Thursday, April 17, 2014

BCOR, IACI: Google's TACs not very encouraging for BCOR and IACI ...

Google (GOOG) reported its Q1 results, which provides some color regarding how Blucora's (BCOR) and IAC/InterActive's (IACI) search segments may have performed in Q1.  In our opinion, the traffic acquisition costs (TAC) of GOOG indicate continuing deceleration in BCOR and IACI search segment revenues.    


GOOG's Q1 TAC, related to its AdSense, grew only 4.8% Y/Y, compared with 11.8% in Q1 '13.  Such deceleration in GOOG TAC (positive for GOOG as its ad revenues still grew 16.5%, but not for its partners) has been evident also in annual numbers as TAC grew 5.7% and 20.5% in FY '13 and FY '12, respectively.  Historically, we estimate that AdSense has been responsible for 80%+ of BCOR's search revenues.  Combined with the fact that the latest arrangement between GOOG and BCOR do not include ads on mobile platforms, this is not every good news for BCOR's search segment.  We have touched on this risk faced by BCOR before. 

We expect only high single-digit search segment revenue growth for BCOR in FY '14.  We think the Company can accelerate growth in its owned and operated (O&O) search revenues, likely in the teens.  However, O&O revenues represent only 20% - 25% of total search revenues.  We expect total search revenues to grow approx. 10% this year compared to 24% in FY '13.  

BCOR stock has declined 36% since it hit its 52-week high of $30.12 on 11/15/13.  We continue to value it at approx. $22.50, based on sum-of-parts: FY '14 EBITDA multiples of 6, 8, and 7.5 for its search, TaxAct, and e-commerce segments plus net cash of approx. $31MM.  The Company is trying to further diversify its business as it will likely bid on the specialty retailer Brookstone.  We note that according to various reports Spencer Spirit Holdings is also bidding on Brookstone.  Given BCOR's need to find other sources of revenues, it may have to offer too-high of a premium to Spencer's bid, which is approx. $146MM.  Regarding this name, we remain on the sideline.  As a reminder, we recommended BCOR on 1/29/13 at $15.13 and 'downgraded' on 11/5/13 at $24.24. 


The same 'TAC logic' we believe is applicable to IACI when it comes to its search & applications segment.  Although, IACI's acquisition of ValueClick's O&O websites in Dec. '13 may make those figures look a bit better.  We expect approx. 11% growth in search & applications revenues for FY '14.  What has held IACI stock in the high $60s is anticipation of an IPO of the Match Group (online dating) business.  It appears the market considers Match Group's Tinder (which we discussed early on in Nov. ’13) attractive, although the question of monetization still needs to be answered.  By the way, Zoosk, another online dating service provider, filed its S-1 today, 4/16/14.  We will review it in the near future and likely provide our valuation of the company.  Of course, a successful Zoosk IPO could shoot IACI stock much higher.  But we still have a 12-month valuation of $60 for IACI, based on 7.5x FY '14 EBITDA.  We recommended IACI on 1/29/13 at $40.65 and 'downgraded' it on 11/4/13 when it closed at $55.68.

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