Friday, February 21, 2014

BCOR: Good Q4 numbers; bad guidance; lowered valuation; remain on the sideline

Blucora (BCOR), the Company which we downgraded on 11/5/13, reported better than expected FY '13 results but provided disappointing Q1 guidance.  We recommend remaining on the sideline as the risks that its search segment faces continue to increase.  We value BCOR based on our sum-of-parts model, which includes EV/EBITDA multiples of 6.0, 8.0, and 7.5 applied to the search, TaxAct, and ecommerce segments, respectively; resulting in a $22.54/sh valuation.

Although the Company announced a renewal of its Google (GOOG) contract for its search business (Infospace), it is clear that GOOG is lowering BCOR's annual 'allowance' in search revenues as traffic fees generated on the mobile platform are not included in the new contract.  Most of BCOR's search revenues come from the desktop platform; however we all know that at least for the time being traffic and therefore the ad and marketing environments are shifting onto the mobile platform.  Unfortunately, given that 70%+ of BCOR's search revenues are dependent on GOOG, none of this is good news for BCOR.  We certainly discussed this search issue before and it was the main reason (in addition to valuation) that drove us to downgrade this stock a while back. We have adjusted our FY '14 estimates; more detail provided below.  In addition, given the much more rapid deceleration in BCOR's search growth, we discounted the EV/EBITDA multiple applicable to that segment to 6.0, from 7.0.  As a result, again, we continue to recommend remaining on the sideline when it comes to the BCOR stock.  We value it at $22.54/sh, down from our previous valuation of $25.30/sh.  The stock closed at $21.57 on Thursday, but was down nearly 6% in AH trading.  BCOR has declined 28.4% since hitting a $30.12 52-week high on 11/15/13.

Now let's move on to the results.  Total FY '13 revenues of $574.0MM were in-line with our $574.1MM estimate.  As shown below, we were slightly too optimistic regarding the ecommerce segment (Monoprice) and just a bit too pessimistic regarding the search segment.  BCOR reported total EBITDA of $114.2MM, a bit higher than our $113.6MM. 

The Company's guidance was disappointing, especially when applied to the entire FY '14.  Management expects search revenue growth in "low single digits" for the year, compared to our 12.2% estimate, which we actually thought went along with the slowdown in the search business that we had discussed many times before.  With the $95MM - $97MM TaxAct revenue guidance for the first half of FY '14, revenue for the entire year appears to be pretty much in-line with our $98.6MM estimate.  Not much color was provided regarding the ecommerce segment revenues for the year.  We have it at $165MM.  

Although management's guidance was disappointing, especially for the search segment, we think there is still enough 'umph' in desktop search revenue market to help BCOR generate $468.2MM in search revenues in FY '14, slightly lower than our initial $477.4MM estimate, but it does represent a 10% Y/Y growth, most of which will likely be realized in Q1 and Q2.  We did lower our margins for that segment given the expected lower prices.  We now have $89.0MM in search segment EBITDA, compared to our previous estimate of $91.9MM.

We maintained our TaxAct revenue estimate of $98.7MM, but lowered margins by 200bps to 48%.  While we expect volume to pick-up, we also think the Company will be aggressive in its pricing, possibly resulting in less margin expansion.  

We also did not adjust our ecommerce revenue projection of $165MM, but lowered margins to 11.5% from 13%.  Given the slightly lower than expected growth in Q4 and likely a slower start in Q1, we think the Company will market Monoprice more aggressively than initially planned, again hindering growth in margins.  Our initial and adjusted projections are provided below.

This is no longer 2013.  We will say it again: growth in the search business, which brings in 75% of BCOR's revenues, is decelerating rapidly.  Any potential buyer of BCOR's Infospace is probably thinking of it in terms of a mere 5x EBITDA, rather than the 6x that we suggested on 12/10/13, as BCOR no longer has any pricing leverage when it comes to negotiating the sale of Infospace.  

In addition, there are a lot of questions surrounding the ecommerce business and whether or not it will be negatively impacted by the slower than expected search business.  One thing that we touched on a while back regarding Monoprice was that it may get an initial boost in site traffic and possibly sales from BCOR's search capabilities, but that seems even less likely now.  Going forward, it appears that we were not too pessimistic when we said the 11.3x TTM EBITDA that BCOR paid for Monoprice was a "pretty hefty multiple".

