Attached files
| file | filename |
|---|---|
| EX-10.3 - EXHIBIT 10.3 - BLUCORA, INC. | ex-10310xqq32015.htm |
| EX-10.5 - EXHIBIT 10.5 - BLUCORA, INC. | ex-10510xqq32015.htm |
| EX-10.9 - EXHIBIT 10.9 - BLUCORA, INC. | ex-10910xqq32015.htm |
| EX-10.7 - EXHIBIT 10.7 - BLUCORA, INC. | ex-10710xqq32015.htm |
| EX-10.6 - EXHIBIT 10.6 - BLUCORA, INC. | ex-10610xqq32015.htm |
| EX-10.1 - EXHIBIT 10.1 - BLUCORA, INC. | ex-10110xqq32015.htm |
| EX-10.4 - EXHIBIT 10.4 - BLUCORA, INC. | ex-10410xqq32015.htm |
| EX-31.1 - EXHIBIT 31.1 - BLUCORA, INC. | ex311x10qq32015.htm |
| EX-31.2 - EXHIBIT 31.2 - BLUCORA, INC. | ex312x10qq32015.htm |
| EX-32.1 - EXHIBIT 32.1 - BLUCORA, INC. | ex321x10qq32015.htm |
| EX-32.2 - EXHIBIT 32.2 - BLUCORA, INC. | ex322x10qq32015.htm |
| EX-10.8 - EXHIBIT 10.8 - BLUCORA, INC. | ex-10810xqq32015.htm |
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 |
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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 22, 2015 | |
Common Stock, Par Value $0.0001 | 40,992,081 | |
TABLE OF CONTENTS
Page | ||
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BLUCORA, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
September 30, 2015 | December 31, 2014 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 59,638 | $ | 46,444 | |||
Available-for-sale investments | 232,705 | 254,854 | |||||
Accounts receivable, net of allowance of $99 and $67 | 23,157 | 30,988 | |||||
Other receivables | 1,230 | 3,295 | |||||
Inventories | 33,673 | 29,246 | |||||
Prepaid expenses and other current assets, net | 10,768 | 13,477 | |||||
Total current assets | 361,171 | 378,304 | |||||
Property and equipment, net | 15,089 | 15,942 | |||||
Goodwill, net | 308,827 | 304,658 | |||||
Other intangible assets, net | 147,253 | 168,919 | |||||
Other long-term assets | 4,134 | 4,891 | |||||
Total assets | $ | 836,474 | $ | 872,714 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 33,570 | $ | 37,755 | |||
Accrued expenses and other current liabilities | 18,918 | 21,505 | |||||
Deferred revenue | 6,563 | 7,884 | |||||
Short-term portion of long-term debt, net | — | 7,914 | |||||
Total current liabilities | 59,051 | 75,058 | |||||
Long-term liabilities: | |||||||
Long-term debt, net | 30,000 | 85,835 | |||||
Convertible senior notes, net | 188,050 | 185,177 | |||||
Deferred tax liability, net | 15,024 | 42,963 | |||||
Deferred revenue | 2,382 | 1,915 | |||||
Other long-term liabilities | 6,225 | 2,741 | |||||
Total long-term liabilities | 241,681 | 318,631 | |||||
Total liabilities | 300,732 | 393,689 | |||||
Commitments and contingencies (Note 7) | |||||||
Stockholders’ equity: | |||||||
Common stock, par $0.0001—authorized shares, 900,000; issued and outstanding shares, | |||||||
40,951 and 40,882 | 4 | 4 | |||||
Additional paid-in capital | 1,506,593 | 1,467,658 | |||||
Accumulated deficit | (970,784 | ) | (987,524 | ) | |||
Accumulated other comprehensive loss | (71 | ) | (1,113 | ) | |||
Total stockholders’ equity | 535,742 | 479,025 | |||||
Total liabilities and stockholders’ equity | $ | 836,474 | $ | 872,714 | |||
- 3 -
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, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
Revenues: | |||||||||||||||
Services revenue | $ | 45,975 | $ | 76,885 | $ | 268,819 | $ | 362,199 | |||||||
Product revenue, net | 38,806 | 37,970 | 109,764 | 110,408 | |||||||||||
Total revenues | 84,781 | 114,855 | 378,583 | 472,607 | |||||||||||
Operating expenses: | |||||||||||||||
Cost of revenues: | |||||||||||||||
Services cost of revenue | 28,492 | 49,754 | 94,204 | 177,280 | |||||||||||
Product cost of revenue | 28,523 | 25,605 | 77,878 | 73,771 | |||||||||||
Total cost of revenues | 57,015 | 75,359 | 172,082 | 251,051 | |||||||||||
Engineering and technology | 5,418 | 5,970 | 15,803 | 14,922 | |||||||||||
Sales and marketing | 16,933 | 18,152 | 98,416 | 96,275 | |||||||||||
General and administrative | 12,513 | 9,495 | 33,936 | 28,552 | |||||||||||
Depreciation | 1,215 | 1,085 | 3,540 | 3,278 | |||||||||||
Amortization of intangible assets | 5,349 | 6,118 | 17,585 | 17,463 | |||||||||||
Total operating expenses | 98,443 | 116,179 | 341,362 | 411,541 | |||||||||||
Operating income (loss) | (13,662 | ) | (1,324 | ) | 37,221 | 61,066 | |||||||||
Other loss, net | (3,275 | ) | (3,208 | ) | (11,578 | ) | (11,001 | ) | |||||||
Income (loss) before income taxes | (16,937 | ) | (4,532 | ) | 25,643 | 50,065 | |||||||||
Income tax benefit (expense) | 6,326 | 2,294 | (8,903 | ) | (17,579 | ) | |||||||||
Net income (loss) | $ | (10,611 | ) | $ | (2,238 | ) | $ | 16,740 | $ | 32,486 | |||||
Net income (loss) per share: | |||||||||||||||
Basic | $ | (0.26 | ) | $ | (0.05 | ) | $ | 0.41 | $ | 0.78 | |||||
Diluted | $ | (0.26 | ) | $ | (0.05 | ) | $ | 0.40 | $ | 0.75 | |||||
Weighted average shares outstanding: | |||||||||||||||
Basic | 40,950 | 41,034 | 40,952 | 41,589 | |||||||||||
Diluted | 40,950 | 41,034 | 41,911 | 43,303 | |||||||||||
Other comprehensive income (loss): | |||||||||||||||
Net income (loss) | $ | (10,611 | ) | $ | (2,238 | ) | $ | 16,740 | $ | 32,486 | |||||
Unrealized gain (loss) on available-for-sale investments, net of tax | 111 | (1,917 | ) | (149 | ) | 173 | |||||||||
Foreign currency translation adjustment | (122 | ) | — | (122 | ) | — | |||||||||
Reclassification adjustment for realized (gain) loss on available-for-sale investments, net of tax, included in net income as Other loss, net | (68 | ) | (4 | ) | 349 | (4 | ) | ||||||||
Reclassification adjustment for other-than-temporary impairment loss on available-for-sale investments, included in net income as Other loss, net | — | — | 964 | — | |||||||||||
Other comprehensive income (loss) | (79 | ) | (1,921 | ) | 1,042 | 169 | |||||||||
Comprehensive income (loss) | $ | (10,690 | ) | $ | (4,159 | ) | $ | 17,782 | $ | 32,655 | |||||
See accompanying notes to Unaudited Condensed Consolidated Financial Statements.
