vest to test new opportunities to bring more value to our TaxACT customers. Search and content continues to be a mix story. Core searches declining consistent with recent trends over 30% of our network partners are now migrated to bank and the financial uplift of this transition is positive. Overall, the core search business continues to transition to new policies from our search engine partners, but signs of stabilization are evident and the model is intact. At HowStuffWorks, the team is making great progress on several fronts, highlighted by the recent launch of an advance publishing and revenue optimization platform built for the social edge. The work done by this team in a short time is impressive and includes tools providing real-time insights into relevant content. A lightweight platform enabling editorial publishing of modern articles. Underlying data in the analytics that optimize site monetization in customer ROI. Soft-launched in September, the results are showing. Monthly page views were up over 50% compared to June, programmatic revenue is up 31% over Q2. In October, the team launched How Stuff now, a new HSW online publication to deliver enlightening trending content to smart social media consumers and its first week now it's contributing over 150,000 incremental weekly unique sessions. Now it's built on a new technology stack that extends the tremendous HowStuffWorks content to new engaged audiences. At Monoprice, the team continues to advance against its goal of product innovation, operational enhancement and channel development. Recent product introductions in core categories like cables and battery backups have been well reviewed and are generating customer excitement. New launches and pro-audio display camera, home theater and security position Monoprice well for the coming holiday season and onward. On the operational front, Monoprice opened up a new distribution center in Kentucky providing faster delivery times and better values to eastern U.S. customers. Last third party channels continue to provide growth outside of Monoprice.com expand our reach to new domestic and international customers and demonstrate the value proposition of our extensive CE product offerings. The outlook for Monoprice and InfoSpace is encouraging as we announced earlier this month our plan is to divest both businesses in connection with our strategic transformation. We are close to launching both sales processes and expect each to generate interest from multiple parties and unlock value. The plan is to complete both divestures no later than mid next year. Now for a few words on our pending acquisitions of HD Vest. This transaction builds around our strongest asset TaxACT and creates opportunities to realize significant synergy. In 2017, we estimate 5 million in revenue synergy and 7 million in cost reductions as a result of our narrow focus. Our anticipated divesture of InfoSpace and Monoprice will facilitate our strategic transformation and in turn enable us to reduce operating expenses and focus conservatively on the growing financial services and technology market. I am thrilled about the plans for HD Vest to join forces with Blucora led by Roger Ochs of HD Vest team brings decades of experience in providing financial planning and wealth management solution to tax professionals and their clients. Our experience in providing tech enabled financial services through TaxACT positions Blucora to accelerate the distinct HD Vest vision of empowering tax professionals with financial planning and wealth management solutions. Blucora will enable HD Vest to strengthen its commitment to helping individual clients pursue a holistic approach to their financial wellbeing. The combination provides HD Vest with the advantages of operating as part of a publicly traded company including greater access to capital markets for growth opportunities and enhances flexibility and compensation and employee ownership participation. For over 30 years HD Vest independent advisers have focused on the mass affluent market which has been greatly undeserved by the financial advisory community. HD Vest has more than 4,500 advisers across the 50 states. The HD Vest mission statement has not wavered over the years helping Americans retire with financial dignity. HD Vest delivers holistic financial planning that considers both taxes and investment choices. HD Vest calls this approach TaxAlpha and it represents the value added to a client's financial plan by optimizing sound tax strategies. HD Vest business is built on the relationship that tax professionals have with their clients. It starts with the tax return itself. HD advisers have upload data into a financial planning tool called 1040 analyst and identify investment opportunities whether it's helping them retire with financial dignity, making sure they have the right investments to fund their children's education or maybe the right insurance in place. They do that by starting with the tax return and then ultimately going through a financial planning process and then in the end managing the assets to help them to get there. The tie ends with TaxACT are obvious and compelling. TaxACT delivers a valuable service to 5.5 million consumers many of them millennial, these consumers may or may not believe that they need a financial adviser today but as they get older and get married, they have kids, buy a house, they are going to start thinking about retirement planning where they are going to start thinking about putting their kids through school or start thinking about the need for insurance to protect against some catastrophic event. This progression of financial management needs creates an exciting life time opportunity for the new Blucora. TaxACT also provides tax software to more than 19,000 tax professionals directly engaging with these tax professionals should help accelerate HD Vest recruiting efforts and bring added value by growing the practices of the current TaxACT pay professional customers. In summary we are excited about our future as a financial services and technology company. Following completion of our strategic transformation the new Blucora will be well positioned in markets that benefit from positive secular trend. On top of that the combined company will benefit from proven growth, strong cash flow generation and synergy opportunities. I would now like to turn the call over to Eric for more details on our financials.

