Most American consumers know by now that whatever the brand
label on their electronics, most of them were made in the same
network of factories in China. Shoppers at the website
Monoprice.com follow this to its logical conclusion: Why not cut
out the middlemen, and buy the gadgets straight from the Far
Monoprice launched in 2002 selling cables and switches it had
bought from Asia and offered at cut-rate prices thanks to its
simplified supply chain. Since then, it's expanded into computer
accessories and, more recently, audio and video equipment. And in
August, it came to the stock market's attention whenBlucora (
) acquired it for $180 million.
Search Engine Roots
Blucora might have seemed an unlikely buyer for Monoprice,
since the only thing the two companies had in common was the
Internet. Up until 2012, Blucora was known as the search engine
InfoSpace, a by-its-fingernails survivor of the dot-com boom and
bust that experimented with various business models before
stabilizing under the leadership of CEO William Ruckelshaus, who
took the helm in 2010.
In January 2012, however, it branched outside its core
business by buying TaxAct, a provider of cloud-based
tax-preparation software. Like Monoprice, TaxAct has carved out
its place in a highly competitive market -- dominated byIntuit (
) andH&R Block (
) -- by undercutting its rivals on price.
TaxAct has "a product offering with substantially the same
feature set as larger players in the space but at what we would
characterize as a substantially more fair price for their
filing," Ruckelshaus told the BMO Technology, Media &
Entertainment Conference in December. "The cornerstone of their
offering is free federal filing for everybody regardless of your
filing type or complexity or AGI (adjusted gross income), without
Another thing that TaxAct and Monoprice have in common is the
potential that Ruckelshaus sees in them for expansion. He
estimates that the digital do-it-yourself tax market is growing
4% to 6% a year, but the company has also been broadening its
product offerings with sites designed to help people write up
their own wills or navigate ObamaCare.
Monoprice also continues to offer a wider variety of wares,
with more than 5,000 kinds of product available at this point.
Ruckelshaus believes the customer base can be expanded given the
high satisfaction of existing customers -- some 70% of reviews
have given the site a 9 or 10 rating, he says. Jefferies analyst
Brian Fitzgerald wrote in his Dec. 31 initiation report that
Monoprice should also benefit from secular growth.
"Monoprice operates in large markets that are rapidly moving
online," he wrote. "Global consumer electronics is a $300 billion
market growing at single digits. The $37 billion online
subsegment is forecasted to grow approximately 15% annually
through 2016, according to IDC."
Business In Transition
Even so, the majority of Blucora's revenue -- around 60% -- is
still coming from its core search business. The InfoSpace unit
doesn't generate its own search results, but aggregates the
results of other search engines through sites such as Dogpile and
WebCrawler, as well as through its partners' properties and
through the distribution of toolbars. It has more than 100
partners but about 31% of search revenue comes from the top five,
led byGoogle (
Google has been the source of some concern for analysts, since
early in 2013 it changed its software distribution policy in
response to complaints about misleading toolbar downloads that
wind up taking over the browser. Blucora changed its own policies
in accord with Google's, which Fitzgerald says slowed search
revenue growth by quite a bit last year -- from 62.5% in the
third quarter of 2012 to 17.9% in Q3 2013.
Nonetheless, Blucora's third quarter handily beat
expectations, sending its stock to a 12-year high. Profit rose
20% over the year-earlier quarter to 30 cents a share, nearly
double analysts' consensus. Sales climbed 34% to $124 million,
vs. analysts' estimate of $96 million.
On the conference call to discuss results on Nov. 5, Wedbush
analyst Gil Luria asked how the company had achieved such growth
in its search revenue, given the policy changes.
Ruckelshaus pointed to the advantage of using both the
distribution-partner model and the owned-and-operated website
"You're starting to see evidence of our taking advantage of
that on the owned-and-operated side, which is really reverting
back to where the company had its origins, which is as a
consumer-facing provider of search solutions that are
differentiated in their nature," he said. "What you're seeing in
recent periods is our ability to not just bring that product to
market, but also to market it and promote it in a way that we
think is a benefit to consumers and also a benefit to us."
Nonetheless, analysts still see an overhang in the expiration
of InfoSpace's contract with Google at the end of the first
quarter. Fitzgerald points out that both Google andYahoo (
), another major InfoSpace partner, have refused to renew
contracts recently with partners who they thought were abusing
However, Barrington Research analyst Alexander Paris didn't
sound worried in his Dec. 9 research note.
"While customer concentration is indeed high, we do believe
the agreement will be renewed at similar terms," he wrote.
Analysts overall expect continued solid growth from Blucora.
They estimate that fourth-quarter sales jumped 62% over the
year-earlier quarter to $158 million, with profit rising 63% to
39 cents a share.