- 4 -
BLUCORA, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine months ended September 30, | |||||||
2015 | 2014 | ||||||
Operating Activities: | |||||||
Net income | $ | 16,740 | $ | 32,486 | |||
Adjustments to reconcile net income to net cash from operating activities: | |||||||
Stock-based compensation | 9,357 | 8,974 | |||||
Depreciation and amortization of intangible assets | 27,706 | 27,298 | |||||
Excess tax benefits from stock-based award activity | (35,612 | ) | (29,801 | ) | |||
Deferred income taxes | (30,904 | ) | (15,621 | ) | |||
Amortization of premium on investments, net | 1,250 | 3,095 | |||||
Amortization of debt issuance costs | 943 | 853 | |||||
Accretion of debt discounts | 3,064 | 2,753 | |||||
Realized (gain) loss on available-for-sale investments, net | 312 | (6 | ) | ||||
Other-than-temporary impairment loss on equity securities | 964 | — | |||||
Other | 161 | 78 | |||||
Cash provided (used) by changes in operating assets and liabilities: | |||||||
Accounts receivable | 7,740 | 16,212 | |||||
Other receivables | 2,065 | 4,134 | |||||
Inventories | (4,427 | ) | 1,067 | ||||
Prepaid expenses and other current assets | 4,150 | 849 | |||||
Other long-term assets | (219 | ) | 43 | ||||
Accounts payable | (4,185 | ) | (18,382 | ) | |||
Deferred revenue | (854 | ) | (48 | ) | |||
Accrued expenses and other current and long-term liabilities | 32,689 | 17,174 | |||||
Net cash provided by operating activities | 30,940 | 51,158 | |||||
Investing Activities: | |||||||
Business acquisition, net of cash acquired | (1,740 | ) | (44,927 | ) | |||
Purchases of property and equipment | (3,115 | ) | (4,247 | ) | |||
Purchases of intangible assets | (696 | ) | — | ||||
Proceeds from sales of investments | 19,246 | 26,620 | |||||
Proceeds from maturities of investments | 210,699 | 195,296 | |||||
Purchases of investments | (209,112 | ) | (237,063 | ) | |||
Net cash provided (used) by investing activities | 15,282 | (64,321 | ) | ||||
Financing Activities: | |||||||
Proceeds from credit facilities | 20,000 | 4,000 | |||||
Repayment of credit facilities | (83,940 | ) | (62,000 | ) | |||
Stock repurchases | (7,068 | ) | (29,923 | ) | |||
Excess tax benefits from stock-based award activity | 35,612 | 29,801 | |||||
Proceeds from stock option exercises | 2,374 | 2,447 | |||||
Proceeds from issuance of stock through employee stock purchase plan | 1,193 | 1,376 | |||||
Tax payments from shares withheld upon vesting of restricted stock units | (1,193 | ) | (2,569 | ) | |||
Net cash used by financing activities | (33,022 | ) | (56,868 | ) | |||
Effect of exchange rate changes on cash and cash equivalents | (6 | ) | — | ||||
Net increase (decrease) in cash and cash equivalents | 13,194 | (70,031 | ) | ||||
Cash and cash equivalents, beginning of period | 46,444 | 130,225 | |||||
Cash and cash equivalents, end of period | $ | 59,638 | $ | 60,194 | |||
Supplemental disclosure of non-cash investing activities: | |||||||
Purchases of property and equipment through leasehold incentives | $ | 515 | $ | 120 | |||
Cash paid for: | |||||||
Income taxes | $ | 1,499 | $ | 2,536 | |||
Interest | $ | 5,536 | $ | 6,336 | |||
- 5 -
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 operates through our InfoSpace LLC subsidiary (“InfoSpace”) and 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 and small businesses, tax preparation software for individuals, small businesses, and professional tax preparers, and ancillary services through its website, www.taxact.com. The E-Commerce business consists of the operations of Monoprice, Inc. (“Monoprice”) and sells self-branded electronics and accessories to both consumers and businesses primarily through its website, www.monoprice.com.
On July 2, 2015, TaxACT acquired all of the equity of SimpleTax Software Inc. (“SimpleTax”), a provider of online tax preparation services for individuals in Canada through its website www.simpletax.ca.
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, Tax Preparation, and E-Commerce. The Search and Content segment is the InfoSpace business, 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 provided through the InfoSpace business, 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.
Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and disclosure of contingent assets and liabilities. Estimates include those used for impairment of goodwill and other intangible assets, useful lives of other intangible assets, acquisition accounting, valuation of investments, revenue recognition, the estimated allowance for sales returns and doubtful accounts, the estimated allowance for obsolete, slow moving, and nonsalable inventory, internally developed software, contingent liabilities, 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, 2014. 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
- 6 -
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 loss” on the consolidated balance sheets. Amounts reclassified out of comprehensive income into net income are determined on the basis of specific identification.
The Company reviews its available-for-sale investments for impairment and classifies the impairment of any individual available-for-sale investment as either temporary or other-than-temporary. The differentiating factors between temporary and other-than-temporary impairments are primarily the length of the time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. An impairment classified as temporary is recognized in “Accumulated other comprehensive loss” on the consolidated balance sheets. An impairment classified as other-than-temporary is recognized in “Other loss, net” on the consolidated statements of comprehensive income.
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. The acquisition-date fair value of total consideration includes cash and contingent consideration. Since the Company is contractually obligated to pay contingent consideration upon the achievement of specified objectives, a contingent consideration liability is recorded at the acquisition date. The Company reviews its assumptions related to the fair value of the contingent consideration liability each reporting period and, if there are material changes, revalues the contingent consideration liability based on the revised assumptions, until such contingency is satisfied through payment upon the achievement of the specified objectives. The change in the fair value of the contingent consideration liability is recognized in “General and administrative” expense on the consolidated statements of comprehensive income for the period in which the fair value changes.
Goodwill is calculated as the excess of the acquisition-date fair value of total consideration over the acquisition-date fair value of net assets, including the amount assigned to identifiable intangible assets, and is assigned to reporting units that are expected to benefit from the synergies of the business combination as of the acquisition date. Reporting units are consistent with reportable segments. Identifiable intangible assets with finite lives are amortized over their useful lives on a straight-line basis. Acquisition-related costs, including advisory, legal, accounting, valuation, and other similar costs, are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.
Fair value measurements: The Company measures its cash equivalents, available-for-sale investments, and contingent consideration liability at fair value. The Company considers the carrying values of accounts receivable, 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 contingent consideration liability is related to the Company's acquisition of SimpleTax and is classified within Level 3 of the fair value hierarchy because the Company values the liability utilizing significant inputs not observable in the market. Specifically, the Company has determined the fair value of the contingent consideration liability based on a probability-weighted discounted cash flow analysis, which includes assumptions related to estimating revenues, the probability of payment, and the discount rate. The Company accounts for contingent consideration in accordance with applicable accounting guidance pertaining to business combinations, as disclosed in the accounting policy “Business combinations and intangible assets including goodwill.”
Foreign currency: The financial position and operating results of the Company's foreign operations are consolidated using the local currency as the functional currency. Assets and liabilities recorded in local currencies are translated at the exchange rate on the balance sheet date, while revenues and expenses are translated at the average exchange rate for the applicable period. Translation adjustments resulting from this process are recorded in “Accumulated other comprehensive
- 7 -
loss” on the consolidated balance sheets. The gain or loss on foreign currency transactions, calculated as the difference between the historical exchange rate and the exchange rate at the applicable measurement date, are recorded in “Other loss, net” on the consolidated statements of comprehensive income.
Supplier concentration risk: During the nine months ended September 30, 2015 and 2014, Monoprice inventory purchases from two key unrelated vendors accounted for 15% and 18% of Monoprice’s total inventory purchases, 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, 2017. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company currently is evaluating the impact of this guidance on its consolidated financial statements.
In April 2015, the FASB issued two separate ASUs, both of which are effective for annual reporting periods beginning after December 15, 2015, including interim reporting periods within that reporting period. Earlier adoption is permitted for both ASUs. One of these ASUs provides guidance about whether a cloud computing arrangement includes a software license, in which case the software license element should be accounted for consistent with the acquisition of other software licenses; otherwise, the arrangement should be accounted for as a service contract. This guidance may be applied either prospectively or retrospectively. The other ASU provides guidance related to the balance sheet presentation of debt issuance costs, in which those debt issuance costs should be presented as a direct deduction from the carrying amount of the recognized debt, unless the debt issuance costs relate to line-of-credit arrangements, in which case asset presentation of such debt issuance costs would still be permitted. This guidance must be applied retrospectively. The adoption of these ASUs are not expected to have a material impact on the Company's consolidated financial statements.
Note 3: Business Combinations
SimpleTax: On July 2, 2015, TaxACT acquired all of the equity of SimpleTax, a provider of online tax preparation services for individuals in Canada, for C$2.4 million (with C$ indicating Canadian dollars and amounting to approximately $1.9 million based on the acquisition-date exchange rate) in cash and additional consideration of up to C$4.6 million ($3.7 million) that is contingent upon product availability and revenue performance over a three-year period. The estimated fair value of the contingent consideration as of the acquisition date was C$4.1 million ($3.3 million). See “Note 5: Fair Value Measurements” for additional information related to the fair value measurement of the contingent consideration.
The acquisition of SimpleTax is strategic to TaxACT and intended to expand its operations. SimpleTax is included in the Tax Preparation segment. Intangible assets acquired amounted to approximately C$1.2 million ($0.9 million), consisting of customer relationships and proprietary technology both of which have finite lives. Identifiable net liabilities assumed were not material. Goodwill amounted to C$5.6 million ($4.5 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.
HSW: On May 30, 2014, InfoSpace acquired HSW, a provider of online content, 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
- 8 -
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.
