Monday, August 11, 2014

BCOR: Very disappointing guidance; remaining 'neutral' on the name

Blucora (BCOR) was singing the blues on Friday after reporting better than expected Q2 results, but accompanied by very disappointing guidance.  We advised to remain on the sideline regarding this stock in Nov. '13, after a 60% gain since we initially recommended longing it in Jan. '13.  Our sum-of-parts model now spits out a $16/sh valuation of BCOR based on our newly introduced FY '15 estimates.  BCOR stock has declined 23% during the last 12 months, which includes a 35% decline since we 'downgraded' it.

Search & Content

The Search & Content segment is declining more rapidly than we thought; and we thought we might be too pessimistic!  Yes, as we have stated many times, the latest contract with Google (GOOGL), which excludes the mobile platform is pretty much forcing BCOR to 'beg for forgiveness'.  Of course, it has not done anything wrong, except become too dependent on GOOGL over time.  For the year, it appears that Search & Content revenues will be down nearly 20% Y/Y, while EBITDA margins will contract by around 300bps.  After a 24% top-line growth in 2013, we modeled in huge deceleration in growth (only single-digit growth), and it appears we were actually too optimistic.  Our mere 30bps EBITDA margin contraction assumption has also turned out 'too good to be true'. 

Disappointing results in BCOR's O&O side of the Search & Content were surprising.  While O&O still represents less than 20% of that segment's total revenues, many thought that the growth seen the last few quarters could at least very slightly offset the turmoil seen from the latest GOOGL contract on the distribution side, which we do not think will be helped much by YHOO's contract that includes the mobile platform.  With Q2's 4.6% Y/Y decline in O&O revenues, it appears that salt was actually poured on BCOR's Infospace wound in Q2 and will continue in Q3.

All of this explains why BCOR management decided to add content to its offering by acquiring HowStuffWorks.  While this may spur some growth in O&O, we think it will also lower margins a bit.

We have adjusted our FY '14 Search & Content revenues and EBITDA estimates to $345.1MM (a 19.5% Y/Y decline) and $56.9MM (280bps lower EBITDA margin), respectively.  While O&O revenue growth may be a healthy 18% in FY '15, it will not be enough to offset the 18% decline we expect in revenues from distribution partners, which represent 80%+ of total Search & COntent revenues.  We estimate FY '15 Search & Content revenues of $311.4MM, a 9.8% decline Y/Y (assuming no other acquisitions).  EBITDA margin will likely decline by another 100bps to 15.5%, resulting in EBITDA of only $48.3MM in FY '15.


TaxAct Q2 top and bottom-line looked good.  However, while for the year, revenues will likely come in above our expectations (based on management's guidance on the Q2 call), we note that margins are likely to be approx. 100bps below what we had in mind, as BCOR will not only be marketing for FY '15 more aggressively, but will likely also include additional services surrounding TaxAct's offerings at very competitive prices. 

We estimate FY '15 TaxAct revenues of $112.7MM, which represent a 9.4% Y/Y growth from our adjusted FY '14 estimate of $103.0MM.  Drivers of such growth in FY '15 include an assumed 225K per month change in NFP this year, slight increase in TaxAct's market share, along with servicing more small businesses which we think could up TaxAct's ARPU by approx. 5%.  We expect no change in EBITDA margin for the TaxAct segment in FY '15 when compared with our assumption of 47.25% this year.  We estimate BCOR's TaxAct to generate approx. $53.3MM in EBITDA in FY '15.


Whether the acquisition of Monoprice by BCOR was a good strategic move, remains to be seen.  While Q2 eCommerce revenues came in a bit better than expected, the Y/Y decline in volume forces us to remain cautious.  We did not change our FY '14 revenue estimate of $165MM; however, we lowered EBITDA margin significantly to 8% as we think BCOR and Monoprice will be forced to market much more aggressively.  So we expect eCommerce EBITDA of only $13.2MM this year.  We have modeled in a 7.5% top-line growth in FY '15, resulting in $177.4MM.  We look for margin expansion of approximately 50bps, resulting in eCommerce EBITDA of $15.1MM next year.


When applying a sum-of-parts valuation model (5x Search & Content, 8x TaxAct, and 7.5x eCommerce EBITDAs) to FY '14 estimates, BCOR is valued at only $16/sh, or 1.5% above where it closed on Friday.  Unfortunately, improvements in the TaxAct and eCommerce segments will be offset by continuing decline in top and bottom-line of the Search & Content segment in FY '15.  Based on the same valuation model and our FY '15 estimates, we think BCOR is worth only $16/sh, which means the stock is fairly valued.  We also see risk from a technical standpoint as the stock hit its 52-week low of $15.27 on Friday, a 12-month decline of 25.4% (while S&P 500 has gone up more than 14% during the same period!).  For this reason, we think in order for the stock to become attractive, it will not only have to decline to between $12 and $13 per share (to represent a 20% - 30% upside based on our $16/sh valuation), but also will have to stabilize or create a base at that level.  We remain 'neutral' on BCOR.


  1. Do you ascribe any value to NOL's?

    1. Yes, but given many questions regarding whether BCOR will be selling some of its assets (in addition to acquiring other assets) and possible structure of any M&A, which creates more questions regarding how the NOLs will be treated ... we decided not to include it in valuation. But assuming an effective tax rate of 38%, only NOL carryfwd, and profitability for BCOR going fwd, we came up with NOLs being worth between $4 and $4.40 per share. So if you'd like to include it in total valuation of BCOR, based on our sum of parts model and NOL val, BCOR could be worth between $20 and $21 per share. A 25-30% potential upside for a company with one of its main segments facing huge risks and declining, that segment's market valuation certainly not at a discount right now, questions regarding its eCommerce side and how well it can grow, and that a sizable part of its valuation is based on NOLs rather than top-line growth, operating efficiencies, etc. ... doesn't seem very attractive, in our opinion.