Blucora (I.e. Infospace): Worse Than Blinkx Plc & Babylon Ltd.

By gothamcityresearch :

GOTHAM CITY RESEARCH'S OPINIONS

1. +60% of ( BCOR )'s revenue will evaporate in coming quarters, as Google realizes it is better off without BCOR. Google ( GOOG ) and Yahoo ( YHOO ) can walk away from Blucora any time.
2. At least 50% of BCOR's traffic is derived from malware, click fraud, illicit traffic (e.g. child pornography), and otherwise suspect traffic.
3. Blucora and its partners' practices will receive scrutiny from Google, advertisers, FTC, DOJ, FBI, IRS, &/or the SEC.
4. BCOR shares are worth no more than $5.00/share, and

SUMMARY OF FACTS

1. 94.81% of Infospace.com visitors go to css.infospace.com, a known redirect virus/browser hijacker.
2. Infospace.com/Iminent.com generate clicks via cloaking, a practice forbidden per Google's Webmaster Guidelines.
3. 3 of dogpile's Top 10 search words are child pornrelated. Webcrawler aggressively purchased child porn search traffic in recent quarters.
4. Google prohibits advertising related to child pornography.
5. 80+% of webcrawler's visitors originate from outside the US, yet only ~1% of BCOR's revenues are international.
6. Ads displayed in Blucorabranded search results violate requirements set in their 2011 Amended Agreement.
7. Metacrawler is the 3,301st most visited site, yet is defunct.
8. ~10% decline in Google revenues wipes ~50% of BCOR EPS.
9. BCOR has a storied history of defrauding investors, customers, and vendors over the last 15+ years.
10. Free cash flow has gone negative over the last 9 months.
11. ~50% of recent cash flow from operations consists of increases in accrued liabilities.
12. NonGAAP reporting, not seen since 2003, is back.
13. Audit fees declined sharply, after changing auditors in '12.
14. Gotham City Research contacted Blucora on several occasions and did not hear back from the Company.

INTRODUCTION

Blucora, formerly known as Infospace, is one of the truly great historical case studies of the fraud and excesses committed during the dot com boom of the late 1990s 1 . Former Merrill Lynch analyst, Henry Blodget, privately referred to Infospace as a "piece of junk", even as he publicly remained bullish its stock. Blodget was indicted for securities fraud, and agreed to a permanent ban from the securities industry (he also paid a $2 million fine plus a $2 million disgorgement). 2

While Mr. Blodget appears to have subsequently turned around his life (as evidenced by his modestly successful media outfit, Business Insider ), it seems Blucora never learned its lessons. For example, we discovered that nearly all infospace.com traffic is malwarerelated, and that BCOR's search volumes experienced a significant boosted in recent quarters, due to a rise in illicit search traffic (specifically child pornography searches). We also captured a specific instance whereby infospace.com/imminent.com generates clicks via cloaking (the practice of presenting different content or URLs to human users and search engines). Cloaking is considered a violation of Google's Webmaster Guidelines because it provides users with different results than they expected 3 .

Professor Ben Edelman has been recording and exposing Blucora's wrongdoing since 2005

We discovered that we were not alone in our findings. Harvard Business School Professor, Benjamin Edelman, who recently exposed Blinkx plc's wrongdoing in a piece titled The Dark Side of Blinkx , had already exposed Infospace.com's wrongdoing over many years.

In January 2010, for example, Edelman exposed Blucora's role in a complex ad fraud scheme (which incidentally involved AdOn Network, a Blinkx subsidiary). At the time, Professor Edelman stated 4 : "Google doesn't need InfoSpace, and there's zero reason for this relationship to continue in light of InfoSpace's repeated failings." Blucora seemed to show some remorse, as it "discontinued the syndication of our search results to certain distribution partners who we deemed to be delivering low quality clicks." 5 BCOR took a hit to revenue, and its share price suffered as well.

Worse than Blinkx Plc, as Blucora Continues its Wrongdoing

Gotham City Research believes that Blucora did not correct its behavior, after Edelman exposed the company's wrongdoing in January 2010. If anything, we believe Blucora redoubled its efforts (search revenue has only risen since). We find that Blucora is worse than Blinkx for the following reasons:

1. 94.81% of Infospace.com visitors go to css.infospace.com, a known redirect virus/browser hijacker. Webcrawler.com, dogpile.com, and metacrawler.com seem no better.
2. Infospace.com/Iminent.com appears to drive traffic via cloaking, a practice forbidden per Google's Webmaster Guidelines. Their scheme reminds of Infospace.com/WhenU in 2010.
3. We estimate at least 50% of BCOR's traffic is derived from malware, click fraud, and illicit traffic (e.g. child pornography & pirated content). It would explain how webcrawler.com has become the 460th most "visited" website today, ahead of att.com, irs.gov, quora.com, retailmenot.com, elance.com, abcnews.go.com, and surveymonkey.com. Clicks aren't really clicks.

Blucora = Involuntary clicks + Artificial clicks + Illicit clicks

Are Blucora's Recent Search Revenue Growth and Traffic Gains Too Good to Be True?