Note 4: Goodwill and Other Intangible Assets
The following table presents goodwill by reportable segment (in thousands):
Search and Content | Tax Preparation | E-Commerce | Total | |||||||||||||
Goodwill as of | December 31, 2014 | $ | 59,912 | $ | 188,541 | $ | 56,205 | $ | 304,658 | |||||||
Addition | — | 4,473 | — | 4,473 | ||||||||||||
Foreign currency translation adjustment | — | (304 | ) | — | (304 | ) | ||||||||||
Goodwill as of | September 30, 2015 | $ | 59,912 | $ | 192,710 | $ | 56,205 | $ | 308,827 | |||||||
The goodwill addition related to the acquisition of SimpleTax as described in “Note 3: Business Combinations.”
Intangible assets other than goodwill consisted of the following (in thousands):
September 30, 2015 | December 31, 2014 | ||||||||||||||||||||||
Gross carrying amount | Accumulated amortization | Net | Gross carrying amount | Accumulated amortization | Net | ||||||||||||||||||
Definite-lived intangible assets: | |||||||||||||||||||||||
Customer relationships | $ | 132,791 | $ | (66,056 | ) | $ | 66,735 | $ | 132,500 | $ | (50,075 | ) | $ | 82,425 | |||||||||
Technology | 45,372 | (41,522 | ) | 3,850 | 44,805 | (35,649 | ) | 9,156 | |||||||||||||||
Content | 18,200 | (2,427 | ) | 15,773 | 18,200 | (1,061 | ) | 17,139 | |||||||||||||||
Other | 6,667 | (6,667 | ) | — | 6,667 | (6,667 | ) | — | |||||||||||||||
Total definite-lived intangible assets | 203,030 | (116,672 | ) | 86,358 | 202,172 | (93,452 | ) | 108,720 | |||||||||||||||
Indefinite-lived intangible assets: | |||||||||||||||||||||||
Trade names | 60,199 | — | 60,199 | 60,199 | — | 60,199 | |||||||||||||||||
Internet domain names | 696 | — | 696 | — | — | — | |||||||||||||||||
Total indefinite-lived intangible assets | 60,895 | — | 60,895 | 60,199 | — | 60,199 | |||||||||||||||||
Total | $ | 263,925 | $ | (116,672 | ) | $ | 147,253 | $ | 262,371 | $ | (93,452 | ) | $ | 168,919 | |||||||||
The additions to customer relationships and technology were related to the acquisition of SimpleTax as described in “Note 3: Business Combinations.”
Amortization expense was as follows (in thousands):
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
Statement of comprehensive income line item: | |||||||||||||||
Services cost of revenue | $ | 1,911 | $ | 1,875 | $ | 5,636 | $ | 5,641 | |||||||
Amortization of intangible assets | 5,349 | 6,118 | 17,585 | 17,463 | |||||||||||
Total | $ | 7,260 | $ | 7,993 | $ | 23,221 | $ | 23,104 | |||||||
Expected amortization of definite-lived intangible assets held as of September 30, 2015 is presented in the table below (in thousands):
2015 | 2016 | 2017 | 2018 | 2019 | Thereafter | Total | |||||||||||||||||||||
Services cost of revenue | $ | 1,910 | $ | 810 | $ | 189 | $ | 94 | $ | — | $ | — | $ | 3,003 | |||||||||||||
Amortization of intangible assets | 4,316 | 17,247 | 17,197 | 17,012 | 16,879 | 10,704 | 83,355 | ||||||||||||||||||||
Total | $ | 6,226 | $ | 18,057 | $ | 17,386 | $ | 17,106 | $ | 16,879 | $ | 10,704 | $ | 86,358 | |||||||||||||
- 9 -
The weighted average amortization periods for definite-lived intangible assets are as follows: 53 months for customer relationships, 14 months for technology, 104 months for content, and 61 months for total definite-lived intangible assets.
Note 5: Fair Value Measurements
The fair value hierarchy of the Company’s assets and liabilities carried at fair value and measured on a recurring basis was as follows (in thousands):
Fair value measurements at the reporting date using | |||||||||||||||
September 30, 2015 | 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 | $ | 3,000 | $ | — | $ | 3,000 | $ | — | |||||||
Money market and other funds | 4,285 | — | 4,285 | — | |||||||||||
Commercial paper | 18,398 | — | 18,398 | — | |||||||||||
Time deposits | 249 | — | 249 | — | |||||||||||
Total cash equivalents | 25,932 | — | 25,932 | — | |||||||||||
Available-for-sale investments: | |||||||||||||||
Debt securities: | |||||||||||||||
U.S. government securities | 97,098 | — | 97,098 | — | |||||||||||
Commercial paper | 13,694 | — | 13,694 | — | |||||||||||
Time deposits | 19,734 | — | 19,734 | — | |||||||||||
Taxable municipal bonds | 101,857 | — | 101,857 | — | |||||||||||
Total debt securities | 232,383 | — | 232,383 | — | |||||||||||
Equity securities | 322 | 322 | — | — | |||||||||||
Total available-for-sale investments | 232,705 | 322 | 232,383 | — | |||||||||||
Total assets at fair value | $ | 258,637 | $ | 322 | $ | 258,315 | $ | — | |||||||
Contingent consideration liability | $ | 3,052 | $ | — | $ | — | $ | 3,052 | |||||||
Total liabilities at fair value | $ | 3,052 | $ | — | $ | — | $ | 3,052 | |||||||
- 10 -
Fair value measurements at the reporting date using | |||||||||||||||
December 31, 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 | $ | 8,490 | $ | — | $ | 8,490 | $ | — | |||||||
Time deposits | 1,242 | — | 1,242 | — | |||||||||||
Taxable municipal bonds | 4,754 | — | 4,754 | — | |||||||||||
Total cash equivalents | 14,486 | — | 14,486 | — | |||||||||||
Available-for-sale investments: | |||||||||||||||
Debt securities: | |||||||||||||||
U.S. government securities | 100,818 | — | 100,818 | — | |||||||||||
International government securities | 6,560 | — | 6,560 | — | |||||||||||
Commercial paper | 24,589 | — | 24,589 | — | |||||||||||
Time deposits | 30,759 | — | 30,759 | — | |||||||||||
Corporate bonds | 1,528 | — | 1,528 | — | |||||||||||
Taxable municipal bonds | 87,366 | — | 87,366 | — | |||||||||||
Total debt securities | 251,620 | — | 251,620 | — | |||||||||||
Equity securities | 3,234 | 3,234 | — | — | |||||||||||
Total available-for-sale investments | 254,854 | 3,234 | 251,620 | — | |||||||||||
Total assets at fair value | $ | 269,340 | $ | 3,234 | $ | 266,106 | $ | — | |||||||
The Company also had financial instruments that were not measured at fair value. See “Note 6: Debt” for details.
A reconciliation of changes in Level 3 items measured at fair value on a recurring basis was as follows (in thousands):
September 30, 2015 | |||
Contingent consideration liability: | |||
Beginning balance | $ | — | |
Initial estimate upon acquisition | 3,274 | ||
Foreign currency translation adjustment | (222 | ) | |
Ending balance | $ | 3,052 | |
The contingent consideration liability is related to the Company's acquisition of SimpleTax (see “Note 3: Business Combinations”), and the related payments are expected to occur annually beginning in 2017 and continuing through 2019. As of September 30, 2015, the Company could be required to pay up to an undiscounted amount of $3.4 million. The Company has determined the fair value of the contingent consideration liability based on a probability-weighted discounted cash flow analysis, which includes assumptions related to estimating revenues, the probability of payment (100%), and the discount rate (9%). A decrease in estimated revenues would decrease the fair value of the contingent consideration liability, while a decrease in the discount rate would increase the fair value of the contingent consideration liability. As of September 30, 2015, the Company recorded the entire contingent consideration liability in “Other long-term liabilities” on the consolidated balance sheets.
- 11 -
The cost and fair value of available-for-sale investments were as follows (in thousands):
Amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | ||||||||||||
Balance at September 30, 2015 | |||||||||||||||
Debt securities | $ | 232,330 | $ | 67 | $ | (14 | ) | $ | 232,383 | ||||||
Equity securities | 296 | 26 | — | 322 | |||||||||||
Total | $ | 232,626 | $ | 93 | $ | (14 | ) | $ | 232,705 | ||||||
Balance at December 31, 2014 | |||||||||||||||
Debt securities | $ | 251,673 | $ | 16 | $ | (69 | ) | $ | 251,620 | ||||||
Equity securities | 4,312 | — | (1,078 | ) | 3,234 | ||||||||||
Total | $ | 255,985 | $ | 16 | $ | (1,147 | ) | $ | 254,854 | ||||||
The contractual maturities of the debt securities classified as available-for-sale at September 30, 2015 and December 31, 2014 were less than one year.
