BCOR: Reporting after the close; new valuation of $26.00/sh; not much upside

Given BCOR's earnings release later this afternoon and the fact that the stock has appreciated 58.6% since we suggested it in late Jan '13, compared with S&P 500's 17.2%, we thought to review our estimates and valuation.  We included our projections for Monoprice (acquired in late Aug '13) in our Q3 and full-year estimates, in addition to our valuation of BCOR.  Our latest sum-of-parts valuation, based on our 2014 estimates, resulted in $26.00/sh, which represents a mere 7.0% upside from where the stock is currently trading.  

For Q3, which will be announced today after the close, we expect total revenues of $108.5MM, consisting of $94.7MM from search, $1.5MM from TaxAct, and $12.4MM from Monoprice.  We estimate adj. EBITDA for each of the three segments to be $17.0MM, -$2.4MM, and $1.5MM, respectively.  As a reminder, TaxAct is very seasonal which means it generates small losses in Q3 and Q4.  For a full calendar year, TaxAct's EBIDTA margin is within the 45% - 50% range.  In addition, our Monoprice estimates are only for the month of September in Q3 as the deal closed on August 22.  Our total company adj. EBITDA projection (which includes corp. G&A expenses) is $12.6MM.  

For FY '13, which will include only 4 months for Monoprice, we estimate total revenues of $534.8MM and company adj. EBITDA of $105.5MM.  

For 2014, we have reduced search segment revenue growth projection from mid-teens to only 7.1%, as we expect impact of GOOG's pricing adjustment to be more significant than we initially assumed.  We think this will be only slightly offset by BCOR's ongoing efforts to increase growth of its O&O sites.  We're assuming 10% Y/Y growth for revenues generated from O&O.  With all this said, we expect adj. EBITDA margin of 18.3%, which is what we also have for FY '13.  We look for 2014 search revenues and adj. EBITDA of $416.4MM and $76.2MM, respectively.  We note that this segment could become an acquisition target given the impact of GOOG's pricing on smaller search businesses.  However, we do not think this will take place until we and the potential buyer see a considerable decline in BCOR's stock price. 

Regarding BCOR's TaxAct segment, we expect 8.0% top-line growth in 2014, driven mainly by a higher NFP estimate for 2013, which means likely more tax payers in 2014 tax season.  We estimate an average of 185K change in NFP per month in 2013.  In addition, we think 2014 TaxAct's total units, as a percentage of 2013 NFP will go up a few bps to approx. 4%.  This translates into approx. 5.5MM total units during 2014 tax season, generating around $94.5MM in revenues.  For Q3 and Q4 '14, we expect additional $3.0MM in combined revenues, bringing 2014 total tax services revenues to $97.5MM.  In addition, we think BCOR's marketing, development, and partnership strategies will pay off more next year, possibly increasing this segment's EBITDA margin to 50%, which equates to $48.7MM in EBITDA.

Monoprice is a stable and profitable business with adj. EBITDA margin of 12% - 13%.  However, the $180.0MM that BCOR paid to acquire Monoprice, represents 11.3x TTM adj. EBITDA, which we think is a pretty hefty multiple.  While BCOR's online presence in the search space can help spur revenue growth for Monoprice, we do not think it justifies paying 11.3x adj. EBITDA for that business.  We have assumed Monoprice revenues of $154.6MM for FY '14 as we think they will get an initial boost from BCOR's search capabilities; but going past FY '14, we would be surprised to see a 5-year revenue CAGR above 7%.  We have modeled $20.1MM in adj. EBITDA for Monoprice in FY '14.  

Our new $26.00/sh valuation represents a sum-of-parts: 6.5x search adj. EBITDA, 8x tax services adj. EBITDA, 7.5x Monoprice adj. EBITDA, and net cash.  Again, the Company will report Q3 today after the close. 

IACI: New valuation of $59.50/sh; not much upside

We thought to provide an update on IACI which reported its Q3 results last Tuesday (10/29).  Yes, we are a bit late but we did not 're-activate' our stock tracking and valuation until last Thursday.  As a reminder, we spotted IACI as a value-play in late Jan '13.  Since then, the stock has appreciated 37.8% compared to S&P 500's 17.3%.   It closed at $55.68, slightly higher than our previous $54.00 valuation.