Blucora (a.k.a. Infospace) refers to itself as an "established player in search advertising." 1 Search traffic and revenue have risen dramatically over recent years and quarters 2 :

In fact, BCOR's most popular property, webcrawler.com, has somehow become the 460th most popular website today (it was the ~7000th most popular website in the world just 2 years ago) 3 :

Reasons for grave doubts and why BCOR's performance does not pass the "sniff test"

The company's phenomenal performance makes little sense given:

1. Brand recognition for its properties is nearly nonexistent (when is the last time you heard about webcrawler.com, outside of this Gotham City Research report?). Metacrawler is defunct 4 .
2. Webcrawler.com ranks ahead of att.com, irs.gov, quora.com, retailmenot.com, elance.com, abcnews.go.com, surveymonkey.com, even as webcrawler.com is a poor quality product 5 :

1. Blucora's peers (e.g. Babylon stock fell 60%) have been negatively impacted by recent Google policy changes (Note Blucora derives 60+% of revenue from Google vs. 40% for Babylon)6 :

The Best Explanation: BCOR Uses Devious Practices to Artificially Boost Search Results

Gotham City Research believes most of Blucora's search revenue and traffic growth result from:

1. Involuntary clicks Intentionally deceive vulnerable users (e.g. the elderly), via malware, viruses.
2. Artificial clicks Boost fake/artificial traffic via click fraud (for example, hire cheap labor in India and other developing countries to click on ads, all day).
3. Illicit clicks Attract users interested in child pornography, pirated materials, & similar.

In fact, we estimate at least 50% of traffic is involuntary, artificial, and/or of otherwise suspect origin 7 :

In the next ~20 pages, we provide the facts and considerations that lead us to believe 50+% of search traffic is suspect. See Appendix A for accompanying notes to the above table.

The Underlying Blucora/Infospace Business Model

Blucora/Infospace and its distribution partners' trafficboosting schemes are complex and inherently adaptive. Underlying the intricacies, however, is a conceptually simple business model:

Consequences of Blucora and its Distribution Partners' Malfeasance

1. The artificially boosted search revenues (60+%of total revenues) will decline significantly in the near future, eventually reaching de minimis levels, as Google and advertisers realize they're better off without Blucora (see Google is Better off without Infospace/Blucora )
2. Google, advertisers, the FTC, DOJ, FBI, IRS, and/or the company itself will validate our beliefs.
3. Blucora's malicious intent is evidenced by its many years of violating rules and regulations.

The following facts support our beliefs:

1. All of Blucora's main web properties are tied to malware, viruses, & browser hijackers that attack computers. Infospace is described outright as a "fraudulent web search engine".
2. 3 of Blucora's Top 10 search words are child pornographyrelated terms, on dogpile.com. Webcrawler aggressively purchased child porn search traffic in recent quarters.
3. Over 90% of webcrawler's top search terms are generic terms.
4. 80% of webcrawler.com's visitors originate from outside North America.
5. Over 33% originate from India, Pakistan, Indonesia, Nigeria, and Bangladesh.

Pertaining to Google (see more inGoogle is Better off without Infospace/Blucora):

1. Blucora's displayed ads in search results fail to comply with Google's guidelines, as described in its 2011 amended agreement with Google.
2. Google prohibits advertising related to child pornography.
3. Even if Google/Blucora Renew their Agreement in March 2014, Google can walk away any time.

The Many Ties that Blind (seeTies that Blind: "You're only as good as the company you keep"):

1. All the searchrelated violations mentioned in this report, and elsewhere, happened under the current Chairman, CEO, CFO, and Infospace President's watch.
2. BCOR's current and past business partners include WhenU.com, Blinkx, Intelius.com, Babylon, info.com, and Iminent.com, i.e. a "who's who" of the worst malware/click fraud offenders.
3. Top five distribution partners generated approximately 25%50% of total revenues, yet the company refuses to disclose these distribution partners' identities, on the record.
4. Blucora/Iminent.com cloaking behavior we've captured resembles Blucora and WhenU.com's impropriety, as caught in 2010 by Harvard Business School Professor, Ben Edelman.

BCOR shareholders do not understand that BCOR has achieved high & steady revenue growth since 2010 by taking on greater and greater risks, which remain hidden until…

"A Turkey is fed for 1000 daysevery day confirms to its statistical dept. that the human race cares about its welfare 'with increased statistical significance'. On the 1001st day, the turkey has a surprise."8

Involuntary Clicks: infospace.com is a "fraudulent web search engine"

A web security expert describes infospace as a "fraudulent web search engine". He also states 9 ,

1. Infospace.com is associated with browser hijackers and rootkits such as Google Redirect Virus and ZeroAccess rootkit
2. Browser hijackers and rootkits involve a tracking cookie which helps cybercriminals to change search results on Google and other major search engines and redirect Internet users to Infospace.com and other malicious advertisement websites.

This explains why 94+% of traffic is directed to css.infospace.com, a virus/browser hijacker 10 :

(click to enlarge)

1. Ccs.infospace.com is " www.keepbrowsersafe.com/removecssinfos... ;
2. It installs in the computer system without users' permission or consent often with free downloads.
3. It changes existing browser settings including provided search engines and home pages causing it to redirect to related malicious websites.
4. As a tactic against innocent Internet users, it appears alike some legitimate search engine like Google.com and persuade victims to use illegitimate search engine.
5. It often messes up with the privacy settings and exploits them to steal personal files or information.
6. Nearly all google search results for "Ccs.infospace.com" result in some variation of "how to remove css.infospace.com virus" guide.
7. Unsurprisingly, most victims (i.e., visitors) are middleaged or elderly 11

Webcrawler.com, Dogpile.com, and Metacrawler.com Are No Better Than Infospace.com

We find the same pattern of malwarerelated misbehavior in all of BCOR's web properties. For example, Fantastigames.webcrawler.com is a tricky browser hijacker that presents itself as a legitimate search engine and sneaks in the computers without the consent of the user 12 :

• Dogpile.com is referred to as a 'browser hijacker' and a 'redirect virus' 13 . We believe BCOR cleverly infects users by leading them to dogpile.com via searching (on google, ironically) for 'search engines' and related terms 14 :