Monday, February 10, 2014

GCI: CBS to simulcast 8 Thursday night NFL games during the 2014 season

Some good news regarding Gannett (GCI) and its local CBS TV stations, as on Feb. 5th, the NFL chose CBS to simulcast half of its Thursday night games during the 2014 season.  This will likely help generate higher advertising revenues for GCI's CBS stations.  Companies and advertisers place higher bids for ads to be aired during NFL games than even the most successful and widely viewed prime time programs, even though the games will be simulcast on the NFL Network.  While top prices of 30-second ads to be shown during top prime time shows have been between $300K and $350K, the median price of ads for Monday Night and Sunday Night NFL games has been around $450K.  The more advertisers pay for national spots, the more glorified those time-ranges become, and the more local advertisers will likely pay.  CBS may have to move some of its very popular programs, such as The Big Bang Theory, to be shown on different nights; but again, the 29% - 50% premium that it can get for spots during the Thursday night games will make it all worthwhile.  Overall, we view this news as positive for GCI.

Friday, February 7, 2014

NFP disappoints, unemployment rate pleases, and the confusion continues ...

Well, it appears that the labor market may have taken a step back based on the establishment survey results, or a step forward based on the household results; but the equity market, as usual, is loving such confusion created by the Jan. employment figures.

NFP change for Jan. came in at 113K, significantly below our estimate and the Street's.  What is worse, is that the Dec. number was barely revised up to 75K, from 74K.  So, if we take the average of those two months, we get only 93.5K jobs added per month.  But let's even add the much higher revised Nov. figure.  In the BLS report, it was stated that change in NFP for Nov. was revised up by 33K to 274K!  The average jobs added per month since Nov. is only 154K, which is not necessarily a sign of a tighter, growing, or more competitive labor market.  

On the bright side, the 'official' unemployment rate fell 10bps to 6.6%. And the participation rate increased 20pbs to 63%, the level we saw in Nov., but much less than the 63.6% we saw in Jan. of 2013, and much lower than the 66%+ 10 years ago.  In addition, the more 'credible' U-6 unemployment rate fell to 12.7%, from 13.1%.  

It appears that the household survey results were a lot more positive than the establishment survey results.  The difference between the surveys in monthly change of the number of people employed in Jan. was 525K (establishment survey said 113K and household survey said 638K!).  Historically, since 1948, that difference has been an average of 172K.  Looking at it another way, again historically, that number has been above 500K only 5% of the time, only 42 of the 791 months.  Since 2000, it has increased to 7%.  Since the end of Q3 '07 (or beginning of the Great Recession), it increased to 8%.  During the last four years, again, only 8% of the time was the difference between the two surveys more than 500K.  However, for some reason, that number of occurrences has jumped to nearly 17% since 2012.  We are thinking that maybe the BLS should revise its revisions, again.  

Going back to the household survey, in terms of duration of unemployment, there were more people unemployed less than five weeks and 15 - 26 weeks.  Number of people unemployed for 27+ weeks continued its decline, which is good news.  

The number of people working part-time for economic reasons dropped more than 8% from Dec., while part-time for non-economic reasons went up by only 2%; taken together, these numbers can also be considered as positive.  

Now let's move to the not-so-great establishment survey results.  As mentioned earlier, change in NFP was very disappointing.  The biggest gains were in construction (a bit surprising given the media's over-hyped 'weather factor' supposedly impacting every economic indicator negatively; as you can tell, we just love all the BS we see and hear on CNBC), manufacturing, professional and business services, and leisure and hospitality.  The biggest declines came in government jobs, retail, and education and health services.  

While average weekly hours worked were unchanged at 34.4, average earnings per hour went up by a nickel from Dec., and up nearly 2% since Jan. '13.  This is not necessarily good news, especially when combined with the disappointing change in NFP.  Higher wages while there are no changes in hours worked and not that many more people are being hired, could force more companies to hire less, let go of some, and more importantly, it could make the Fed accelerate tapering or maybe slightly increase the federal funds target rate.  But obviously, the equity market doesn't think so, as the S&P 500 is up 0.4%.

