Wednesday, February 13, 2013

BCOR: Strong Q4 Results; Guidance Ahead of Expectations

Blucora (BCOR), the company we suggested on 1/29, reported strong Q4 numbers and provided Q1 guidance well ahead of consensus.  The Company also announced a $50MM share buy-back program over the next 24 months; which we view as positive. Based on where it closed on Wednesday, BCOR is trading at a mere 6x total FY '13 EBITDA.  The stock has reacted well to the Q4 earnings release as it was up nearly 10% in AH, at $16.54.  Whether this upturn will continue throughout the day on Thursday remains to be seen.  As a reminder, our valuation of the company is $19/sh.
  • Total Q4 revenues came in at $97.47MM, up 46.3% Y/Y, driven mainly by 44.6% growth in the Search segment.  Not surprisingly, revenues from the Tax Preparation segment in Q4, the seasonally weakest quarter, came in at only $1.17MM.  For the year, top-line growth was 77.8% driven not only by the acquisition of TaxAct, but also a 50.7% growth in the Search segment.
  • Search segment EBITDA margin for the quarter was 18.0%, slightly lower than the 19.2% in Q4 '11.  This was mainly due to a higher portion of revenues, with lower margins, coming from distribution partners. 
  • Initially we were a bit too conservative as we thought that such trend in BCOR's Search revenues, in addition to changes enforced by Google (GOOG), would drive EBITDA margin to 15% in FY '13.  However, based on management's guidance, it appears that management believes Search segment income margin will bottom out at slightly above 16%.  We expect that BCOR's and other players' adaptation to GOOG standards over time will lead to margin expansion again, likely in late Q4 and continuing into FY '14.  However, given the expected volatility surrounding this space, we stand by our 15% assumption for FY '13, which, again, appears to be very conservative.
  • As expected, the Tax Preparation segment generated losses in the quarter.  However, for the year, that segment's income margin was an impressive 48.4%.  Management's guidance for 1H '13 indicates EBITDA margin of 52%.  While we have confidence that the Company can achieve this, we believe margin for the year will be slightly lower, likely around 49%, due to expected losses in Q3 and Q4.  We note that given the new services being rolled out in that segment, revenues in 2H '13 may be higher, possibly reducing losses compared to those incurred in FY '12.

We have not changed any of our assumptions or estimates as we continue to view BCOR as a value-play. 

We still expect top-line growth of 12.5% in Search for the year, which is in-line with what management guided this afternoon - "low double digit" growth.  As mentioned earlier, our Search EBITDA estimate is below management's guidance, but we're sticking with it given the volatility in that space.  So we estimate $387.9MM and $58.2MM for FY '13 Search revenues and EBITDA, respectively.  Based on management's guidance, the Street will likely be expecting EBITDA of around $64MM - $65MM for Search. 

We estimate $90.5MM in FY '13 revenues for Tax Preparation, which could generate approx. $44MM in EBITDA. 

Our sum-of-parts valuation, which consists of 6x Search EBITDA, 8x Tax Preparation EBITDA, plus net cash of approx. $88MM, results in a market cap of $790MM or nearly $19/sh.  This represents a forward EV/EBITDA multiple of only 7.9 for the entire company, which we think will include around $13MM in unallocated corp. expenses in FY '13. 

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