• Metacrawler Toolbar is a malware addon/extension which installs to internet browsers with or without user consent 15 , and seems to infect some users seeking pirated materials, as evidenced by Filmovizija and Kizi 3 searches send traffic 16 :

• Metacrawler.com seems offline, as it redirects users to zoo.com 17

1. If Metacrawler.com were a legitimate website, it makes no sense that its website is offline, and it instead redirects visitors to zoo.com 18 :

1. All these websites receive a disproportionate number of elderly visitors 19 :

While we prefer to use the term "artificial clicks", 'click fraud' is the correct term to describe 20 :

• 80% of webcrawler.com's visitors originate from outside North America, specifically over 33% of "visitors" originate from India, Pakistan, Indonesia, Nigeria, and Bangladesh. India is a wellknown hot spot for click fraud 21 .

• metacrawler.com 22

• dogpile.com 23

8090% of traffic originates from outside the US, but only 1% of revenue originates outside the US24

(click to enlarge)

"Signs [of click fraud] include large # of clicks coming from a single IP address or a block of addresses."25

• Over 90% of webcrawler's top search terms are generic terms 26

• 5 of metacrawler's top search terms seem to originate from single IPs/blocks 27

Did Blucora Move its Click Fraud Operations to India in 2010, just in case HBS Professor Ben Edelman's January 2010 WhenU/Infospace Exposé would put an end to all the Company's click fraud schemes?

(click to enlarge)

Something Occurred in 2010 in India that Helped BCOR Continue its Nefarious Schemes to Date

1. January 2010, The Cyber Sheriff Warns: "Google's first step is easy: Fire BCOR. Google doesn't need BCOR, and there's zero reason for this relationship to continue in light of InfoSpace's repeated failings." 32
2. April 2010, BCOR Explores New Scheme: BCOR announces it will sell Infospace India to Aditi: "Signed a definitive agreement to sell to Aditi & expects to enter into an outsourced development arrangement with Aditi. This provides BCOR with continued access to engineering talent while reducing BCOR's costs of managing a foreign subsidiary." 33
3. Before June 30 2010, Feigns Remorse: "we discontinued the syndication of our search results to certain distribution partners who we deemed to be delivering low quality clicks." 34 BCOR
4. September 2010: Chairman Voelker announces resignation from the Board. 35
5. November 2010: CEO William Lansing quits. 36
6. 2011 Present. Scheme Pays Off, Complaints Rise: Blucora implements its Indiabased click fraud schemes, helping the company drive sufficient traffic. Meets and beats internal and Wall Street search revenue expectations. An increasing number of vulnerable users are victimized by Blucora and its business partners' malfeasance, as we've documented throughout this report.

Supporting Facts

Infospace's search revenue has increased 2x since 2010, even as its brandrecognition declined 37 :

Blucora has taken every possible action, EXCEPT reinvest in its search business since 2010:

1. Renamed itself Infospace Blucora 38 … why distance itself from a 'growing' business?
2. Acquired a hodge podge of unrelated businesses, instead of reinvesting in search 39 .
3. BCOR has behaved as if its search business can disappear at any given moment.
4. Aditi has an office in Bellevue, WA, 10 minutes away from Blucora 40

41

6. Infospace Technologies Linkedin profile sounds as if it could generate search traffic 42

7. Blucora's main web properties derive a 80+% of traffic from outside the US, and India is the #1 and #2 traffic contributor (as shown several pages ago)

8. Blucora's past/present relationships with controversial entities such as Intelius, Blinkx (all with offices 10 minutes away from Blucora).

9. Blucora does not name a single distribution partner, between 2010 present (except Make the Web Better in 2010, which seems to have disappeared unnoticed in 2011), despite their sizeable contributions toward overall revenue.

Recent Growth of Owned and Operated Revenue and Traffic

Owned and Operated revenue growth has surprised to the upside in the last 2 quarters, just as distributed search growth decelerated significantly (presumably due to Google policy changes) 43 :

(click to enlarge)

webcrawler.com

metacrawler.com

dogpile.com

Rise ofIllicit Clicks Explains Recent Growth in Owned and Operated Search Revenue

We believe most (if not all) recent growth in Blucora's Owned and Operated search revenues are derived from illicit content searches, e.g. child pornography and pirated content. BCOR had clear motive to generate marginal traffic from fringe sources, as distribution revenue growth recently slowed 44 :

"We expect that revenue from searches conducted by end users on sites of our distribution partners will continue to be an increasing majority of our search services revenue." 10K 2012

Unfortunately for Blucora, Google (as well as Federal Law) does not care if child pornography related activity is 0.1%, 1.0%, 10.0%, or 100.0% of total activity. It has a zero tolerance policy 45 :

Evidence Blucora Benefits from Child Pornrelated Search Traffic

"He who accepts evil without protesting against it is really cooperating with it." Martin Luther King, Jr.

1. child.webcrawler.com Daily Ad budget for this shady subdomain has increased dramatically from Q3 to Q4 2013. They keywords used to generate traffic include child pornographyrelated terms 46 :

Webcrawler.com Places Child Pornography Ads on Google47

Child Pornography Ads on Google Blucora Removed Recently

The following search results were visible through January. We wonder if Professor Edelman's Blinkx post frightened BCOR, or BCOR wanted to window dress before Google negotiations:

Instead of webcrawler.com, info.com (listed as one Blucora's distribution partner several years ago; we suspect the two are secretly business partners) now shows ads related to these child porn terms 48 :

3 of the top 10 keywords to Dogpile.com are child pornographyrelated terms 49 :

Why we Believe Webcrawler.com and Dogpile.com may be a Refuge for Pedophiles

Compare the autofilled results for dogpile and webcrawler vs. google, when the word 'child' is typed 50 :

(click to enlarge)

(click to enlarge)

Blucora's History of Bad Behavior: The Iminent.com Problem

Iminent.com of 20132013 = WhenU.com of 2010?