IACI reported mixed Q3 results, as it missed on revenues but handily beat on EPS.  We have a slightly clearer picture of upcoming 2014.  We now value IACI at $59.50/sh (up from our prior valuation of $54.00/sh), which represents only a 7% upside from where it closed on Monday.  For this reason we think the stock is now a 'neutral'. 

IACI's revenue miss was due to Google's (GOOG) latest pricing adjustment as IACI's search business is dependent mainly on GOOG.  We note that such miss came about even though total queries were 30%+ higher Y/Y.  This indicates that GOOG adjusted its prices significantly, to which IACI must adapt quickly.  The 300bps Y/Y operating margin expansion was the good news for that segment.

Slightly better than expected top-line from the Match segment only partially offset the miss in Search & Applications.  Match's 9% Y/Y revenue growth helped expand its margin by approx. 70bps.  

Local, Media & Other segments displayed top-line growth but, not surprisingly, they generated a combined operating loss in Q3.  

With that said, although we do not believe much upside remains in the stock, as usual, the probability of IACI selling portions of its portfolio at some premium and returning the ROI to shareholders is higher than with other companies.  

IACI could also acquire additional businesses to lessen the volatility in its portfolio.  For example, given its dependency on GOOG, the Company could try to buy other remaining small search businesses hoping that faster growing queries could minimize impact of GOOG's pricing policies.  Blucora's (BCOR) Infospace could become an acquisition target for IACI, in our opinion.  

IACI also has some products and services that have not yet been monetized.  Tinder, part of the Match segment, is one example.  The 'on-the-fly' and 'quick' (or short-term) match making service for the ones with the 'urge' has become popular among users within the age range of 25 - 55.  Yes, this is a pretty wide range, which is good news for IACI and its monetization efforts of Tinder, which already is a mobile product.  In addition, Tinder is basically riding the coattails of Facebook (FB), as it is only available for users with FB accounts (as far as we know).  On a side note, this does support the latest figures that FB's popularity among teens is decelerating.  In addition, IACI is a majority owner of Tinder.  Although the stock reacts positively to good news regarding another asset, Aereo, and its battle with MSO's, IACI owns only a minority interest in Aereo.  The stock could react much more positively to any news of progress made in monetizing Tinder.

Another asset which has performed well and still has significant upside is Vimeo, a video sharing website.  According to management, Vimeo has generated $37MM in revenues during the last 12 months.  However, those revenues are generated mainly from the video upload process.  The Company has yet to make money off of video viewing and ads on Vimeo.

While certain parts of IACI's portfolio have some attractive upside (in addition to the Company's nearly 2% dividend yield), we think the stock is now close to fair value.  For FY '13 we expect total revenues of $3.06bil, representing a 9% Y/Y growth.  We expect approx. 200bps EBITDA margin expansion for the Company, resulting in EBITDA of $605.5MM.  For FY ’14 we have modeled in a 10% top-line growth, or $3.37bil in revenues.  Although we expect EBITDA margin to increase slightly more in FY ’14, 240bps to 22.2%, the deceleration in Search & Applications, which represents 50%+ and 60%+ of the Company's revenues and operating income, respectively, is forcing us to continue to apply the same EV/EBITDA multiple for valuing IACI.  At 7.5x our FY ’14 EBITDA estimate, IACI’s EV could be around $5.08bil.  After adding the Company's net cash balance of $188.00MM, we think market value of IACI is approx. $5.26bil, or $59.50/sh.   

By the way, BCOR will be reporting tomorrow after the close.  We will try to post our thoughts on that Company's valuation before the earnings release, but as usual, this is not a guarantee. 

We're back ... for now; let's talk about FB

We thought we should update our valuation of Facebook (FB), the momo stock (momentum stock), which shot up from below $18/sh to nearly $55/sh.  Of course, this was after the stock closed at $38.23, below its IPO price, after the first day of trading in May '12.  Simply put, FB dropped more than 50% below its IPO price to $17.73 (which we enjoyed), and it climbed nearly 200% which was certainly welcomed by many FB fans.  The stock has been a momo one for the past 3.5 months. 

