|Shares Out. (in M):||42||P/E||0.0x||0.0x|
|Market Cap (in M):||782||P/FCF||8.2x||7.7x|
|Net Debt (in M):||-31||EBIT||0||0|
Blucora is well known to the VIC community. The stock is currently trading at around $19, down from $29+ for much of November and December 2013 and we thought it warranted a fresh look. This write-up focuses mainly on recent events; we direct readers to Madler934’s excellent post in late 2012 as well as the lengthy associated message board for further review. We believe Blucora is a terrific buy at these prices; we view it as a collection of five high free cash flow generating businesses with varying risk profiles, very low annual capex (<5% of EBITDA), a $643M NOL balance, and a fair value of $27 representing over 40% upside.
The Company’s current TTM EBITDA multiple is 5.6x and the FCF yield is 13.2%. Using a sum-of-the-parts analysis, we get a price target of $27 for year-end 2014.
Blucora is a collection of five different businesses and the table below breaks out actual and estimated revenue and EBITDA for each business, from largest to smallest by EBITDA. Note that we choose to divide the reported Search business into three sub segments: Search Distribution, Webcrawler, and Dogpile.
Why It’s Cheap
Blucora’s stock price has dropped 25% in the last two months. Two events have taken place to create this downward pressure:
- Feb 18: a short report came out on the stock, written by Gotham City Research LLC. The full report is available on Gotham City’s website.
- Feb 20: the Company re-signed its Google agreement with a change to contract terms, resulting in lowered annual guidance. Blucora also released 1Q14 estimates with a midpoint that was a little lower than consensus.
The Short Report
There were four allegations in the Gotham City report that we investigated further. These were the allegations that we could not immediately explain, despite our familiarity with the business. After conversations with management and various other contacts, it is our belief that each of these allegations is invalid.
1) Blucora buys keywords associated with illicit activities, which drive a substantial amount of traffic and revenue
The report’s case for illicit keyword purchasing is based on the finding that Webcrawler purchased questionable keywords as part of its participation in Google’s AdWord service. These keywords are used to drive traffic to Webcrawler’s landing page where it displays ads that generate revenue for Blucora. A full four pages of the report (pages 18-22) are dedicated to this issue although we note that one table seems to confuse Webcrawler with Dogpile, which does not purchase keywords at all (page 22).
Keyword purchasing, which is part of the search arbitrage process, is exclusively part of Webcrawler’s business. We estimate that Webcrawler represents a total of ~$56M out of $650M of total revenue for Blucora. Webcrawler purchased nearly 1M Google keywords algorithmically in 2013, according to Spyfu. This short report highlights 2-3 terms out of ~1M purchased terms. Management indicated that these keywords escaped the automated filters that were designed to prevent this type of thing from happening. Frankly, it is our opinion that these three terms are innocuous enough that it is easy to see how.
Furthermore, these keywords also slipped through Google’s own keyword filter; it was their AdWords service that held these terms in inventory to sell. The same goes for Blucora’s largest competitor, Ask.com, which also purchased these same keywords from AdWords as the Gotham City report clearly illustrates. A leading Internet fraud expert we spoke with confirmed that both Google and Blucora use automated keyword systems (“robots and software”), and that it’s likely that neither “knew what the heck was going on”.
In conversations with management it was made clear to us that Blucora has no intent to buy illicit keywords and that three terms out of 1M terms are not driving the Webcrawler business, let alone Blucora’s business. As management pointed out on the 4Q conference call, “Totally removing illicit keywords from a search network is an ongoing battle for all industry participants. This is all the more challenging in the case of code words and euphemisms that are ever-changing. While our systems and filters are robust, they require constant evolution.” Googling these same terms now invokes no advertisements from any providers, indicating closure of whatever filter loophole may have existed.