Thanks Bill. Consolidated results for the third quarter were in line with our guidance expectations were normalized for transaction related expenses and other onetime charges. Third quarter revenue was 84.8 million and adjusted EBIDTA was negative 1.6million. Non-GAAP net loss was 5.5 million or a loss of $0.13 per share and GAAP net loss was 10.6 million or a loss of $0.26 per share. We exit the third quarter with cash, cash equivalents and short-term investments of $292.3 million and net cash of $61.1 million. Turning to our third quarter segment performance I want to touch briefly on tax preparation which is in its seasonally slow period. Revenue in the quarter was $2.9 million and segment loss was 2.5 million both exceeding the high end of our guidance expectation. We are tightening our full year 2015 tax segment expectations to the high end of the range. We expect revenue of about 117 million to 117.5 million and segment margin of 47.5% to 48%. Looking ahead to 2016 we expect first half segment revenue of 122 million to 125 million at a segment margin of 55% to 56%. We expect approximately 72% of our first half revenue to hit in the first quarter at a segment margin of approximately 54%. Now turning to the search and content and e-commerce segments. Given our stated intention to divest both businesses, their results were reported as discontinued operations beginning in the fourth quarter. As such I will provide some color on their respective third quarter results and then provide combined fourth quarter outlook for these segments. Starting with search and content. Third quarter revenue was 43.1 million and segment income was 4.5 million which included a onetime charge of 650,000 associated with a 10% reduction in work force. Owned and operated revenue was down 37% sequentially due to new marketing practices referenced in our last call which pressured margins and resulted in our pulling back in marketing spend in the quarter. Team has successfully optimized and stabilized performance exiting the third quarter and we expect growth from owned and operated in the fourth quarter. Distribution revenue was down 7% sequentially in part driven by new marketing changes noted above. We are encouraged by these results although we again expect a step down in the fourth quarter we are optimistic and we are nearing the bottom. Moving to e-commerce. Revenue for the third quarter was $38.8 million and segment income was $2.2 million or a segment margin of approximately 6%. The segment margin came in lower than expected driven by promotional activity and product mix shifts in certain marketplace channels. Revenue was up 2% versus prior year on a 5% decrease in orders offset by an 8% increase in average order value. Combined fourth quarter outlook for the search and content and e-commerce segments are as follows. Revenue of 83.4 million to 89.1 million and segment income of $7.5 million to $9.2 million. The revenue outlook reflects expectations of sequential growth for e-commerce and a potential for growth in search and content. Additionally the revenue outlook reflects a path to double digit growth for e-commerce. With that being said, with our announced intent to divest Monoprice, we will be less inclined to sacrifice profitability to chase revenue. We expect sequential segment income growth from both segments and expanded margin in search and content segment. Finishing up the third quarter results. Unallocated corporate expenses came in at $5.8 million and included onetime charges of $1.5 million primarily driven by transaction expenses associated with the announced acquisition of HD Vest. For the unallocated corporate expense of $9.6 million to $9.3 million which includes approximately $5.9 million in charges associated with the announced acquisition of HD Vest and the Blucora transformation. Charges include employee severance and retention related expenses, non contingency based transaction expenses and other nonrecurring costs. It is worth noting that our fourth quarter expectations for unallocated expenses exclude contingency based transaction expenses which will be triggered at the close of the HD Vest acquisition. Further certain corporate costs that are related to the search and content and e-commerce segments may also be reported as discontinued operations beginning in the fourth quarter. Closing with our consolidated fourth quarter expectations. We expect consolidated revenue between $85.9 million and $91.9 million. Adjusted EBITDA between negative $7.7 million and negative $5.2 million, non-GAAP net loss of $9.1 million to $6.5 million or a loss of $0.22 to $0.16 per share, and GAAP net loss of $16 million to $14.3 million or a loss of $0.39 to $0.35 per share. With that let’s turn the call over to the operator and we'll gladly take your questions.

[Operation Instructions] Our first question comes from line of Gil Luria with Wedbush Securities. Your line is now open.