The Company's equity securities consist of a single holding in a publicly-traded company. During the nine months ended September 30, 2015, the Company recorded a $1.0 million other-than-temporary impairment loss on its equity securities due to the length of time and extent to which the fair value had been less than cost. The impairment loss was recognized in “Other loss, net” on the consolidated statements of comprehensive income. During the three months ended December 31, 2014, the Company's equity securities were in an unrealized loss position for the first time, and, at that time, the Company had considered such position to be temporary.
Note 6: Debt
The Company’s debt consisted of the following (in thousands):
September 30, 2015 | December 31, 2014 | ||||||||||||||||||||||
Principal amount | Unamortized discount | Net carrying value | Principal amount | Unamortized discount | Net carrying value | ||||||||||||||||||
Monoprice 2013 credit facility | $ | 30,000 | $ | — | $ | 30,000 | $ | 42,000 | $ | (191 | ) | $ | 41,809 | ||||||||||
TaxACT 2013 credit facility | — | — | — | 51,940 | — | 51,940 | |||||||||||||||||
Convertible Senior Notes | 201,250 | (13,200 | ) | 188,050 | 201,250 | (16,073 | ) | 185,177 | |||||||||||||||
Total debt | $ | 231,250 | $ | (13,200 | ) | $ | 218,050 | $ | 295,190 | $ | (16,264 | ) | $ | 278,926 | |||||||||
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, until repaid in full in 2015 as discussed below, also consisted of a $40.0 million term loan. 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 initially borrowed $50.0 million under the credit facility, from both the revolving credit loan and the term loan. Monoprice had net repayment activity of $12.0 million and $6.0 million during the nine months ended September 30, 2015 and 2014, respectively. 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). In accordance with this provision, Monoprice repaid the outstanding amount under the term loan in full in 2015, which was included in the net repayment activity for 2015 and resulted in the write-down of the remaining unamortized discount and debt issuance costs related to the term loan. Amounts remained outstanding under the revolving credit loan, which continues to be available to Monoprice through its final maturity date. 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
- 12 -
agreement. As of September 30, 2015, Monoprice was in compliance with all of the financial and operating covenants. As of September 30, 2015, 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. The 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 $80.0 million on August 30, 2015 and will reduce to $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.
TaxACT initially borrowed approximately $71.4 million under the 2013 credit facility. TaxACT had net repayment activity of $51.9 million and $52.0 million during the nine months ended September 30, 2015 and 2014, respectively. 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. In accordance with this provision, TaxACT repaid the outstanding amount under the credit facility in full in 2015, which was included in the net repayment activity for 2015. The credit facility continues to be available to TaxACT through its final maturity date. 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, 2015, the Company was in compliance with all of the financial and operating covenants.
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, 2015, the Notes were not convertible. |
• | During the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of the Notes for each trading day of the measurement period was less than 98% of the product of the last reported sales price of the Company’s common stock and the conversion rate on each trading day. |
• | If the Company calls any or all of the Notes for redemption. |
• | Upon the occurrence of specified corporate events, including a merger or a sale of all or substantially all of the Company’s assets. |
The convertibility of the Notes is determined at the end of each reporting period. If the Notes are determined to be convertible, they remain convertible until the end of the subsequent quarter and are classified in “Current liabilities” on the balance sheet; otherwise, they are classified in “Long-term liabilities.” Depending upon the price of the Company’s common stock or the trading price of the Notes within the reporting period, pursuant to the first two criteria listed above, the Notes could be convertible during one reporting period but not convertible during a comparable reporting period.
- 13 -
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 related to the Notes (in thousands):
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
Contractual interest expense (Cash) | $ | 2,138 | $ | 2,138 | $ | 6,415 | $ | 6,415 | |||||||
Amortization of debt issuance costs (Non-cash) | 249 | 232 | 735 | 684 | |||||||||||
Accretion of debt discount (Non-cash) | 975 | 907 | 2,873 | 2,671 | |||||||||||
Total interest expense | $ | 3,362 | $ | 3,277 | $ | 10,023 | $ | 9,770 | |||||||
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, 2015 was $192.3 million, based on the last quoted active trading price, a Level 1 fair value measurement, as of that date.
Note 7: Commitments and Contingencies
Except for the additions related to the contingent consideration liability for the SimpleTax acquisition as disclosed in “Note 3: Business Combinations” and the operating lease for the E-Commerce Kentucky warehouse, as well as the debt
- 14 -
repayments as disclosed in “Note 6: Debt,” 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 8: Commitments and Contingencies” in Part II Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
Litigation: From time to time, the Company is subject to various legal proceedings or claims that arise in the ordinary course of business. The Company accrues a liability when management believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Following is a brief description of the more significant legal proceedings. Although the Company believes that resolving such claims, individually or in aggregate, will not have a material adverse impact on its financial statements, these matters are subject to inherent uncertainties.
On March 5, 2015, Remigius Shatas filed a shareholder derivative action against Andrew Snyder, a director of the Company, certain companies affiliated with Mr. Snyder, as well as nominal defendant Blucora, in the Superior Court of the State of Washington in and for King County. Although the Company is a nominal defendant, the plaintiff purports to bring the action on behalf of the Company and thus does not seek monetary damages from the Company. Instead, the plaintiff alleges improper use of inside information in certain sales of the Company's common stock and seeks to recover from Andrew Snyder and those companies affiliated with Mr. Snyder profits resulting from those allegedly improper sales. On May 15, 2015, the court granted the Company's motion to dismiss the Complaint based on the plaintiffs’ failure to file this matter in the proper court. Subsequently, the plaintiff moved for reconsideration of the Superior Court's decision to grant the motion to dismiss, and on June 5, 2015, that motion for reconsideration was denied. On June 30, 2015, the plaintiff filed a Notice of Appeal with the Superior Court, indicating plaintiff's intention to appeal to the Washington Court of Appeals, Division I. On September 14, 2015, the plaintiff filed a motion with the Washington Court of Appeals to add an additional plaintiff, which the court subsequently denied on October 19, 2015. Plaintiff filed its appellant brief on September 25, 2015, and the Company filed its response on October 26, 2015, as well as a Motion on the Merits to Affirm on the grounds that the plaintiff lacked standing at all points relevant to the lawsuit. The Company has entered into indemnification agreements in the ordinary course of business with its officers and directors and may be obligated to advance payment of legal fees and costs incurred by the defendants pursuant to the Company’s obligations under these indemnification agreements and applicable Delaware law.
Note 8: Stockholders’ Equity
Stock-based compensation: The Company included the following amounts for stock-based compensation expense, which related to stock options, restricted stock units (“RSUs”), and the Company’s employee stock purchase plan (“ESPP”), in the consolidated statements of comprehensive income (in thousands):
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
Cost of revenues | $ | 48 | $ | 101 | $ | 155 | $ | 373 | |||||||
Engineering and technology | 509 | 568 | 1,315 | 1,312 | |||||||||||
Sales and marketing | 457 | 74 | 1,405 | 1,715 | |||||||||||
General and administrative | 2,296 | 1,865 | 6,482 | 5,574 | |||||||||||
Total | $ | 3,310 | $ | 2,608 | $ | 9,357 | $ | 8,974 | |||||||
Excluded and capitalized as part of internal-use software | $ | 7 | $ | 26 | $ | 68 | $ | 80 | |||||||
In May 2012, the Company granted 190,000 stock options to certain employees who perform acquisition-related services. The vesting of such options were predicated on completing “qualified acquisitions” under the terms of the options. The completion of the HSW acquisition on May 30, 2014 constituted a qualified acquisition under such terms, resulting in a charge of $0.3 million to stock-based compensation expense (reflected in “General and administrative” expense) in the nine months ended September 30, 2014.
- 15 -
Total net shares issued for stock options exercised, RSUs vested, and shares purchased pursuant to the ESPP were as follows (in thousands):
Three months ended September 30, | Nine months ended September 30, | ||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||
Stock options exercised | 25 | 74 | 245 | 214 | |||||||
RSUs vested | 40 | 79 | 209 | 284 | |||||||
Shares purchased pursuant to ESPP | 51 | 49 | 103 | 85 | |||||||
Total | 116 | 202 | 557 | 583 | |||||||
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, 2015, the Company purchased 0.5 million shares in open-market transactions at a total cost of approximately $7.0 million and an average price of $14.46 per share, exclusive of purchase and administrative costs. 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, 2015, the Company may repurchase an additional $29.4 million, which takes into consideration share repurchases during 2013 and 2014 of $48.6 million, of its common stock under the repurchase program.
