Tuesday, November 5, 2013

BCOR: Better than expected Q3 earnings and Q4 guidance; new valuation of $25.30/sh; a 'neutral' stock

BCOR reported much better Q3 numbers than we and the Street expected.  However, during the call management confirmed our assumption that revenues generated from the search segment will decelerate, although management's expectation of "low double-digit growth" in FY '14 is ahead of our initial 7.1% assumption.  We do not think BCOR's acquisitions of TaxAct and Monoprice will offset the slowdown in the search business.  With some adjustments to our estimates and the Company's latest net cash, we actually lowered our valuation of BCOR to $25.30 from $26.00.  We note the stock has reacted positively to earnings results, as it is up 9%+ in AH at $26.50.  Based on the AH price, BCOR has increased more than 75% since we recommended it in early Jan '13 (compared with S&P 500's 17% gain); however, we no longer consider it a value-play as it is now trading above the $25.30 fair value we've arrived at using a sum-of-parts model.  Similar to IACI, we now view BCOR stock as a 'neutral'.

Total revenues and adj. EBITDA of $124.1MM and $16.6MM, came in ahead of our estimates of $108.5MM and $12.6MM, respectively.  


Search revenues grew 17.9% Y/Y to $107.7MM, above our $94.7MM estimate.  However, revenues generated from distribution partners, which includes GOOG and represent 80%+ of segment's revenues, grew only 8.2%.  The Y/Y growth for those revenues were 23.4%, 66.1%, and 22.5% in FY ’11, FY ’12, and 1H ‘13, respectively.  Clearly, GOOG's pricing is impacting BCOR.  This slowdown was partially offset by the 90%+ Y/Y growth in O&O search revenues, which certainly surprised us and made up most of the difference between the Company's results and our estimates.  O&O’s impressive growth also helped expand the search segment's margins by nearly 200bps to 19.8%, as those revenues have higher contribution margins.  Search adj. EBITDA were $21.3MM, much higher than our $17.0MM estimate.

While O&O is now responsible for nearly 19% of BCOR's search revenues, significantly higher than 12% in FY '12, we do not expect them to become as recurring and non-volatile as the distribution partners revenues had been.  Distribution revenues do have more brand loyalty, mainly driven by GOOG.  For this reason, we think the Company will be forced to increase its marketing significantly in FY '14 to grow O&O further in order to the offset slowdown in revenues from distribution partners.  We believe this will partially offset O&O's higher contribution margin in 2H '14.


Revenues from TaxAct were $1.7MM, slightly higher than we expected.  In addition, that segment's loss of $1.6MM was a bit better than our $2.4MM estimate.  Again, TaxAct is very seasonal, which means it generates losses in Q3 and Q4.


Monoprice revenues (or revenues from BCOR's e-commerce segment) came in at $14.6MM, higher than our $12.4MM estimate.  This represents revenues generated in only five weeks.  


Management provided better-than-expected Q4 guidance.  However, we think BCOR's 12-month price target should be based on its operations during the next 12 months, FY '14.  We did up our FY '14 estimates.  

We now expect 12.2% search revenue growth resulting in adj. EBITDA of $91.9MM.  The slowdown in search, especially in revenues from distribution partners, is taking a bit longer to accelerate than we anticipated; but it is coming.

We now expect $98.6MM in TaxAct revenues in FY '14, $4.1MM higher than our initial estimate.  This change is based on our assumption that BCOR will successfully increase its market share a bit.  We upped our assumption of TaxAct units as a percentage of 2013 NFP slightly to 4.1%, from 4.0%.  With a 50% margin, we think TaxAct will bring in $49.3MM in adj. EBITDA in FY '14.

We also increased our Monoprice revenue estimate as that business generated revenues significantly more than we had expected in its initial five weeks as a BCOR company.  We think Monoprice will generate around $165.0MM in top-line and adj. EBITDA of $21.5MM.  As mentioned earlier today, we think this is just an initial boost that Monoprice will get from BCOR's search capabilities.  Going beyond FY '14, we would be surprised to see a 5-year revenue CAGR above 7%.  


Our new $25.30/sh valuation represents a sum-of-parts: 7.0x search adj. EBITDA, 8x TaxAct adj. EBITDA, 7.5x Monoprice adj. EBITDA, plus net cash.  We are applying a slightly higher multiple to search adj. EBITDA as that segment's top-line growth will remain in double-digits for FY '14.  However, we continue to believe that the slowdown in its biggest component, revenues from distribution partners, will accelerate in 2H '14.

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