Thank you, good afternoon. Overhead it sounds like you are going to break overhead into couple of pieces into pieces that will go to the discontinued operations and a piece that will be ongoing and go forward with TaxACT and HD Vest in the future. What’s your sense for what the run rate for overhead is going to be exiting this year and entering next year?

Gil, its Eric. We are going to have a lot of transitions that carries into next year and so I think the best number to point to is our expectation in 2017 getting to the $12 million target. I would say from modeling purposes a reasonable expectation in giving some considerations to some of the transition we will have happen in next year is probably in the $14.5 million to $16 million range next year, but we will be sure to itemize out those kind of non-recurring charges as we go forward.

Got it and then on tax 122 to 125 maybe I didn't hear correctly that's just for the half of the year or is that for the full year?

That's just for the first half.

That's for the first half, okay. And on HD Vest can you give us, this is new for a lot of us can you give us an update on what some of the regulatory challenges are in terms of the product that they sell, are there any product that are high yielding that maybe have a change in the regulatory environment and what part of your revenue comes from those types of products?

Hi Gil, it's Eric. So, I think this is a highly regulated industry and constantly changing and so it's something we're going to have to stay in front of. And we have a very experienced team at HD Vest that has been doing this for years. And so we take great comfort in that. I think as we think about regulatory exposure and kind of the questions that people have been focused on, it's really related to the perspective DOL changes, which would impact primarily retirement based accounts, retirement assets, that are either kind of illiquid or alternative or variable annuities, which are already tax advantaged saving vehicles for retirement. So, we've talked a little bit about that in our previous call and basically we would have think about that in our business, about 20% of our revenue is driven by transactional transaction or commission based revenue. And only a less than 50% of that total is driven by variable annuities and alternative products. And so, the other thing I would say is this is a top 10 independent broker dealer. It's got the size and scale to deal with these types of changes in a very experienced group to do that. Part of the DOL change is going to require fiduciary responsibility or fiduciary responsibility from the advisor to its clients. If you think about our clients, they already have a fiduciary responsibility. They're enrolled agents in CPA. So, I think it's nothing that's going to be new for them. And then it's we've also talked about kind of the trend in our assets under management. Over time it's moving more and more towards the base which will not be impacted by the DOL regulation. So, I think, look, it's a macro rest to the industry in something that we spend some time on in managements at HD Vest very familiar with. And we think we're well positioned to deal with the changes. But certainly it can impact players in this space and we'll work harder and make sure it minimizes the impact on us.

Got it. That makes sense, thank you very much.

Okay.

Our next question comes from the line of Dan Kurnos with The Benchmark Company. Your line is now open.

Great, thanks. So, a couple from me, I guess I, you know, look, we've all had some time to digest the HD Vest acquisition. Maybe if we can just step back from a high level picture, I understand that this is transformational acquisition. Maybe, can you guys just sort of give us any more insight into your rationale, as it relates to long-term shareholder value between this option, and just simply divesting search and ecommerce and reinvesting in TaxACT and buying back stock?

Yes, Dan, it's Bill. Look, I think this is consistent with what we've been stating as a strategic objectives over the last several years, which is to position Blucora with quality businesses that has strong growth prospects and ideally where there was a tying together of those businesses we owned, where we could focus. The attributes we would look for would be attributes we would all recognize as contributing to the definition of a good business in term, including growth and predictability, visibility. And certainly we see those attributes in TaxACT and the opportunity to pair TaxACT with HD Vest. And in connection with that, very logically look for new owners for InfoSpace and Monoprice, strikes us as precisely the right direction to go to as it relates to fulfillment of the strategy. So, what does that then enable. Well, I referenced in my opening remarks, the idea of unlocking value in Monoprice and InfoSpace. I truly believe that these businesses will be more valuable in the hands of a different owner than they are right now in the hands of Blucora. And that's one of the reasons why I believe unlocking value is likely to happen in these forthcoming divestiture discussions. In upon our executing those divestitures and bringing together TaxACT in HD Vest inside of a more lean corporate parent, we are well on the way toward a repositioning of the company around something that I think actually had probably more recognizability and coherence inside a particular space and where the synergy opportunity gives us an opportunity to think about reinvesting in strategic ways as well as shifting our capital allocation view when it comes to M&A towards being much more through a strategic lens, which is always advantageous. And also, I think importantly puts us on a path of utilizing the NOL, which has been a significant asset and potential significant source of value for shareholders. This transaction definitely checks the box on that, and positions us as we discuss in our last call. In 2017, to start returning capital with shareholders that they can start to benefit directly in the value creation that we're seeing from it. So, I think all-in-all it's a very complicated set of messages that we announced a couple of weeks ago. But when we get through some of these in immediate execution steps, I think we'll be very well positioned and our shareholders will start to benefit.