2) Blucora has set up click farms to generate revenue
The Gotham City report case for click farming seems to be based on three things: 1) international traffic for Webcrawler, Metacrawler and Dogpile is significant, 2) international revenue for Blucora is minimal and 3) top search terms are generic and originate from a single IP/block. These three facts are somehow pieced together to suggest that Blucora is engaged in click farming/fraud to generate revenue.
The connection between the aforementioned facts and Gotham City’s click farming allegation isn’t completely clear to us or to any of the experts that we spoke with. Our fraud detection expert’s strong view is that it is nearly impossible to identify click-farming activities externally, likening it to putting a camera in every bank in the world and waiting around for a suspect to commit a robbery, which may or may not happen when and where the camera is focused.
In addition there are several alternative, plausible explanations for the facts above that are not suspicious. For example, international traffic is around 75-85% of most search engine traffic. The US has around 250M Internet users and the world has around 2.5B Internet users so this makes sense. India traffic, which was called out as particularly suspicious, is the second largest search traffic source after the US for every English-language search engine that we checked on Alexa. Blucora’s low percentage of international revenue reflects that 1) TaxAct (and now Monoprice) are US-based and nearly 40% of Blucora’s overall revenue, and 2) search revenue is almost entirely comprised of payments made by Google and Yahoo (US-based companies). In other words, Blucora’s reported international revenue does not tie to its international traffic at all. Lastly, the Webcrawler and Metacrawler generic search terms that the author claims are suspicious, appear to be misunderstood (or mislabeled). These terms are not “top search terms” for Webcrawler or Metacrawler. Instead, they represent the most popular search keywords that send traffic to a Webcrawler or Metacrawler landing page (from an upstream search engine). These are simply terms that are very frequently searched in any search engine. These search terms are unrelated to IP addresses.
It would be a major issue for Google if Blucora had click fraud issues. According to management, Blucora’s compliance team (and Google’s click quality team) actively monitor for serious indications of click fraud. We take management’s comments at face value after speaking with them at length – there is no click fraud taking place and the risk of alienating Google is just not something they would ever consider doing.
3) Blucora’s ad displays violate its Google agreement
The Gotham City case for ad display violations is based on a comparison between the current number/placement of ads that are displayed upon a webcrawler.com search query versus the allowable number/placement of ads that are displayed upon a Google search query per the (now outdated) Google contract filed in the 1Q11 10Q. Four full pages of the Gotham City report are devoted to this issue (pages 27-31).
The simple explanation for this discrepancy, per our discussion with management, is that there are different advertisement real estate restrictions for Webcrawler versus Blucora’s search distribution landing pages. The Google agreement filed within the 10Q refers specifically to BCOR search distribution landing page restrictions while the Gotham City report shows exclusively Webcrawler landing pages. Management also indicated that Google can (and does) change the rules of their contract, periodically, and these changes do not require contract updates. Blucora speaks with Google on a daily basis and sometimes changes and adaptations are made informally to things like allowable number and placement of ads.
As with click fraud, it would be a major issue for Google if Blucora was blatantly ignoring rules in its Google agreement. Blucora’s management explicitly indicated to us that they could not violate Google’s policies and still renew their Google contract. We know that the Google contract was renewed as announced on the last quarterly call and that Google has periodically elected not to renew contracts with partners that violate their agreements (i.e. Babylon). It seems highly unlikely that Blucora has been blatantly violating Google’s contract terms.
4) Blucora engages in “cloaking”
The Gotham City case for cloaking, on page 25 of the report, shows a toolbar search query for the term “cars” that returns an Amazon display ad but that has an Infospace web address (shown in the bar at the bottom of the page). The accusation is that Blucora is tricking the end user into believing they are clicking an Amazon link, when in fact they are being directed to an Infospace landing page.
The example cited above is not an example of cloaking and instead is just a “standard redirect” that all search distribution partners like Blucora use to count click-throughs to advertisements, as part of the normal billing process. Thus users that click on the Amazon link are, for a split second, redirected to the Infospace link, and are then sent along to the Amazon page. Our fraud detection expert substantiated this error, and that indeed this is just a simple standard redirect. In his eyes, confusing cloaking and standard redirects suggested a significant misunderstanding of common practices in Internet search, and called into question the entire credibility of the author.
