Friday, May 2, 2014

BCOR: Difficulties continue ...

Blucora (BCOR) disappointed again, mainly due to weakness in its search segment.  We warned that this may happen on 4/17.  But the problems do not end there.  The Company's eCommerce segment's margin was also disappointing.  We continue to stay away from this stock.  As a reminder, we recommended this name on 1/29/13 at $15.13, and lowered our 'rating' on 11/5/13 when the stock was trading at $24.24, which represented a 60% gain.

Similar to IACI, BCOR is experiencing difficulties conducting its search business which is nearly 80% dependent on Google (GOOG).  Although the Company renewed its contract with GOOG in Feb., it only covered searches on desktops, which is no longer growing much.  GOOG left it out of the mobile platform, so this shortcoming was foreseen.  While the stock has already declined 35% from its 12-month high of $30.12, based on its 10% decline in AHs, it appears that such shortcoming was not that easily foreseen by the market nor its current investors.  We note that management also cited implementation of new technology within this segment as one of the reasons behind its weakness.  

Search revenues grew only 6% Y/Y in Q1.  18% margin was higher Y/Y, but was due to cost cutting, mainly less marketing as the Company expected the disappointing growth.  

BCOR is acquiring HowStuffWorks to hopefully help accelerate growth in the search segment.  The acquisition will close this month, but we do not expect much improvement in the search segment post this transaction.  We continue to expect a mere 8% FY '14 search revenue growth, with segment income of $89MM, or a 19% margin.

BCOR's TaxAct segment performed well, with revenues of $72.3MM, up 12% Y/Y.  Segment's margin of 51.7% appears to be in-line with what we expect for the full-year.  Given expected losses during Q3 and Q4, which are not part of the tax season, we estimate 48% margin for FY '14.  

eCommerce revenues were $37.1MM.  The mere 6% margin was very disappointing.  Even if we take this business' seasonality into account, it appears that it may not meet our $165MM revenue estimate and 11.5% margin assumption for FY '14.  This could be the reason why the Company may bid on Brookstone.  But as we mentioned before, it may be forced to pay too much for the business.  

Overall, we think it would be best for BCOR to sell its search business.  One of the interested parties may be IACI.  We think IACI could place a $450MM bid on that business, representing 5.5x TTM and approx. 5x FY '14 EBITDA.  Whether IACI would place the bid or BCOR would accept such an offer remains to be seen.  We now value BCOR at $20.62/sh, based on 5x, 8x, and 7.5x search, TaxAct, and eCommerce EBITDAs, respectively.  Given growth risks associated with the search and eCommerce businesses, we remain 'neutral' on BCOR.

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