All right. So, being a bit deeper and thanks for that Bill. Can you guys give us, I know it's still relatively early, but can you give us any more granularity on some of the puts and takes within HD Vest such as your expectations for AUM growth. How fast the pieces, whether transactional fee based or growing longer term outlook for those now that you have dug in a little bit deeper, maybe beyond sort of those the initial data you shared with us. How exactly you playing on capturing the 5 million in synergies and the full value of your NOLs?

Yes. So, in the presentation that we provided a couple of weeks ago in connection with our announcement. There is a particular schedule where we pointed to 15 and 16 results for HD Vest and also referenced a long term model. That's probably a good schedule to point you to in terms of guidance, these guidance that we're prepared to provide. At this point, whether it's financial based or matrix based, but would point you back to that, Dan, and then the synergy capture is frankly just one of the sources of synergy that we actually see occurring in this transaction. And it just specifically relates to bringing some of the HD Vest investment advisory solutions as well as investment choices to TaxACT customers, either in connection with their tax planning and filing or outside of it. And we specifically modeled 2017 which is when we think we're going to be best prepared to do that in a seamless and automated fashion as possible. You might imagine that as we kind of approaching the end of the year and have not yet even close the transaction. It's going to be difficult to pull that off in the coming tax season. But that's really the sources synergy that we modeled. And I think the synergies that we think actually exist in total are coming from a variety of sources. So, in our minds that's just scratching the surface.

Okay. Hello.

And hey, is there -- something that I would add to that is if you just take the guidance that we provided for the first half of tax season for next year, and do it on a LTM basis, this is a proxy for 2016 for the TaxACT business. Let's call that 61 million in segment income. And if you assume we get to our corporate outback number 12, in early 2017 on a run rate basis. You're looking at a -- and just pro forma that back to 2016, you're looking at adjusted EBITDA up close to a $100 million called 96. And unlevered free cash flow about 86 million and a non-GAAP EPS of a $1.29, which is really in our calculation a proxy for cash per share per shareholders. And that is going to be up, call it 16% to 18% versus what pro forma basis should be on 2015. So, I think you really start to see the benefit of this asset being in our ownership structure. And then compiling on top of that is the synergies which are not or even outside of that that we hope to unlock in 2017. So, I think that's a really compelling case, if you focus on getting through as Bill said these transitional steps and putting us on a path to provide some pretty healthy financial results and metrics into future.

So on the plus side I guess it's a good thing that my pro forma 16 looks kind of in line with your thinking. But just one more additional question for you I guess maybe Eric this might be for you just on the TaxACT side it looks like you are giving up maybe a percentage point or so margin to ensure that you maintain that double digit growth profile understanding that HD Vest isn't going to be significant contributor this quarter, I understand that could change depending on sort of the way the product mix and how the tax season unfolds but is that kind of a fair assessment and thought process and maybe it ends of being more like a half percentage point at the end of the year or how should we think about that?

Yes, so couple of things I would say that and Bill touched on it in his prepared remarks. I mean, we are changing some pricing and packaging this year and I think the way to read that is we are prioritizing share growth. We have always sort out profitable share and we will continue to seek out profitable share but a lot of the pricing and packaging changes that we are going to make this year is to make us more competitive which will introduce a little uncertainty and into our forward expectations just when you introduce change. We are going to make sure that we are conservative but I would also call your attention to couple of things. We are continuing to invest in tools and technology which are onetime investments so that there we believe we are going to come through next year and so I think assuming that we are going to give up point or so in margin next year for future growth is the right way to think about it. And then, in addition to that we are bringing simple tax on and that's something we are excited about up in Canada and we are looking to invest in that as well. So I think the 2016 is a year where we’re changing our pricing and packaging looking to be a little more aggressive on share and then as well make some investments in the core as well as up in simple tax up in Canada.

Alright, great. Thanks guys.

Our next question comes from the line of Brian P. Fitzgerald with Jefferies. Your line is now open.

Hi. Thank you for taking my question. This is actually John Strep [ph] on for Brian. Just talking about the acquisition and your history of acquisitions a little bit once the HD Vest acquisition closed, are you guys going to be looking at any other acquisitions that you might be able to bolt on and a quick follow-up to that would it be a bolt on to the TaxACT and HD Vest businesses or would it be in other verticals maybe?