In 2004, WhenU.com was banished by Google and Yahoo! for distorting search rankings 1 :

Google cracked down on WhenU.com after Harvard Business School Professor, Benjamin Edelman, alleged that WhenU was using at least thirteen cloaking sites in "an attempt to hold multiple positions in search engine results bearing WhenU's name".2

By 2010, WhenU.com somehow resurfaced as spyware, scheming this time with Infospace/Blucora. Edelman pointed out their complicit wrongdoing. 3 BCOR took notice 4 :

Blucora/Infospace is a Repeat Offender, as Documented by Edelman Below5

Blucora/Infospace Offenses Continue Through 2014, Marking a Decade+ of Wrongdoing

As we've shown earlier in this report and the appendix, BCOR's search traffic shenanigans continue unabated. We would like to highlight Blucora's recent and current malfeasance tied to Iminent.com.

According to Blucora's most vocal shareholder (who incidentally was a shareholder of many nowproven Chinese reverse merger frauds), Iminent.com is one of Blucora's model customers 6 :

This Blucora shareholder did not do his due diligence, just as he did not do his due diligence before purchasing Chinese reverse mergers stock frauds7:

It Gets Worse: We have a video and we document the Infospace/Iminent scam in realtime8

1. Thisvideo captures the Infospace/Iminent scam in real time.
2. Note several instances of misrepresentation, specifically cloaking (i.e. search engines see one thing, and visitors see something else). Popups open without consent.
3. Iminent.com is referred to as a virus, browser hijacker, adware, spyware, and more 9 .
4. The Infospace/Iminent scam resembles the Infospace/WhenU scam Edelman exposed.
5. Appears to be in violation of Google's terms of agreement, and also applicable laws.

The Smoking Gun: Infospace/Iminent Cloaking with Search Ads, in Violation of Google Guidelines

This screen sufficiently shows Infospace cloaking 10 :

Cloaking is considered a violation of Google's Webmaster Guidelines11:

Cloaking refers to the practice of presenting different content or URLs to human users and search engines. Cloaking is considered a violation of Google's Webmaster Guidelines because it provides our users with different results than they expected.

Google is Better off without Infospace/Blucora

On Oct 30, 2013, Babylon's shares declined 62%, as Google walked away from Babylon 1 :

Gotham City Research believes Blucora is worse than Babylon, Google is Better off without BCOR

The following support our beliefs:

1. Blucora is worse than Babylon, when it comes to illicit search traffic, as evidenced by the child porn and pirated content searches and clicks (see earlier sections for more).
2. Google prohibits any advertising related to child pornography.
3. Blucora's search results violate guidelines articulated in BCOR/GOOG 2011 amended agreement.
4. BCOR has a long (and growing) track record of a variety of wrongdoing.
5. Google is economically better off without Blucora.
6. Google has more reasons to drop BCOR today than it did in 2010, when Edelman suggested it.

Severing Ties with Blucora would Bolster Google's Recent Commitment to Combat Child Pornography

2 weeks after Google cut ties with Babylon, it publicly responded to UK Prime Minister David Cameron 2 :

Google has a zerotolerance Policy on Child Pornography & Prohibits any Advertising Related to it

According to Google 3 :

Ads on Search Results Violate Google Requirements per 2011 Amended Agreement

We've found at least 2 kinds of direct violations:

• There are more than 3 ads displayed, despite Google allowing for UP TO 3 4

• We see ads displayed in the middle of search results, where only organic results should be placed (in fact, it seems ads take up more space than organic search results):

• Low quality ads the ads displayed on the top are nearly identical to those on the bottom

• Ads are repetitive, only take up space

AMENDED AND RESTATED GOOGLE SERVICES AGREEMENT5

Even if Google and Blucora Renew their Agreement in March 2014, Google Can Walk Away Any Time

Straight from BCOR SEC filings 6 :

Google is economically better off without Blucora

The BCOR shareholder describes the economics of BCOR search business 7 :

1. If the above is correct, Google will retain a greater percentage of the $1 described if it severs its ties with BCOR.
2. Given how terrible (in quality) BCOR's search results are, it's not clear what BCOR is bringing to the table to earn 80% of the economics. And this is only on the legitimate searches.
3. The above analysis only addresses the upside return, not the downside risks. If UK Prime Minister David Cameron, or other politicians probe Google and Blucora's child porn search results & ads, Google bears a disproportionate amount of the financial & reputational risks.
4. If Google does not renew its agreement with Blucora, it eliminates the downside risks, and captures all of the upside potential.

Google has more reasons to drop BCOR today than it did in 2010, when Edelman suggested it

Professor Benjamin Edelman has publicly recommended (on several occasions) that Google should, "Fire InfoSpace; there's zero reason for this relationship to continue in light of InfoSpace's repeated failings". We've documented some of his statements & reasoning earlier in this report. Here is more 8 :

Ties that Blind: "You're only as good as the company you keep"

The Ties that Blind

By now, we expect readers to wonder how Infospace/Blucora could possibly get away with all the current and past misdeeds highlighted in this report. Gotham City Research believes the following have contributed to the company's misbehavior leading to the present:

1. No senior Blucora/Infospace executive has ever faced criminal liability, to date, despite the many and repeated examples of management and corporate malfeasance throughout its history.
2. The current management team (a few key members have been with the company for 515 years), has been conditioned to believe it can engage in any risky/improper behavior, and never face personal liability; only upside.
3. Most, if not all, of the misbehavior that we & Professor Edelman describe occurred under current Management's watch.
4. Nearly all BCOR CEOs have eventually resigned amid some prevailing controversy, at the time.
5. Blucora's distribution partners include some (at best) controversial outfits, as well as some proven rogue operators. The company does not reveal their identities for a reason.