Note 9: Segment Information
The Company has three reportable segments. The Search and Content segment is the InfoSpace business, 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):
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
Revenues: | |||||||||||||||
Search and Content | $ | 43,100 | $ | 74,416 | $ | 153,976 | $ | 260,999 | |||||||
Tax Preparation | 2,875 | 2,469 | 114,843 | 101,200 | |||||||||||
E-Commerce | 38,806 | 37,970 | 109,764 | 110,408 | |||||||||||
Total revenues | 84,781 | 114,855 | 378,583 | 472,607 | |||||||||||
Operating income (loss): | |||||||||||||||
Search and Content | 4,533 | 12,709 | 19,745 | 45,971 | |||||||||||
Tax Preparation | (2,542 | ) | (1,859 | ) | 61,493 | 52,754 | |||||||||
E-Commerce | 2,188 | 3,336 | 7,374 | 9,192 | |||||||||||
Corporate-level activity | (17,841 | ) | (15,510 | ) | (51,391 | ) | (46,851 | ) | |||||||
Total operating income (loss) | (13,662 | ) | (1,324 | ) | 37,221 | 61,066 | |||||||||
Other loss, net | (3,275 | ) | (3,208 | ) | (11,578 | ) | (11,001 | ) | |||||||
Income tax benefit (expense) | 6,326 | 2,294 | (8,903 | ) | (17,579 | ) | |||||||||
Net income (loss) | $ | (10,611 | ) | $ | (2,238 | ) | $ | 16,740 | $ | 32,486 | |||||
- 16 -
The E-Commerce segment sells a variety of products; however, due to product category evolution, a consistent taxonomy is not available, thus disclosure of revenues by major product category is currently impracticable.
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, 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, | ||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||
Weighted average common shares outstanding, basic | 40,950 | 41,034 | 40,952 | 41,589 | |||||||
Dilutive potential common shares | — | — | 959 | 1,714 | |||||||
Weighted average common shares outstanding, diluted | 40,950 | 41,034 | 41,911 | 43,303 | |||||||
Shares excluded | 6,195 | 5,302 | 2,950 | 940 | |||||||
Shares excluded primarily related to shares excluded due to the antidilutive effect of a net loss (for the three months ended September 30, 2015 and 2014), 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 (for 2014).
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, 2015 and 2014.
Note 11: Subsequent Events
Acquisition: On October 14, 2015, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) to acquire 100% of the outstanding capital stock of HDV Holdings, Inc., which is the holding company for the group of companies that comprise the HD Vest Financial Services® business (“HD Vest”). HD Vest provides wealth management and advisory solutions specifically for tax professionals and is expected to be synergistic with TaxACT as a result of cross-selling opportunities and an expanded addressable market for both HD Vest and TaxACT. In connection with the acquisition, certain members of HD Vest management will roll over a portion of the proceeds they would have otherwise received at the closing into shares of the acquisition subsidiary through which the Company intends to consummate the purchase of HD Vest. A portion of those shares will be sold to the Company in exchange for a promissory note. After giving effect to the purchase of the rollover shares for the promissory note, it is expected that the Company will indirectly own approximately 97% of HDV Holdings, Inc., with the remaining 3% non-controlling ownership interest held collectively by the rollover management members and subject to put and call arrangements exercisable beginning in 2019.
The total consideration payable is $580.0 million in cash, subject to certain adjustments for working capital, cash retained by HD Vest, and the non-controlling ownership interest retained by certain HD Vest management members. Of the total consideration payable, the $5.8 million promissory note will be paid over a three-year period, with 50% paid in year one, 40% paid in year two, and 10% paid in year three. The Company also agreed to pay additional consideration of up to $20.0 million that is contingent upon HD Vest achieving certain Adjusted EBITDA targets for 2015. The purchase price is expected to be funded by a combination of cash on hand and committed credit facilities.
In connection with the Purchase Agreement, the Company entered into a debt financing commitment letter with a financial institution, under which the financial institution has committed to arrange and provide a $400.0 million first lien term loan facility and a $25.0 million revolving credit facility. Interest will be payable quarterly.
- 17 -
The acquisition, which is expected to close in late 2015 or early 2016, is subject to certain closing conditions, including regulatory conditions, retention of a certain number of financial advisors and a certain level of assets under administration or management, retention of the HD Vest Chief Executive Officer or certain other management members, the absence of any material adverse effect, and other customary closing conditions. Either party may terminate the Purchase Agreement upon an uncured breach, in certain circumstances, or if the acquisition has not closed by March 7, 2016. In addition, the seller may terminate the Purchase Agreement if the Company fails to close within three business days following the Company's receipt of notice from the seller of the satisfaction or waiver of all closing conditions, in which case the Company would be required to pay the seller a termination fee of $40.0 million (if the seller terminates the Purchase Agreement in 2015) or $50.0 million (if the seller terminates the Purchase Agreement in 2016).
Through the nine months ended September 30, 2015, the Company incurred transaction costs of $1.3 million. The Company expects to incur up to an additional $9.6 million in transaction costs and $13.4 million in debt issuance costs on the closing date.
Business divestitures and chief executive officer departure: On October 14, 2015, the Company announced plans to explore the divestitures of the Search and Content and E-Commerce segments and the departure of its chief executive officer once a permanent successor has been identified. The Company expects that these divestitures will be substantially completed by June 30, 2016. The Company expects to incur separation costs of approximately $1.6 million pursuant to the chief executive officer's existing employment agreement and employee-related business exit costs of approximately $3.3 million, with the majority of these combined costs to be recorded in the fourth quarter of 2015 and the first quarter of 2016.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. The statements in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements generally are identified by the words "believe," "project," "expect," "anticipate," "estimate," "intend," "plan," "may," "should," "will," "would," and similar expressions. These forward-looking statements include, but are not limited to: statements regarding projections of our future financial performance; trends in our businesses; our future business plans and growth strategy, including our 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, and prospects to be materially different from those expressed or implied by such forward-looking statements. These risks, uncertainties, and other factors include, among others, those identified under Part II Item 1A, “Risk Factors,” and elsewhere in this report. You should not rely on forward-looking statements included herein, which speak only as of the date of this Quarterly Report on Form 10-Q or the date specified herein. We do not undertake any obligation to update publicly any forward-looking statement to reflect new information, events, or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events.
Overview
Blucora (the “Company”, “Blucora”, or “we”) operates a portfolio of 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 and small businesses, tax preparation software for individuals and professional tax preparers, and ancillary services. The E-Commerce business consists of the operations of Monoprice and sells self-branded electronics and accessories to both consumers and businesses.
Strategic Transformation
On October 14, 2015, we announced our plans for a strategic transformation of the Company to focus on the financial services and technology market. This transformation consists of plans to acquire the HD Vest Financial Services® business (“HD Vest”) and to divest of our Search and Content and E-Commerce segments. The transformation will result in fewer support requirements and, therefore, reduced corporate operating expenses. We also expect to shift our capital allocation priorities to pay down debt upon divesting our Search and Content and E-Commerce segments and to eventually return capital
- 18 -
to shareholders in the form of share repurchases and/or dividends, with a goal to begin returning that capital by early 2017. The elements of our strategic transformation are described in more detail below.
Acquisition: On October 14, 2015, we entered into an agreement to acquire 100% of the outstanding capital stock of the holding company for HD Vest. HD Vest provides wealth management and advisory solutions specifically for tax professionals and is expected to be synergistic with TaxACT as a result of cross-selling opportunities and an expanded addressable market for both HD Vest and TaxACT. In connection with the acquisition, certain members of HD Vest management will roll over a portion of the proceeds they would have otherwise received at the closing into shares of the acquisition subsidiary through which we intend to consummate the purchase of HD Vest. A portion of those shares will be sold to us in exchange for a promissory note. After giving effect to the purchase of the rollover shares for the promissory note, we expect to indirectly own approximately 97% of the holding company for HD Vest, with the remaining 3% non-controlling ownership interest held collectively by the rollover management members and subject to put and call arrangements exercisable beginning in 2019.
We will pay $580.0 million in cash, subject to certain adjustments for working capital, cash retained by HD Vest, and the non-controlling ownership interest retained by certain HD Vest management members, of which $5.8 million will be paid pursuant to the promissory note over a three-year period, with 50% paid in year one, 40% paid in year two, and 10% paid in year three. We also agreed to pay additional consideration of up to $20.0 million that is contingent upon HD Vest achieving certain Adjusted EBITDA targets for 2015. The purchase price is expected to be funded by a combination of cash on hand and committed credit facilities.