Thursday, February 6, 2014

Jan. '14 NFP change guesstimate ...

BLS is releasing the NFP and unemployment rate figures tomorrow morning.  The Dec. '13 numbers were impacted by bad weather, supposedly.  For this reason, we expect some revision of the Dec. figures.  Regarding Jan., believe it or not, we think the change in NFP will be higher than the current consensus; 220K vs 181K.  We note that we have not assumed any revision for Dec.  The range of guesstimates for NFP change is a very wide one, as many are not sure just how much the Dec. number will be revised.  Of course, don't be surprised if there is a miss, and BLS and the uber-economy-bullish CNBC guys blame it on the rain and snow.  We think the best way to look at tomorrow's numbers is to take the average of those and the likely revised Dec. figure.  If the average is at or above 175K, it may reduce fears regarding the labor market.  Based on our model, we think that figure will be around 147K.  BLS will release employment numbers tomorrow morning at 8:30am (ET). 

TWTR: Beat Q4 & FY '13 estimates, but traded down 18% in AH

The mainstream media says that Twitter (TWTR) reported excellent numbers; however, those numbers were not as good as everyone thinks.  Revenues beat our expectation and the Street's.  In addition, the adj. EBITDA number was impressive too.  The areas of concern are disappointing user engagement, disappointing EBITDA guidance, and what appears to be much higher stock-based compensation expense and capex, going forward.  We adjusted our model based on the FY '13 results and management's color on this year.  At the end, we came up with a $13.76bil valuation for TWTR, which is slightly higher than our initial pre-IPO valuation of $13.18bil.  Of course, comparison with our previous valuation is not important.  What is important is the fact that at the closing, TWTR had a market cap of $37.4bil, significantly higher than our valuation!  Unfortunately, the stock did not react well to the Company's earnings release.  It declined nearly 18% in AHs.  While this may be an indication that the market is coming to its senses, we are not sure if the stock will trade down this much on Thursday.  But as usual, in our opinion, it should as the Company remains overvalued.

TWTR reported FY '13 revenues of $664.9MM compared to our $652.7MM estimate and the Street's $639.4MM.  Its GAAP bottom-line numbers were not that impressive as it reported net loss of $645.3MM compared with our $224.6MM estimate.  These days, the Street seldom puts out any GAAP net income or net loss figures.  Adj. EBITDA of $75.4MM was very impressive, except for the fact that it was helped by over $600MM in stock-based compensation.  We were expecting a mere $11.8MM in adj. EBITDA.  

Now let's get to the details that really matter.  In terms of user reach, or monthly active users (MAU), TWTR reported total MAU of 241MM for Q4, below our 261MM estimate.  User engagement indicator, referred to as timeline views, was also disappointing, coming in at 147,783.0MM, significantly below our 157,592.7MM.  Similar to Facebook (FB) the good part was the monetization or price, or as TWTR refers to it: ad revenue per 1,000 timeline view.  That figure of $1.49 was significantly above our $1.16 estimate.  We think there are a few factors that drove this.  One was the seasonality factor as marketing and ad volume is usually high during Q4.  The other is the uber-enthusiasm regarding mobile ads that we also saw at FB.  Companies and advertisers are jumping on the bandwagon, for now, fearing that they may miss the great revolution.  We think price growth will begin to decelerate later this year.

We must also note that, to our surprise, TWTR's non-ad revenues, or data licensing revenues, came in higher than what we had expected; $70.3MM vs our $64.0MM.  This was due to an acquisition that TWTR made in FY '13.  In addition, we think given the TWTR platform where anyone, anywhere can post tweets, reaching possibly anyone, anywhere; some companies and advertisers might be thinking about conducting the analysis in-house and then posting the free tweets.  The data necessary for this, comes from TWTR.  We are not sure about the real cost of doing these things in-house, but if companies and advertisers do come up with strategies on when and to whom they can post their tweets to get a good ROI, they might as well purchase the lower-priced data.  Of course, the data will be lower-priced until TWTR realizes the higher demand, to which it will react by upping its prices.  We will now try to touch on TWTR numbers and move away from our 'theoretical' discussions!