A Closer look at Management

"There is some good in the worst of us andsome evil in the best of us" Dr. Martin Luther King Jr.

Gotham City Research finds it very concerning that all the searchrelated violations we documented in this report, and many of the improprieties Professor Edelman documented between 20052010, happened under the current Chairman, CEO, CFO, and Infospace President's presence 1 :

1. Eric Emans, a longtime Infospace/Blucora employee, is the Chief Financial Officer. He was the Chief Accounting Officer prior to being appointed CFO, and worked for Deloitte & Touche (BCOR's longtime auditor, up to 2012) before joining Infospace in the early 2000s.
2. Michael Glover heads the search segment, and has been with BCOR since 2000.
3. William J. Ruckelshaus became the company's president and CEO in November 2010 after serving as a board member since May 2007. Ruckelshaus had no prior CEO experience.
4. John E. Cunningham, IV has served as director of the company since July 1998 and as the chairman of the board of directors since January 2011. He also served as lead independent director from February 2010 through December 2010. He is a member of the Audit Committee.
5. Mr. Cunningham's brother, James S. Cunningham, is an employee of the Company who is serving as one of the Company's managers of business development.

Info.com Distribution Partner of the Past, Present, or Both?

From BCOR 2006 10K 2 :

Recall from our earlier child pornography section that webcrawler.com's illicit ads related to the 'vlad model' disappeared recently, only to be replaced by info.com ads for the same illicit terms 3 :

Info.com and Blucora Appear to Have Some Kind of Relationship4

(click to enlarge)

Blinkx and Blucora Partners of the Past, Present, or Both?

June 25, 2007 According to an Infospace press release 5 : "InfoSpace Partners with blinkx to Offer Video Search Functionality on AwardWinning Dogpile.com"

January 12, 2010 According to Professor Edelman's, "Google Click Fraud Inflates Conversion Rates and Tricks Advertisers into Overpaying", AdOn Networks (a subsidiary of blinkx as of 2012) and Infospace were part of the same scheme 6 :

November 30, 2010 "Blinkx hasn't become a household name like YouTube, in part because the lion's share of its business is providing video search services to other companies, such as Ask.com, Real Networks, and Infospace. " 7

January 28, 2014 According to Professor Edelman's, "The Darker Side of Blinkx": "I show the exAdOn traffic broker still sending invisible, popup, and other tainted traffic." 8

According to Alexa 9 :

Blinkx and Blucora Mere Coincidences?10

1. (click to enlarge)

https://www.linkedin.com/pub/pavellyadnov/23/160/70a

Blinkx and Blucora 10 minute drive (11

http://www.yellowpages.com/bellevuewa/mip/blinkx460664010

We called the listed phone number, and surely it is Blinkx.

The Controversial Babylon Was/Is a "Strategic Partner" of Blucora12

https://www.linkedin.com/in/shakedtal

Intelius and Blucora Partners of the Past, Present, or Both?

Founder and former CEO of Infospace.com Naveen Jain (with other former Infospace employees) founded Intelius 13 :

After leaving InfoSpace Jain started a new company, Intelius,across the street from his old offices in Bellevue, Washington.Intelius has been on the receiving end of hundreds of consumer complaints alleging fraud, many of which are around a partnership the company has with Adaptive Marketing and a "product" they offer called Privacy Matters Identity. Every time a customer buys a product at Intelius, they are shown a page telling them "Take our 2008 Consumer Credit Survey and claim $10.00 CASH BACK with Privacy Matters Identity."

January 1, 2008 from Intelius S1 (it never went public) 14 : "We have established relationships with leading online portals and directories, including Idearc, InfoSpace , MSN, Yahoo! and YELLOWPAGES.COM, that market our services on their websites and direct visitors to our websites.

June 2012 Infospace changes its name to Blucora, and Intelius changes its name to Inome. 15

Last but Not Least, Let's Not Forget Iminent.com

As we've documented earlier in this report, Iminent.com is a deeply troubling, current Blucora partner 16 :

(click to enlarge)

NonGAAP is Back

InfoSpace bubbleera accounting highly "complicated": historical background

According to USA Today1 :

InfoSpace used complicated accounting methods in an attempt to reach Wall Street's revenue expectations during the aftermath of the dotcom frenzy, The Seattle Times reported this week.

The deals helped the once highflying technology company please Wall Street analysts even as its muchvaunted business was not performing as well as executives had hoped, the newspaper said.

After Naveen Jain was forced out, Jim Voelker took over as CEO, and stopped reporting nonGAAP, "profits before all the bad stuff" 2 :

The company's revenues today are solid, Voelker said. By the time he took over, the company had already stopped the dubious practice of investing in companies in exchange for business. "There weren't any lazy Susan deals out there," he said.

Voelker ended the company's practice of reporting proforma profits, which critics dubbed "profits before all the bad stuff" and which didn't meet general accounting standards.