This is Bill. I think the near term focus is going to be on integrating HD Vest making sure that the conversions and tie ends between HD Vest and TaxACT are happening at the right levels and at the right pace and deleveraging. So, we are taking on a fair amount of debt to finance this transaction and that's certainly going to be the priority as we move down to a more reasonable level of net leverage I think will have the option to think about acquisitions but certainly in the next year or so we are going to be laser focused on deleveraging.

Great, thank you. And a quick follow up I know you mentioned that you have simple tax for Canada is there any plans on bringing HD Vest services a little bit?

Certainly that can be an option for us. I think 5.5 million filers in the U.S. is probably the bigger target to focus on but as simple tax continues to ramp up in Canada we are going to look for opportunities to connect HD Vest with simple tax as well.

Great, thank you so much.

Thank you.

[Operator Instructions] Our next question comes from the line of Mitch Bartlett with Craig-Hallum Capital. Your line is now open.

Hi guys this is George on for Mitch. Couple of more on HD Vest wondering I am still a bit unclear on the revenue synergy and wondering if that's coming from offering some kind of online, the platform online to your core tax customers or it will be delivering leads to the independent tax preparers that use HD Vest?

So, the simple way it's the first category you mentioned which is just as the interesting observation that the founders of HD Vest started with was that as it relates to financial advisory and wealth management it's the unique position that is occupied by the tax preparer, the tax professionals and that comes from two perspectives one is that the relationship is among the more trusted relationships of any professional services relationship that most of us have in the United States. There are surveys they have done year in and year out that continually rank your tax preparer up there, right up there maybe alongside your doctors, the most trusted relationship that you have so that's one. The second observation was that it is precisely in the process of preparing your tax return and coming out of that filing that ideas are and opportunities come forward as it relates to how it is someone can optimize either their tax preparation or their investment objectives and so it's really with those two observations that HD Vest was ultimately founded and has grown to be what it is today. Well, I would say that precisely that set of dynamics when taken to the TaxACT relationship with its 5.5 million filers I think applies and kind of gives you a sense as to why we think there is an opportunity to bring some of the HD Vest products to those filers in the sense that there is a trusted relationship between TaxACT and its filers and it is also true that their signal coming off of those filings as to what might represent suitable investment opportunities for those particular filers based on information going from their tax filing. So that's really sort of the extension of the why we think it can fit and I think what we have to do to best execute against these opportunities is build the technology that will allow for as best as possible an automated presentation of the investment options as well as an automated fulfillment should a filer want to pursue one of them. And also as you might imagine it's important to be very transparent with our filers in terms of getting their consents along the way which we think is something that we intend to do and it's will -- those will be forth coming when the filers see the value in the alternatives that they can be presented with. So hopefully that helps explain it. It is in many respects what the advisers inside of the HD Vest network are doing on behalf of their clients. Its taking those sets of solutions and products and bringing them in a technology enabled way to the 5.5 million filers inside the TaxACT.

Does that require you to get sort of to go through some regulatory process to become enabled to be able to offer that stuff yourselves?

Well HD Vest itself is a fully registered investment adviser so they have the ability to offer that so it would be an HD Vest provided solution.

I guess, I just mean they are not direct with the consumers though right? So does that direct relationships make it so that you have to, I mean, I guess they are just able to offer that right now?

Yes. They have a home office and because they are registered, they are a corporate RIA they can offer those services.

Okay. And then, I know that the near term goal after it's acquired will be paying down debt and getting it all aligned and I am synced up with TaxACT is the longer term thinking three to five years are there a lot of opportunities to acquire kind of ancillary services or products or things that would fit very well with that platform, are there some kind of obvious products that could be added easily that aren't there right now?

Yes. No I think that not to dismiss inorganic growth as an option for the company going forward it's just in this intermediate period of the need to de-lever but yes, certainly I think whether it's products or accelerating the rate of adviser acquisition through strategic acquisition or technology related pieces that can facilitate the HD Vest model or the HD Vest intersection with TaxACT yes, all of those things are going to be interesting to evaluate and already been in discussions with both the TaxACT and HD Vest teams around how to start thinking about segmenting the landscape of opportunities.

Great, thank you.

Thank you.

That concludes today's question and answer session. Ladies and gentlemen thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.