In terms of margins, gross margin of 59.9% was lower than our 63.7% estimate.  TWTR is still growing so we do expect margin expansion after FY '14.  

Going forward, management provided revenue, EBITDA, capex and stock-based compensation guidance.  Our revenue projection for FY '14 was at the low-end of the guidance, so given the higher than expected pricing, for the time being, we upped revenues slightly.  We also adjusted our EBITDA projection higher, but we note that it was mainly due to significantly higher than expected stock-based compensation expense.  In fact, excluding stock-based compensation expense, our gross margin assumption for FY '14 had to be lowered from 64.7% to 57.9%.  So, margins are impacted by other higher costs rather than just by the non-cash stock-based compensation.  The Company's capex guidance was also significantly higher than what we had assumed.  Hopefully TWTR will realize very good returns on so much invested capital.  

For FY '14, we expect $1.19bil in revenues (higher than our initial $1.16bil estimate), with $1.08bil from ads and the rest from data licensing.  We estimate GAAP net loss of $875.5MM and EBITDA of $139.0MM.  We still do not expect TWTR to have a full profitable year (on a GAAP basis) until FY '16.  

Our FCF projection for the next 5 years (FY '14 - FY '18) was not changed much, as our new higher revenue estimates were partially offset by lower margins and higher capex.  

We continue to think TWTR is overvalued.  We use TWTR every day and love it; but in terms of what the Company is worth, based on our DCF model, we think that figure is around $13.76bil and certainly not the current $37.4bil. 

Wednesday, February 5, 2014

IACI: Reports mixed FY '13 results; maintain 'neutral' and value it at $60/sh

IAC (IACI) reported mixed FY '13 results.  The risk that we have discussed many times regarding IACI's Search & Application segment (along with other companies', such as BCOR) came to fruition as that segment's revenues missed expectations big time.  Apparently it took the Street by surprise as IACI declined 5.5% on Wednesday, closing at $65.04.  As a reminder, we acknowledged that IACI was approaching what we thought was the Company's fair value back in Nov. '13, and labeled the stock as a 'neutral'.  Around that time, we also cited that Blucora (BCOR) is facing the same risk and labeled it a 'neutral'.  BCOR will likely report FY '13 results next week.  The stock is back down below $25/sh (from above $30/sh in Nov. '13), which may have improved the likelihood of its Infospace becoming an acquisition target.  However, after the IACI disappointment, future initial bids possibly placed on BCOR's Infospace might disappoint, as that EV/EBITDA multiple of 6, which we thought might be appropriate, is likely to be discounted.  

We adjusted our model slightly; more detail provided below.  The end result was a change in our total EBITDA estimate to $705.5MM (which incl. ValueClick) from $677.1MM.  However, the lower net cash balance on IACI's balance sheet as of the end of FY '13, and a slightly higher diluted share count pushed our valuation of the Company down to $60.00/sh, from $61.35/sh.    

Overall Results
Total revenues of $3,023.0MM were lower than our $3,055.9MM estimate and the Street's $3,040.0MM, mainly due to a miss in Search & Applications.  OIBA (operating income before amortization) margin was at 17.8%, in-line with our 18.1% estimate.  However, due to lower revenues, OIBA of $539.4MM was lower than our $545.3MM estimate.  EBITDA of $598.3MM was also below our $605.5MM.  IACI ended FY '13 with $20.4MM in net cash.

Search & Applications

Revenues for the Search & Applications segment came in at $1,604.9MM, compared with our $1,641.7MM estimate.  As expected, top-line growth in this segment was nowhere near what IACI experienced in FY '12, mainly due to Google's (GOOG) change in pricing.  However, the negative impact was slightly more than we had assumed.  The Company did a good job of addressing deceleration in revenue growth as OIBA margin in this segment was 22.9%, slightly above our 22.3%.  

Management expects modest top and bottom-line growth in this segment in FY '14.  We note that this is mainly due to the acquisition of ValueClick assets, which we applauded and said was necessary.  