Jim Voelker resigned as CEO in 2009, and as Chairman in 2010. BCOR's postVoelker accounting and disclosure practices concern us for the following reasons:

1. CEO William Ruckelshaus reintroduced NonGAAP reporting in 2011. The irregularities between BCOR's GAAP and NonGAAP are troubling.
2. Over 50% of cash flows from operating activities are a result of increases in "Accrued expenses and other current and longterm liabilities", in the last few quarters.
3. Blucora purchased Make The Web Better, a distribution partner (a rare instance whereby BCOR actually names a partner). We suspect there's a "lazy susan" element to this transaction.
4. Accounting Goodwill seems inflated. Economic goodwill seems quite negative.
5. Between 2007 to date, BCOR filed 36 comment and response letters with the SEC (vast majority post 2011).
6. Auditor change Deloitte to Ernst and Young. Timing is interesting (just around the merger time)
7. Audit fee declining $789K to $433K from 2011 to 2012, even as company grew in complexity.
8. Former Blinkx staff accountant is now a Blucora staff accountant.
9. Less distribution partner disclosure today compared to Voelker's time.

The Return of NonGAAP Accounting

As soon as William J. Ruckelshaus became CEO, he reintroduced the previously taboo NonGAAP accounting to Blucora. Since then, NonGAAP net income has consistently exceeded GAAP net income, and NonGAAP net income has grown at a faster rate than GAAP net income 3 :

Quality of Cash Flow (not just Earnings) Suspect as Well

~50% of cash flows from operating activities are a result of increases in "Accrued expenses and other current and longterm liabilities", in the last few quarters. 4

(click to enlarge)

The Curious Case of Make The Web Better: a Lazy Susan Transaction?

Infospace.com in the past 5 :

Revenue generated from search traffic on the Make The Web Better site was $3.1 million in 2012, $8.2 million in 2011, and $16.4 million in 2010 6 :

What happened? How did MTWB revenue decline to zero by 2013 (there is no mention in the 2013 filings), even as total search revenue has doubled in that time? Also it appears Blucora has yet to make the necessary impairments to earnings (i.e. the balance sheet is inflated).

The http://www.makethewebbetter.com/ website is offline; impairment seems appropriate:

SEC Correspondence and Comment letters are concerning

There are 36 of them. As shown in the table below, between 2007 to date, BCOR filed 36 comment letters with the SEC. While the number of exchanges with the SEC does not guarantee an investigation, the arrogance and disrespect towards the SEC that is evident in BCOR rebuttals may not please them 7 :

BCOR Audit Fee Declines 45%

We find the timing of a dramatic reduction in BCOR's audit fee suspicious given 8 :

1. BCOR changed from its longtime auditor, Deloitte and Touche, to Ernst and Young
2. BCOR reintroduced NonGAAP net income the very same year (something that, perhaps, its old auditor would not allow)
3. BCOR growing acquisition activity and complexity

(click to enlarge)

Distribution Partner Disclosure: Opacity Today vs. Transparency in Voelker's Day

The Voelker age (when NonGAAP was banned) 9 :

(click to enlarge)

versus the reign of CEO Ruckelshaus 10 :

• (click to enlarge)

BCOR Shares Are Worth No more Than $5.00 per Share

BCOR is Misunderstood by its Shareholders

"A Turkey is fed for 1000 daysevery day confirms to its statistical department that the human race cares about its welfare 'with increased statistical significance'. On the 1001st day, the turkey has a surprise." 1

Blucora's peer, Babylon, can relate to the Turkey and Indymac 2 :

Blucora's business is structurally fragile, built on a foundation of hidden risks. It additionally faces an array of immediate downside catalysts.

The Known Unknown

Let's compare Blucora against Babylon:

1. Blucora derives 60+% of revenue from Google vs. 40% for Babylon 3
2. Google decided not to renew its contract with Babylon, after receiving a large number of complaints. Blucora's offenses are well documented in this report and elsewhere.
3. Blucora's search traffic has benefited from child porn and pirated content searches, as documented in this report. Google prohibits advertising related to child pornography.

Even if Google and Blucora Renew their Agreement in March 2014, Google Can Walk Away Any Time

The immediate risk for shareholders is the upcoming March 2014 Google deadline. However, the risk remains afterwards. BCOR is the Thanksgiving turkey, the March 2014 deadline is Thanksgiving day, and Google can designate any future day as Thanksgiving day: 4

1. If Google or Yahoo! believe that we or our search distribution partners have failed to meet the requirements and guidelines or the Search Customer agreements,they may suspend or terminate our or our distribution partners' use and distribution of their search products and services, with or without notice, and in the event of certain violations, may terminate their agreements with us.
2. We and our distribution partners have limited rights to cure requirement/guideline breaches.
3. Failure by us or our search distribution partners to comply with the guidelines promulgated by Google and Yahoo! may cause that Search Customer to temporarily or permanently suspend the use of its content or terminate its agreement with us, or may require us to modify or terminate certain distribution relationships.

The Unknown Unknowns: Shareholders are missing the $400+ million Problem

Blucora's search revenue growth since 2010 has come at the cost of building hidden risks into the business, rendering it more fragile today than in 2010 (though it looks stronger to the unsuspecting):

1. FTC, DOJ, FBI, IRS, &/or the SEC If any of these entities investigates BCOR (and we believe they have plenty of cause to do so), we estimate liability to easily exceed $200 million for BCOR.
2. Child Pornography is a Federal Crime, Period Wall Street and Blucora shareholders fail to understand how criminal liability works in practice. If a man is caught watching child pornography, he faces criminal liability, regardless of whether he only spends 10.0%, 1.0%, 0.1%, or 0.01% of his time watching child pornography.
3. Trial Attorney, Class Action If a capable lawyer were to sue Blucora, on behalf of all the malware and related victims (the elderly, advertisers, etc), we estimate liability at $200+ million.
4. Blucora's Search Business Banned If Infospace.com, etc. were to disappear tomorrow, no one will care, and no one will notice. Given the ongoing malfeasance we've uncovered, and its history of committing wrongdoing, a few probes seem wellwarranted.