The Company reported its Q3 results on Wednesday, handily beating, on the top and bottom-line.  The mobile ad strategy has certainly begun to payoff for FB as its overall ARPU grew 7.5% and 33.8% Q/Q and Y/Y, respectively.  Such growth was driven by increase in MAUs and number of ads within news feeds, mainly on the mobile platform.  In fact, we estimate mobile ad ARPU (mobile ad revenues per mobile-only users) of $3.47 in Q3, significantly above the $1.51 total ad ARPU.  Impressive top-line growth certainly helped the bottom-line as we did see a Y/Y non-GAAP EBIT margin expansion of 430bps.  In addition, management touched on some of the newer products that the Company is currently working on.  However, we will need to have patience in order to see some return on those.    

There were some negatives that came along with the positives we just mentioned.  For example, management acknowledged it believes daily active usage by younger teens is slightly declining, which is basically the last thing that advertisers want to hear.  

Management also stated that the Company will not increase the number of mobile ads (via news feed).  We believe, based on its own research, the Company has learned that given the limited amount of space on mobile devices and the users' limited attention span, additional ads will not only reduce ad ROIs, they may drive away users.  This is something that we briefly touched on more than a year ago.   We actually believe that when it comes to mobile advertising, it must be based on a 'pull' strategy and not a 'push' strategy.  This becomes even more important when FB is dealing with large brand names and trying to help them create long-term marketing and advertising strategies.  An analyst touched on this during the call by asking a push/pull question.  Unfortunately, the CEO did not necessarily answer the question.  

Fear of decline in prices may be another reason why management has decided to no longer increase number of mobile ads via news feeds.  By limiting the supply of ad space (number of places available to place ads in) and assuming that demand will stay constant or increase, management is managing the ad prices, in our opinion.  This becomes even more important when user growth begins to decelerate, which we have seen in the North American region.  In addition, we believe prices of ads placed on desktops have plummeted, and management is hoping mobile ads' significant revenue growth will continue, as it certainly has to more than offset the decline in desktop ad revenues.   

We also believe FB has realized its 'closed network' strategy is not paying off as well as it had hoped, especially when there are more open players, such as Twitter, in the social media space.  In fact, we were amused at how much the CEO tried not to mention Twitter when answering a question regarding FB's 'latest strategy' of using hashtags ('#').  This is one reason why Instagram has been successful as it is more open than original Facebook.  However, FB is yet to monetize Instagram.  It is progressing slowly as the Company does not want to risk turning Instagram users away by throwing too many ads (whether text, images or video) at them.  Successful monetization of Instagram does represent an upside for FB.

With the upcoming Twitter IPO, we believe FB will be facing a lot more competition as it seeks more ad dollars.  As management said, current mobile ad dollars represent only 3% of total ad budgets, which means it has a lot of room to grow.  However, we believe such growth will be accompanied by more ad distributors, somewhat limiting growth of the size of their piece of the pie.  Twitter is also well-suited for most mobile device users, as they likely have short attention span and will be multi-tasking, at least while using the device.  And twitter is open; open not only for users, but also for advertisers and companies.  

Going back to FB, we continue to value it below where it is currently trading.  Our DCF model spit out a $25.94/sh valuation, significantly below where the stock closed at on 10/30.  At $49.01, FB is trading at an FY '14 EV/Sales multiple of 12, higher than its peers' 6.  It is also trading nearly 50x its FY '14 non-GAAP EPS, which is below its peers' average of 95x.  However, we note the group P/E average is significantly inflated by AMZN's 133 and YELP's 268.  Our updated estimates are provided below.    

Lastly, we will provide updates on IACI, AVID, and BCOR (reporting Q3 next week) by Sunday.  IACI did report earnings on Tuesday and missed big on the top-line.  It closed down 8.5% at $53/sh, barely below our valuation of the Company, which is $54/sh.  We will review the numbers and provide an update later this week.  Also, since the last time we posted some BS on our blog (7/30), AVID has gone up 16%, compared to S&P 500’s 4.6% increase.  In fact, the stock has jumped 39% since mid-Sep.  As a reminder, AVID is currently in the process of reviewing its revenue recognition, and it may get de-listed from NASDAQ.  However, NASDAQ has given the Company more time to update its financial results and file the necessary 10-Qs and 10-Ks with the SEC.  It is up only 6% from when we initially suggested it, compared to S&P 500’s 24% increase since then.  We note the stock had climbed more than 17% before taking a dump after the revenue recognition review announcement. BCOR closed at $23.18 on Wednesday, up 53%+ since we suggested it in late Jan '13; this is compared to S&P 500's 17% increase since then.  Similar to AVID, BCOR has gone up 16% since our last post, higher than the market's 4.6%.