In connection with the acquisition, we entered into a debt financing commitment letter with a financial institution, under which the financial institution has committed to arrange and provide a $400.0 million first lien term loan facility and a $25.0 million revolving credit facility. Interest will be payable quarterly.
The acquisition, which is expected to close in late 2015 or early 2016, is subject to certain closing conditions. If we fail to close within three business days following our receipt of notice from the seller of the satisfaction or waiver of all closing conditions, the seller may terminate the agreement, and we would be required to pay the seller a termination fee of $40.0 million (if the seller terminates the agreement in 2015) or $50.0 million (if the seller terminates the agreement in 2016).
Through the nine months ended September 30, 2015, we incurred transaction costs of $1.3 million. We expect to incur up to an additional $9.6 million in transaction costs and $13.4 million in debt issuance costs on the closing date.
For a discussion of the risks associated with this pending acquisition, see the section in our Risk Factors (Part II Item 1A of this quarterly report) under the heading “Risks Related to our Pending Transaction with HD Vest.”
Business divestitures and chief executive officer departure: On October 14, 2015, we announced plans to explore the divestitures of the Search and Content and E-Commerce segments and the departure of our chief executive officer once a permanent successor has been identified. We expect that these divestitures will be substantially completed by June 30, 2016. We expect to incur separation costs of approximately $1.6 million pursuant to the chief executive officer's existing employment agreement and employee-related business exit costs of approximately $3.3 million, with the majority of these combined costs to be recorded in the fourth quarter of 2015 and the first quarter of 2016.
For a discussion of the risks associated with this pending acquisition, see the section in our Risk Factors (Part II Item 1A of this quarterly report) under the heading “Risks Related to our Proposed Divestitures of our Search and Content and E-Commerce Businesses.”
Our Businesses
Search and Content
Our Search and Content segment, InfoSpace, provides search services to users of our owned and operated and distribution partners' web properties, as well as online content. These search services generally involve the generation and display of a set of hyperlinks to websites deemed relevant to search queries entered by users, predominantly from desktop and laptop computers. In addition to these algorithmic search results, paid listings generally are displayed in response to search queries. Search services provided through our owned and operated web properties include services through websites such as Dogpile.com, WebCrawler.com, and HowStuffWorks.com. Search services provided to our distribution partners include services to a network of approximately 100 distribution partners through the web properties of those distribution partners, which are generally private-labeled and customized to address the unique requirements of each distribution partner.
- 19 -
The Search and Content segment's revenue primarily consists of advertising revenue generated through end-users clicking on paid listings included in the search results display, as well as from advertisements appearing on our HowStuffWorks.com website. The paid listings, as well as algorithmic search results, primarily are supplied by Google, Yahoo!, and Bing, whom we refer to as “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' web properties, we pay a significant share of our revenue to the distribution partner. Revenue is recognized in the period in which such clicks on paid listings occur and is based on the amounts earned by and ultimately remitted to us by our Search Customers.
We derive a significant portion of our revenue from Google, and we expect this concentration to continue while we own this business. For the three and nine months ended September 30, 2015, Search and Content revenue from Google accounted for approximately 67% and 70%, respectively, of our Search and Content segment revenue and 34% and 29%, respectively, of our total Company revenue. For further discussion of this concentration risk, see the paragraph in our Risk Factors (Part II Item 1A of this quarterly report) under the heading “Most of our search services revenue is attributable to Google, and the loss or termination of our relationship, or a payment dispute with, Google or any other significant Search Customer would materially harm our business and financial results.”
Tax Preparation
Our TaxACT business consists of an online tax preparation service for individuals and small businesses, tax preparation software for individuals, small businesses, 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 professional tax preparer 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 warehouses in Rancho Cucamonga, California and Hebron, Kentucky, the latter of which commenced operations in September 2015. We also sell our products through reseller and marketplace agreements. Monoprice has built a well-respected brand by delivering products with 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. 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.
Acquisitions
On July 2, 2015, TaxACT acquired all of the equity of SimpleTax for C$2.4 million (with C$ indicating Canadian dollars and amounting to approximately $1.9 million based on the acquisition-date exchange rate) in cash and additional consideration of up to C$4.6 million ($3.7 million) that is contingent upon product availability and revenue performance over a three-year period. SimpleTax is included in the Tax Preparation segment and our financial results beginning on July 2, 2015, the acquisition date.
- 20 -
On May 30, 2014, InfoSpace acquired HSW for $44.9 million in cash. HSW is included in the Search and Content segment and our financial results beginning on May 30, 2014, the acquisition date.
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.
RESULTS OF OPERATIONS
Summary
(In thousands, except percentages) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||
2015 | 2014 | Percentage Change | 2015 | 2014 | Percentage Change | ||||||||||||||||
Services revenue | $ | 45,975 | $ | 76,885 | (40 | )% | $ | 268,819 | $ | 362,199 | (26 | )% | |||||||||
Product revenue, net | 38,806 | 37,970 | 2 | % | 109,764 | 110,408 | (1 | )% | |||||||||||||
Total revenues | $ | 84,781 | $ | 114,855 | (26 | )% | $ | 378,583 | $ | 472,607 | (20 | )% | |||||||||
Operating income (loss) | $ | (13,662 | ) | $ | (1,324 | ) | 932 | % | $ | 37,221 | $ | 61,066 | (39 | )% | |||||||
Three months ended September 30, 2015 compared with three months ended September 30, 2014
Total revenues decreased approximately $30.1 million due to a decrease of $31.3 million in revenue related to our Search and Content business, offset by increases of $0.8 million in product revenue from our E-Commerce business and $0.4 million in revenue related to our Tax Preparation business.
Operating loss increased approximately $12.3 million, consisting of the $30.1 million decrease in revenue and offset by a $17.7 million decrease in operating expenses. Key changes in operating expenses were:
• | $23.1 million decrease in the Search and Content segment’s operating expenses, primarily due to lower revenue share owed to our distribution partners resulting from the decrease in distribution revenue and decreased content costs, as well as lower spending on online marketing. |
• | $1.1 million increase in the Tax Preparation segment’s operating expenses, primarily due to higher personnel expenses resulting from increased headcount. |
• | $2.0 million increase in the E-Commerce segment's operating expenses, primarily due to higher E-Commerce product cost of revenue, resulting from the increase in product revenue and a shift in the mix of sales of certain products, offset by lower advertising and marketing expenses. |
• | $2.3 million increase in corporate-level expense activity, primarily due to higher professional services fees mainly from acquisition-related activity, higher personnel expenses resulting from increased headcount to support operations, and higher stock-based compensation mainly related to a net increase in stock award grants, offset by lower amortization expense associated with concluding the useful life of certain Monoprice acquisition-related intangible assets during 2015. |
Segment results are discussed in the next section.
Nine months ended September 30, 2015 compared with nine months ended September 30, 2014
Total revenues decreased approximately $94.0 million due to decreases of $107.0 million in revenue related to our Search and Content business and $0.6 million in product revenue from our E-Commerce business, offset by an increase of $13.6 million in revenue related to our Tax Preparation business.
- 21 -
Operating income decreased approximately $23.8 million, consisting of the $94.0 million decrease in revenue and offset by a $70.2 million decrease in operating expenses. Key changes in operating expenses were:
• | $80.8 million decrease in the Search and Content segment’s operating expenses, primarily due to lower revenue share owed to our distribution partners resulting from the decrease in distribution revenue and decreased content costs, offset by higher personnel expenses primarily resulting from the timing of the HSW acquisition. |
• | $4.9 million increase in the Tax Preparation segment’s operating expenses, primarily due to higher personnel expenses resulting from increased headcount and increased spending on marketing campaigns for the current tax season. |
• | $1.2 million increase in the E-Commerce segment's operating expenses, primarily due to higher E-Commerce product cost of revenue resulting from a shift in the mix of sales of certain products, offset by lower advertising and marketing expenses and lower personnel expenses, primarily resulting from a charge in the second quarter of 2014 related to the resignation of the former President of Monoprice. |
• | $4.5 million increase in corporate-level expense activity, primarily due to higher professional services fees mainly from acquisition-related activity, higher personnel expenses resulting from increased headcount to support operations, and higher stock-based compensation due to a net increase in stock award grants, offset by stock-based compensation on the stock options that vested upon the completion of the HSW acquisition in the second quarter of 2014. |
Segment results are discussed in the next section.