Why we believe Blucora's shares are worth no more than $5.00/share

1. We estimate GAAP earnings will decline to ~$15 million, if revenue from Google declines ~10%. 10% of revenue from Google is ~$36 million, and at a ~40% gross margin, results in a ~$14 million decline in earnings. 2013 TTM net income of $29 million less $14 million = ~$15 million.
2. At a 14x P/E multiple, $15 million in earnings gets us to $5.00 per share.

Why we believe Blucora's shares easily approach

• BCOR has been burning cash in the last few years, just as it should be hoarding cash (to offset against the unacceptable searchrelated risks it has quietly been taking) 5

• Tangible book value is now negative, leaving no downside protection. We believe the company has material NEGATIVE economic goodwill, due to its shady business practices 6

• The Company has very few reserves against a disruptive adverse development 7

• TaxAct and Monoprice's importance is diminished, in our view, because Infospace is large and important enough to bring the whole house of cards down. That being said, we think TaxAct and Monoprice provide $1$2 per share in downside protection. NOLs are of negligible value, given the risks we've identified in this report. NOLs cannot fund fines and restitution.

PLEASE VISIT http://www.gothamcityresearch.com for the appendices.

End Notes

Introduction

1. Dotcon job: How InfoSpace took its investors for a ride, Seattle Times http://seattletimes.com/html/businesstechnology/2002198103_dotcon1main06.html
2. Spitzer: Merrill analyst pitched stock he called 'junk' , USA Today, http://usatoday30.usatoday.com/money/finance/20020415spitzeremailevidence.htm
3. Google on Cloaking, https://support.google.com/webmasters/answer/66355?hl=en
4. Google Click Fraud Inflates Conversion Rates and Tricks Advertisers into Overpaying http://www.benedelman.org/news/0112101.html
5. BCOR 10Q for Q2 2010

Blucora = Involuntary clicks + Artificial clicks + Illicit clicks

1. BCOR Monoprice Transaction Presentation
2. BCOR 10K and 10Q filings.
3. Alexa.com (some of the rankings change daily, but are approximately correct)
4. Visit Metacrawler.com, and https://adblockplus.org/forum/viewtopic.php?t=20286
5. Alexa.com (some of the rankings change daily, but are approximately correct)
6. Babylon Has Record Plunge as Google Deal Ends: Tel Aviv Mover, http://www.bloomberg.com/news/20131030/babylonhasrecordplungeasgoogledealendstelavivmover.html
7. BCOR 10K and 10Q filings.
8. THE FOURTH QUADRANT: A MAP OF THE LIMITS OF STATISTICS By Nassim Nicholas Taleb [9.14.08], http://edge.org/conversation/thefourthquadrantamapofthelimitsofstatistics , Yahoo! Finance for Babylon stock chart
9. Enigma Software Group, http://www.enigmasoftware.com/infospacecomremoval/
10. Alexa.com (some of the rankings change daily, but are approximately correct)
11. Remove Css.infospace.com Get Rid of Css.infospace.com from PC, http://www.keepbrowsersafe.com/removecssinfospacecomgetridofcssinfospacecomfrompc
12. How To Remove Fantastigames.Webcrawler.Com, http://spywareremovers.com/howtoremovefantastigameswebcrawlercom
13. Remove Dogpile.com redirect (Virus Removal Guide) http://malwaretips.com/blogs/removedogpilevirus/
14. Alexa.com (some of the rankings change daily, but are approximately correct)
15. How To Remove MetaCrawler Toolbar Malware And Infospace.com Viruses (Metacrawler.com Hijacker Virus, http://botcrawl.com/howtoremovemetacrawlertoolbarmalwareandinfospaceviruses/
16. Alexa.com (some of the rankings change daily, but are approximately correct)
17. Visit Metacrawler.com, and https://adblockplus.org/forum/viewtopic.php?t=20286
18. Alexa.com (some of the rankings change daily, but are approximately correct)
19. Ibid
20. Discerning click fraud, http://www.legalzoom.com/businessmanagement/runningyourbusiness/discerningclickfraud
21. Alexa.com (some of the rankings change daily, but are approximately correct)
22. Ibid
23. Ibid
24. BCOR 10K 2012
25. Discerning click fraud, http://www.legalzoom.com/businessmanagement/runningyourbusiness/discerningclickfraud
26. Alexa.com (some of the rankings change daily, but are approximately correct)
27. Ibid
28. Google Click Fraud Inflates Conversion Rates and Tricks Advertisers into Overpaying http://www.benedelman.org/news/0112101.html
29. http://www.bloomberg.com/apps/news?pid=conewsstory&tkr=IFP2:GR&sid=aEpAST80cOIA

http://pressrelease.medianama.com/adititechnologiestoacquireinfospaceindiadevelopmentcenter223

1. Aditi.com, Google Maps
2. BCOR 2Q 2010 10Q
3. Google Click Fraud Inflates Conversion Rates and Tricks Advertisers into Overpaying http://www.benedelman.org/news/0112101.html
4. http://www.bloomberg.com/apps/news?pid=conewsstory&tkr=IFP2:GR&sid=aEpAST80cOIA

http://pressrelease.medianama.com/adititechnologiestoacquireinfospaceindiadevelopmentcenter223

