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".


  1. I've seen other sources (Seeking Alpha, Yahoo) where FY14 revenue estimates are much lower ($635-655m). I agree with your growth rates and total revenue, but do you know why other estimates are much lower?

  2. Not sure. They may not have included full year for the ecommerce segment.