SEGMENT REVENUE/OPERATING INCOME
The revenue and operating income amounts in this section are presented on a basis consistent with accounting principles generally accepted in the U.S. (“GAAP”) and include certain reconciling items attributable to each of the segments. Segment information appearing in “Note 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 analyzed these separately.
Search and Content
(In thousands, except percentages) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||
2015 | 2014 | Percentage Change | 2015 | 2014 | Percentage Change | ||||||||||||||||
Revenue | $ | 43,100 | $ | 74,416 | (42 | )% | $ | 153,976 | $ | 260,999 | (41 | )% | |||||||||
Operating income | $ | 4,533 | $ | 12,709 | (64 | )% | $ | 19,745 | $ | 45,971 | (57 | )% | |||||||||
Segment margin | 11 | % | 17 | % | 13 | % | 18 | % | |||||||||||||
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 web properties, which relies on providing search services that align with our Search Customers' preferences. In addition, revenue growth will be dependent upon investments that grow the audience for our owned and operated sites, including HowStuffWorks.com, by leveraging owned and licensed content to create unique and engaging user experiences.
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 also can be impacted by the mix of revenue generated by our distribution partners. In addition, we manage our online marketing by projecting a desired return on our marketing expenditures and attempting to market according to that projected return.
- 22 -
The following table presents our Search and Content revenue by source and as a percentage of total Search and Content revenue:
(In thousands, except percentages) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||
2015 | Percentage of Revenue | 2014 | Percentage of Revenue | 2015 | Percentage of Revenue | 2014 | Percentage of Revenue | ||||||||||||||||||||
Revenue from existing distribution partners (launched prior to the then-current year) | $ | 30,909 | 72 | % | $ | 55,830 | 75 | % | $ | 103,725 | 67 | % | $ | 204,823 | 78 | % | |||||||||||
Revenue from new distribution partners (launched during the then-current year) | 1,108 | 2 | % | 3,204 | 4 | % | 1,629 | 1 | % | 4,495 | 2 | % | |||||||||||||||
Revenue from distribution partners | 32,017 | 74 | % | 59,034 | 79 | % | 105,354 | 68 | % | 209,318 | 80 | % | |||||||||||||||
Revenue from owned and operated web properties | 11,083 | 26 | % | 15,382 | 21 | % | 48,622 | 32 | % | 51,681 | 20 | % | |||||||||||||||
Total Search and Content revenue | $ | 43,100 | $ | 74,416 | $ | 153,976 | $ | 260,999 | |||||||||||||||||||
Three months ended September 30, 2015 compared with three months ended September 30, 2014
Search and Content revenue decreased approximately $31.3 million, or 42%. Revenue from distribution partners decreased $27.0 million, or 46%, driven by decreases of $24.9 million in revenue from existing partners and $2.1 million in revenue from new partners (both defined in the table above). We generated 37% of our Search and Content revenue through our top five distribution partners in the three months ended September 30, 2015 and 2014. The web properties of our top five distribution partners for the three months ended September 30, 2015 generated 19% of our Search and Content revenue in the three months ended September 30, 2014.
The decrease in distribution revenue was driven by previously disclosed factors that impacted the sequential quarterly revenue declines in 2014 and included the loss of certain distribution partner traffic due to increased competition, difficulty in adding new distribution partners, changes in interpretation and enforcement of our Search Customers' policies and requirements, and our own compliance efforts. See further discussion of such factors in our Annual Report on Form 10-K for the year ended December 31, 2014.
Revenue generated by our owned and operated web properties (which includes HSW) decreased $4.3 million, or 28%, primarily due to lower returns on online marketing and a decrease in revenue from our legacy owned and operated web properties. The lower returns on online marketing were attributable to previously disclosed factors that have continued to cause us to experience volatility in our online marketing rate of return. See further discussion of such factors in our Annual Report on Form 10-K for the year ended December 31, 2014. Since December 31, 2014 and as previously disclosed in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2015 and June 30, 2015, our Search Customers made additional changes in online marketing requirements, which have decreased our return on online marketing. As we have adapted to these changes, we have decreased our online marketing, contributing to the year over year and sequential decreases in the related revenue. We cannot provide assurance that such revenue will return to previous levels. To the extent we experience continued volatility, we could be challenged going forward in our ability to increase marketing expenditures while maintaining our desired rate of return.
Search and Content operating income decreased approximately $8.2 million, consisting of the $31.3 million decrease in revenue and offset by a decrease of $23.1 million in operating expenses. The decrease in Search and Content segment operating expenses primarily was due to a $21.4 million, or 47%, decrease in Search and Content services cost of revenue, which was mainly driven by the decrease in revenue share owed to our distribution partners resulting from the decrease in distribution revenue, and decreased content costs. A $1.6 million decrease in spending on online marketing also contributed to the overall decrease. Personnel expenses were flat, with increased employee separation costs offset by lower headcount across various departments. Segment margin decreased primarily due to the lower return on our online marketing.
As disclosed in the “Strategic Transformation” section in Part I Item 2 of this quarterly report, we announced our plans to explore the divestiture of the Search and Content segment. Refer to that section for additional details.
- 23 -
Nine months ended September 30, 2015 compared with nine months ended September 30, 2014
Search and Content revenue decreased approximately $107.0 million, or 41%. Revenue from distribution partners decreased $104.0 million, or 50%, driven by decreases of $101.1 million in revenue from existing partners and $2.9 million in revenue from new partners (both defined in the table above). The decrease in distribution revenue was affected by the same factors described above that impacted the quarterly period and also included the removal of advertisements for our mobile search services as a result of our April 2014 agreement with Google and a technology change. See further discussion of such factors in our Annual Report on Form 10-K for the year ended December 31, 2014.
Revenue generated by our owned and operated web properties (which includes HSW) decreased $3.1 million, or 6%, primarily due to a decrease in revenue from our legacy owned and operated web properties and lower returns on online marketing, whereby the lower returns were affected by the same factors described above that impacted the quarterly period. These decreases were offset by the revenue contribution from HSW.
Search and Content operating income decreased approximately $26.2 million, consisting of the $107.0 million decrease in revenue and offset by a decrease of $80.8 million in operating expenses. The decrease in Search and Content segment operating expenses primarily was due to an $83.1 million, or 51%, decrease in Search and Content services cost of revenue, which was mainly driven by the decrease in revenue share owed to our distribution partners resulting from the decrease in distribution revenue, and decreased content costs. This decrease was offset by a $2.1 million increase in personnel expenses primarily due to the timing of the HSW acquisition and a $0.5 million increase in spending on online marketing. Segment margin decreased primarily due to increased personnel expenses and flat non-personnel operating expenses on declining revenues, as well as the lower return on our online marketing.
Tax Preparation
(In thousands, except percentages) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||
2015 | 2014 | Percentage Change | 2015 | 2014 | Percentage Change | ||||||||||||||||
Revenue | $ | 2,875 | $ | 2,469 | 16 | % | $ | 114,843 | $ | 101,200 | 13 | % | |||||||||
Operating income (loss) | $ | (2,542 | ) | $ | (1,859 | ) | 37 | % | $ | 61,493 | $ | 52,754 | 17 | % | |||||||
Segment margin | (88 | )% | (75 | )% | 54 | % | 52 | % | |||||||||||||
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 or Ultimate offerings 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 and small business 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 largely is driven by our ability to acquire new users of the service, retain existing users, and upsell users to paid offerings 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 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, 2015 compared with three months ended September 30, 2014
Tax Preparation revenue increased primarily due to growth in online consumer users and increased sales of ancillary services.
Tax Preparation operating loss increased approximately $0.7 million, consisting primarily of an increase of $1.1 million in operating expenses. The increase in Tax Preparation segment operating expenses primarily was due to an increase in personnel expenses resulting from higher headcount supporting all functions.
Nine months ended September 30, 2015 compared with nine months ended September 30, 2014
Tax Preparation revenue increased approximately $13.6 million primarily due to growth in revenue earned from online consumer users, increased sales of ancillary services, mostly related to bank services, and increased sales of our professional
- 24 -
tax preparer software. Online consumer revenue grew, despite a slight decrease in e-files, due to growth in average revenue per user, primarily resulting from pricing actions and their related timing when compared to the prior year. Revenue derived from professional tax preparers also contributed to the increase, with an increase in the number of professional preparer units sold and growth in average revenue per user.
Tax Preparation operating income increased approximately $8.7 million, consisting of the $13.6 million increase in revenue and offset by an increase of $4.9 million in operating expenses. The increase in Tax Preparation segment operating expenses primarily was due to an increase in personnel expenses resulting from higher headcount supporting all functions and increased spending on marketing campaigns for the current tax season.