1. BCOR 2Q 2010 10Q
2. BCOR press release
3. BCOR press release
4. BCOR 10K and 10Q filings
5. InfoSpace Changes Corporate Name to Blucora, Inc., http://investor.blucora.com/releasedetail.cfm?ReleaseID=681130
6. BCOR 10K and 10Q filings
7. Google Maps
8. Pradeep Rathinam, Linkedin.com www.linkedin.com/pub/pradeeprathinam/0/...
9. Infospace India, Linkedin.com, https://www.linkedin.com/company/infospacetechnologiesindiapvtltd
10. BCOR 10Q Q3 2012, alexa.com for traffic graphs
11. BCOR 10Q filings compared against BCOR 10K 2012 statement cited.
12. Zero tolerance child porn policy http://googleblog.blogspot.com/2006/06/protectingchildrenonline.html
13. Source: http://www.keywordspy.com/
14. Google.com
15. Google.com , and BCOR 10K 2006
16. Alexa.com (some of the rankings change daily, but are approximately correct)
17. Dogpile.com, webcrawler.com, and google.com

Blucora's History of Bad Behavior: The Iminent.com Problem

1. Google and Yahoo! banish WhenU.com for distorting search rankings, http://www.outlaw.com/page4541
2. Ibid
3. Google Still Charging Advertisers for ConversionInflation Traffic from WhenU Spyware http://www.benedelman.org/news/0105101.html
4. BCOR 2010 Q2 10Q
5. Google Click Fraud Inflates Conversion Rates and Tricks Advertisers into Overpaying, http://www.benedelman.org/news/0112101.html
6. Buckley Blucora Presentation, http://www.businessinsider.com/zackbuckleyblucorapresentation20135?op=1
7. Google.com
8. New fraud found, software bundle that is distributed on a torrent sites http://securetheinternet.org/?p=100
9. Google.com
10. New fraud found, software bundle that is distributed on a torrent sites http://securetheinternet.org/?p=100
11. Google on Cloaking, https://support.google.com/webmasters/answer/66355?hl=en

Google is Better off without Infospace/Blucora

1. Babylon Has Record Plunge as Google Deal Ends: Tel Aviv Mover http://www.bloomberg.com/news/20131030/babylonhasrecordplungeasgoogledealendstelavivmover.html
2. Google and Microsoft agree steps to block abuse images http://www.bbc.co.uk/news/uk24980765
3. Zero Tolerance Policy http://googleblog.blogspot.com/2006/06/protectingchildrenonline.html
4. Webcrawler.com
5. Amended Agreement, GOOG BCOR, http://www.sec.gov/Archives/edgar/data/1068875/000119312511129038/dex101.htm
6. BCOR 10K 2012
7. Buckley Blucora Presentation, http://www.businessinsider.com/zackbuckleyblucorapresentation20135?op=1
8. Google Still Charging Advertisers for ConversionInflation Traffic from WhenU Spyware, http://www.benedelman.org/news/0105101.html

Ties that Blind: "You're only as good as the company you keep

1. Blucora website, management biographies, BCOR SEC filings.
2. BCOR 2006 10K
3. Google.com
4. Alexa.com
5. BCOR press release, InfoSpace Partners with blinkx to Offer Video Search Functionality on AwardWinning Dogpile.com
6. "Google Click Fraud Inflates Conversion Rates and Tricks Advertisers into Overpaying , Ben Edelman
7. With a Lifeline to London, Blinkx Builds the World's Largest Video Search Index, http://www.xconomy.com/sanfrancisco/2010/11/30/withalifelinetolondonblinkxbuildstheworldslargestvideosearchindex/
8. The Darker Side of Blinkx, Ben Edelman
9. Alexa.com
10. Pavel Lyadnov https://www.linkedin.com/pub/pavellyadnov/23/160/70a
11. Google maps
12. https://www.linkedin.com/in/shakedtal
13. Naveen Jain's Latest Scam: Intelius, http://techcrunch.com/2008/05/29/naveenjainsinteliuspreparestogopublichowmuchoftheirrevenueisascam/
14. Intelius S1 Filing
15. Meet Inome: The latest thing to sprout from Naveen Jain http://www.geekwire.com/2012/inomenaveenjainslatestentrepreneurialpursuit/
16. http://www.iminent.com/Help/faq

NonGAAP is Back

1. InfoSpace bubbleera accounting highly "complicated", http://usatoday30.usatoday.com/tech/techinvestor/industry/20050310infospace_x.htm?csp=34
2. Dotcon job: How InfoSpace took its investors for a ride, Seattle Times http://seattletimes.com/html/businesstechnology/2002198103_dotcon1main06.html
3. BCOR 10K filings
4. BCOR 10K and 10Q filings.
5. Dotcon job: How InfoSpace took its investors for a ride, Seattle Times http://seattletimes.com/html/businesstechnology/2002198103_dotcon1main06.html
6. BCOR 10K filings.
7. EdgarPro
8. BCOR proxy filings.
9. BCOR 10K filings
10. Ibid

BCOR Shares Are Worth No more Than $5.00 per Share

1. THE FOURTH QUADRANT: A MAP OF THE LIMITS OF STATISTICS By Nassim Nicholas Taleb [9.14.08], http://edge.org/conversation/thefourthquadrantamapofthelimitsofstatistics
2. Yahoo! Finance
3. Babylon Has Record Plunge as Google Deal Ends: Tel Aviv Mover, http://www.bloomberg.com/news/20131030/babylonhasrecordplungeasgoogledealendstelavivmover.html
4. BCOR 10K and 10Q filings
5. Ibid
6. Ibid
7. Ibid

Disclosure: I am short BCOR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

See also Modine Manufacturing: Should Investors Be Excited About Recent Beat? on seekingalpha.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.