5) Final Thoughts on Gotham City’s Report
The discussion above highlights a few of the highly questionable accusations made in the Gotham City report. There are many more. The entire report seems to consist of a set of loosely connected, circumstantial, and in some cases completely erroneous accusations and misinterpretations. Our fraud detection expert said it best; that while the Gotham City report was indeed “a lot of pages”, the many flaws in the report call into question whether the author is really qualified to do this type of analysis. We also reached out to the author of the report. Our conversation was short and the author was uninterested in having a discussion with us.
The Quarterly Earnings Call
Blucora’s Q4 earnings call didn’t go so well. The Company beat estimates for Q4, but its guidance for Q1 was slightly more tepid than expected. Its contract with Google was renewed but with a change that caused the Company to lower search revenue guidance for 2014 from growth in the “low double-digits” to growth in the “low single digits”.
1) Guidance for 1Q and Monoprice
The Company guided for 1Q14 revenue and EBITDA of $213-$222M and $51-$54M versus street expectations of $222M and $55M. One part of the miss was attributable to the Monoprice business. Instead of around $4M of EBITDA in the quarter, the segment is more likely to see $2-3M of EBITDA due to more moderate yoy revenue growth (low-mid single digits versus 21% in 4Q13) and elevated sales/marketing expenses. It is not particularly troubling because of the minimal absolute dollars of profit that are at stake but certainly worth keeping an eye on.
2) The Google change
Blucora extended its Google contract for three years, but beginning April 1st, excluded AdSense network ads from Blucora or Blucora customer mobile pages, which includes all pages on smartphones and tablets. More explicitly, Blucora will no longer fill advertising real estate on any of its or its customers’ mobile pages with Google ads. Instead, this real estate will display ads from Yahoo and other ad networks.
How important is mobile?
Based on management’s comments, we estimate that mobile revenue in 2013 totaled $50-60M, nearly doubling from 2012 levels. Similar dollar growth in 2014 implies mobile revenue of $80-$90M for 2014, or roughly 11% of 2014E revenue, although we believe 2014 mobile revenue will be lower than this figure as discussed below.
Will Blucora lose customers as a result of this change?
Google is sun-setting the AdSense ad network for all of its search distribution partners, for mobile, as their contracts come up. This is not a Blucora-specific change and we have first-hand knowledge of one other company that was similarly notified that mobile Google AdSense access would stop on April 1st. Customers will not be able to switch to alternative search distributors to access Google ads on mobile. We believe IAC, which potentially retains mobile AdSense access through March of 2016 (when their contract expires) is strongly discouraged, by Google, from partnering with Blucora customers. This gives us some comfort that Blucora will not see large customer defections to IAC as a result of the modification to the Google agreement.
Of course, customers can always bypass Blucora and go directly to Yahoo for their ads, but as one of their leading customers said; 1) Blucora commands better rates, and 2) if there’s a “political issue”, it’s better to be part of the larger Blucora network of customers than a tiny customer of Yahoo.
Will mobile real estate monetize at lower yields now that Google ads are no longer available to display?
The answer to this question is an absolute yes, which is consistent with management’s reduced guidance for 2014, but by how much, and to what degree margins are impacted, is not clear. The customer we talked to above confirmed this but also said that over time, it could be a “blessing” because it frees up mobile page real estate for things like display ads, “pay-per-call” ads, and other potentially more lucrative sources of revenue. One customer also suggested that eliminating Google’s restrictive policies on the placement and number of ads could ultimately be a benefit.
How does this change affect our model?