E-Commerce
(In thousands, except percentages) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||
2015 | 2014 | Percentage Change | 2015 | 2014 | Percentage Change | ||||||||||||||||
Revenue | $ | 38,806 | $ | 37,970 | 2 | % | $ | 109,764 | $ | 110,408 | (1 | )% | |||||||||
Operating income | $ | 2,188 | $ | 3,336 | (34 | )% | $ | 7,374 | $ | 9,192 | (20 | )% | |||||||||
Segment margin | 6 | % | 9 | % | 7 | % | 8 | % | |||||||||||||
E-Commerce revenue growth largely is driven by our ability to increase the number of Monoprice.com orders and extend our sales channels. Order numbers represent the number of orders fulfilled directly from our warehouses and do not include the number of orders fulfilled by our resellers. Order numbers changed as follows:
Three months ended September 30, 2015 | Nine months ended September 30, 2015 | ||||
Order numbers | (5 | )% | (7 | )% | |
Three months ended September 30, 2015 compared with three months ended September 30, 2014
E-Commerce revenue increased approximately $0.8 million, primarily due to an increase in average order value offset by a decrease in the number of orders and increased promotional discounts offered in the current period. The increase in average order value was driven by a shift in the mix of sales with a greater percentage of sales through our marketplace partners, which have higher average order values in the current quarter due to the mix of products sold through such partners.
E-Commerce operating income decreased approximately $1.1 million, consisting of the $0.8 million increase in revenue and offset by an increase of $2.0 million in operating expenses. The increase in E-Commerce segment operating expenses primarily was due to an increase in E-Commerce product cost of revenue, given the increase in product revenue as well as a shift in the mix of sales of certain products with higher costs, offset by a decrease in advertising and marketing expenses due to a short-term advertising consulting arrangement that concluded in 2014 and marketing subsidies received from certain marketplace partners in 2015.
As disclosed in the “Strategic Transformation” section in Part I Item 2 of this quarterly report, we announced our plans to explore the divestiture of the E-Commerce segment. Refer to that section for additional details.
Nine months ended September 30, 2015 compared with nine months ended September 30, 2014
E-Commerce revenue decreased approximately $0.6 million, primarily due to a decrease in the number of orders and increased promotional discounts offered in the current period, offset by an increase in average order value. The order number decrease was affected by the impacts of inventory challenges experienced in the first quarter of 2015 due to port slowdowns. The increase in average order value was driven by a shift in the mix of sales with a greater percentage of sales through our marketplace partners, which have higher average order values in the current period due to the mix of products sold through such partners, as well as an increase in sales through Amazon, our primary reseller. The increase in revenue through Amazon also compressed total order numbers and contributed to the order number decrease.
E-Commerce operating income decreased approximately $1.8 million, consisting of the $0.6 million decrease in revenue and an increase of $1.2 million in operating expenses. The increase in E-Commerce segment operating expenses primarily was due to an increase in E-Commerce product cost of revenue, mainly related to a shift in the mix of sales of certain products with higher costs, offset by decreases in advertising and marketing expenses and personnel expenses. Advertising and marketing
- 25 -
expenses decreased primarily due to a short-term advertising consulting arrangement that concluded in 2014 and marketing subsidies received from certain marketplace partners in 2015. The decrease in personnel expenses was primarily due to a $1.2 million charge in the second quarter of 2014 related to the resignation of the former President of Monoprice. Refer to our Quarterly Report on Form 10-Q for the period ended June 30, 2014 for additional information regarding the arrangement with the former President of Monoprice.
Corporate-Level Activity
(In thousands) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||
2015 | 2014 | Change | 2015 | 2014 | Change | ||||||||||||||||||
Operating expenses | $ | 5,757 | $ | 3,524 | $ | 2,233 | $ | 14,328 | $ | 10,579 | $ | 3,749 | |||||||||||
Stock-based compensation | 3,310 | 2,608 | 702 | 9,357 | 8,974 | 383 | |||||||||||||||||
Depreciation | 1,514 | 1,385 | 129 | 4,485 | 4,194 | 291 | |||||||||||||||||
Amortization of intangible assets | 7,260 | 7,993 | (733 | ) | 23,221 | 23,104 | 117 | ||||||||||||||||
Total corporate-level activity | $ | 17,841 | $ | 15,510 | $ | 2,331 | $ | 51,391 | $ | 46,851 | $ | 4,540 | |||||||||||
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, 2015 compared with three months ended September 30, 2014
Operating expenses included in corporate-level activity increased primarily due to a $1.4 million increase in professional services fees mainly from acquisition-related activity and a $0.3 million increase in personnel expenses, resulting from higher headcount to support operations. Contributing to the increase in corporate-level expense activity, to a lesser extent, was a net decrease in capitalized internally developed software. Internally developed software expense is recorded within our segments with the related cost capitalization benefit recorded within corporate-level activity. As disclosed in the “Strategic Transformation” section in Part I Item 2 of this quarterly report, we announced our plans to reduce corporate operating expenses in connection with that transformation. Refer to that section for additional details.
Stock-based compensation increased primarily due to a net increase in stock award grants.
Depreciation was comparable to the prior period.
Amortization of intangible assets decreased primarily due to concluding the useful life of certain Monoprice acquisition-related intangible assets during 2015.
Nine months ended September 30, 2015 compared with nine months ended September 30, 2014
Operating expenses included in corporate-level activity increased primarily due to a $1.8 million increase in professional services fees mainly from acquisition-related activity and a $1.0 million increase in personnel expenses, resulting from higher headcount to support operations. Contributing to the increase in corporate-level expense activity, to a lesser extent, was a net decrease in capitalized internally developed software, similar to the quarterly period above.
Stock-based compensation increased primarily due to a net increase in stock award grants, offset by stock-based compensation on the stock options that vested upon the completion of the HSW acquisition in the second quarter of 2014.
Depreciation was comparable to the prior period.
Amortization of intangible assets was comparable to the prior period, although it was impacted by amortization expense associated with the acquisition of HSW, offset by lower amortization expense associated with concluding the useful life of certain Monoprice acquisition-related intangible assets during 2015.
- 26 -
OPERATING EXPENSES
Cost of Revenues
(In thousands, except percentages) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||
2015 | 2014 | Change | 2015 | 2014 | Change | ||||||||||||||||||
Services cost of revenue | $ | 28,492 | $ | 49,754 | $ | (21,262 | ) | $ | 94,204 | $ | 177,280 | $ | (83,076 | ) | |||||||||
Product cost of revenue | 28,523 | 25,605 | 2,918 | 77,878 | 73,771 | 4,107 | |||||||||||||||||
Total cost of revenues | $ | 57,015 | $ | 75,359 | $ | (18,344 | ) | $ | 172,082 | $ | 251,051 | $ | (78,969 | ) | |||||||||
Percentage of revenues | 67 | % | 66 | % | 45 | % | 53 | % | |||||||||||||||
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 businesses, which include revenue sharing arrangements with InfoSpace's distribution partners, usage-based content fees, royalties, and amortization of intangibles. It also consists of costs associated with the operation of the data centers that serve our Search and Content and Tax Preparation businesses, which include personnel expenses (salaries, stock-based compensation, benefits, and other employee-related costs), bandwidth costs, cloud platform subscription fees, and depreciation. Product cost of revenue consists of costs related to our E-Commerce business, which include product costs, inbound and outbound shipping and handling costs, packaging supplies, and provisions for inventory obsolescence.
Three months ended September 30, 2015 compared with three months ended September 30, 2014
Services cost of revenue decreased primarily due to decreased Search and Content services cost of revenue of $21.4 million, driven by the decrease in revenue generated from, and the resulting revenue share owed to, our distribution partners and decreased content costs.
Product cost of revenue increased primarily due to the increase in E-Commerce product revenue and a shift in the mix of sales of certain products with higher costs.
Nine months ended September 30, 2015 compared with nine months ended September 30, 2014
Services cost of revenue decreased primarily due to decreased Search and Content services cost of revenue of $83.1 million, driven by the decrease in revenue generated from, and the resulting revenue share owed to, our distribution partners and decreased content costs.
Product cost of revenue increased primarily due to a shift in the mix of sales of certain products with higher costs.
Engineering and Technology
(In thousands, except percentages) | Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||
2015 | 2014 | Change | 2015 | 2014 | Change | ||||||||||||||||||
Engineering and technology | $ | 5,418 | $ | 5,970 | $ | (552 | ) | $ | 15,803 | $ | 14,922 | $ | 881 | ||||||||||
Percentage of revenues | 6 | % | 5 | % | 4 | % | |||||||||||||||||