We now expect Search & Applications revenues of $1,781.4MM in FY '14, accompanied by slight margin expansion to 23.7%, or OIBA of $422.9MM.  Initially, we had $1,773.0 and $399.3, respectively.


This segment generated revenues of $788.2MM compared with our $784.7MM estimate.  OIBA of $262.2 was below our $271.0MM as the Company increased its marketing to try and monetize some of the assets, including Tinder.  We were pleasantly surprised that 1) management finally highlighted Tinder on the call, and 2) analysts showed some interest.  We discussed Tinder back in early Nov. '13.

Although this segment's OIBA margin was approximately 170bps higher than in FY '12, it did come in 120bps below our 34.5% assumption.  We expected IACI to begin its marketing blitz and asset monetization attempts this year.  

With additional revenues coming in from assets that were in 'development' stages last year, we expect a 16% Y/Y revenue growth for the Match segment, resulting in revenues of $914.3MM.  However, margin will likely remain at 33.3%, equivalent to OIBA of $304.2MM.  Initially, we had $902.4 and $298.1, respectively.  We note that the increase in our revenue estimate is driven mainly by monetization of newer sites, and that is why we do not expect margin expansion.  We think the Company is already facing pricing pressure.  As we have said this before, this business can get commoditized very quickly.

Local, Media, & Other

The remaining segments reported total revenues of $630.7MM, pretty much in-line with our $630.0MM estimate.  OIBA loss of $21.3MM in these segments was slightly better than our OIBA loss estimate of $24.0MM.  Simply put, Vimeo has a potential and HomeAdvisors continues to disappoint, especially in the US.  We did not make any adjustments to our FY '14 top or bottom-line estimates for these segments.  We expect $693.8MM in revenues and OIBA loss of $20.0MM.  The 10% revenue growth will be driven mainly by the growth and hopefully successful monetization of Vimeo.

Tuesday, February 4, 2014

GCI: Guides higher than expected Broadcast revenues; Reported strong Q4 and FY '13 results

Gannett (GCI) reported a better than expected FY '13 results.  It also guided broadcast retransmission revenues higher than we had estimated.  GAAP EPS came in lower than our estimate as we had not projected additional facility consolidation or asset impairment charges for Q4.  The stock opened up nearly 4%, but is now up only 2.6%.  We have updated our model given the strong broadcasting revenue guidance provided by management.  Our new valuation of the Company is now $40.75/sh, compared to the $38.61/sh we had in our initial post.

FY '13 broadcast revenues came in at $835.1MM, topping our $815.8MM estimate.  On a Y/Y basis, those revenues were down 7.8% due to more political and Olympic spots in even year, FY '12. Operating margin came in below our estimate; 43.3% vs 48%.  Excluding one-time charges, broadcasting operating margin was 45.2%.  We still expect significant margin expansion given the higher than expected retransmission revenues going forward.  

Digital revenues of $748.4MM came in below our $757.3MM projection, although still up 4.1% Y/Y. Digital operating margin of 17.1% was also below our 18.5% estimate.  However, excluding one-time items, it came in slightly higher, at 18.7%.  

Publishing ad revenues of $2,198.7MM were above our $2,171.2MM estimate, and down 6.7% Y/Y.  Circulation revenues were $1,129.1MM, compared to our $1,118.7MM estimate, and up 1.1%.  We expect overall publishing revenues to continue to decline going forward.  Surprisingly, operating margin in the publishing segment was about 30bps higher than our 8.5% estimate.  In fact, excluding one-time charges, that figure was 12.1%.  With continuing decline in publishing revenues, we expect lower margin in publishing, going forward.

Total FY '13 EBITDA of $987.1MM was higher than our $939.6MM, mainly due to higher revenues.  

For FY '14, in our base case scenario, we upped our revenue estimates in publishing and broadcasting segments, and did not make any adjustments to our digital revenue estimate.  We slightly lowered our margin assumption for broadcasting to 49%, from 50%.  In addition, we upped our publishing margin by 50bps to 8.5%.

With these adjustments, our DCF and sum-of-parts valuations increased, resulting in what we consider to be a fair value of $40.75/sh for GCI.  We await the release of the 10-K in order to fully update our model.