We estimate that Yahoo ads on mobile (and other network ads that Blucora might select) will generate roughly half of the revenue that Google AdSense ads would generate and will also decrease overall search margins by a few percentage points. We spoke with one person who was formerly in the mobile search monetization division at Yahoo, who suggested using a 60% of revenue as the absolute floor instead of 50% of revenue but we choose to be conservative. Both this fellow and Blucora management indicated that they would know the falloff in revenue quickly, once the feed is switched; our mobile search expert suggested within one month, and Blucora management indicated that they have a reasonable idea, based on preliminary tests.
The overall impact to our model is a reduction in revenue of $45M and a reduction in EBITDA of $22M in 2014. Using our 8x multiple implies an overall decrease in valuation of about $4 per share in 2014. Our $27 price target reflects these changes.
The Gotham City short report has numerous flaws. The change in Google’s agreement with Blucora certainly warrants keeping an eye on but our conclusion is that the market has overreacted to both of these issues creating an interesting buying opportunity.
Lastly, we note that the WSJ ran an article on Sunday night regarding a potential acquisition of Brookstone by Blucora. We have spoken with management and our interpretation is that Blucora is not going to be purchasing Brookstone. The Company’s M&A strategy remains focused on internet-based asset-light FCF-generating businesses that will utilize the NOL balance.
|Subject||RE: Mobile Margins|
|Entry||04/03/2014 07:38 PM|
Everdeen - thanks for your question and we agree that there are a lot of interesting and moving parts. Our diligence suggests that there isn’t a different revenue share across mobile and desktop, and so mobile and desktop margins are similar. We think that there are 10-12 significant partners who are generating mobile revenue and we spoke with one of these partners. We strongly believe that these partners are likely to stay with Blucora but they too will lose revenue as a result of the Google change. There is a chance that Blucora will offer some pricing concessions to these customers (i.e. give them a greater share of the payout that Google and Yahoo make to Blucora) on their mobile and desktop business to ease their pain and to ensure that they stay as customers.
The $22m reduction of EBITDA that we are modeling is a function of #1) the lost revenue on mobile (lower revenue because of the switch from Google to Yahoo on mobile) and #2) the increased expense from these pricing concessions (higher payments to customers). We believe we are being somewhat conservative here and that the second quarter results will tell us more.
|Entry||05/06/2014 10:33 AM|
I was in this about about 1.5yrs ago. Stopped following it because it seemed fully valued.
I wouldnt have been aware of what was going on with them if not for your writeup. Built a 10% position yesterday at what I think to be an excellent price.
|Subject||Anyone still watching this one?|
|Entry||08/08/2014 12:20 PM|
So the Search Distribution business is clearly in the gutter, and their Owned & Operating isn’t much better, but does anyone else think the mammoth year Taxact just had is getting a bit overlooked as we head into the two “non-Taxact” quarters?
Per management’s commentary that they expected Taxact to net out at just over $103 million revenue and hit 47% margins, that’s over 13% revenue growth and about 20% EBITDA growth. It’s actually hard for us to think of a better business than Taxact (outside of seasonality): non-cyclical (in fact, as the low cost leader perhaps counter-cyclical), sticky, strong visibility, asset light, secular tailwinds, moderately disruptive to incumbents, no capex etc. Will growth decelerate in 2015? Almost certainly, but we think 5-10% revenue/EBITDA growth is still achievable next year. Even after applying a prorata “unallocated expense” to Taxact, we think $46-48 million in 2015 EBITDA is very achievable (from ~$44 million this year) given the company’s long track record of growth.
Although it may sound silly now, we'd be tempted to give this business a 15x EBITDA multiple, given its backdrop and characteristics (and what we estimate Turbotax gets), but even with just a 12x multiple, Taxact alone is worth over $550 million. Add in a very conservative value of the NOLs at $100 million and about $40 million net cash (I’m estimating here) at the end of the year, and you’ve got a $700 million dollar company.
As we write the market cap is $660, and that also means Monoprice is worth zero (which is silly), Infospace is worth zero (less silly but still very conservative), and How Stuff Works is worth zero (just paid $40 million for it).
It appears to us that that market is settling on close to a 5x NTM EBITDA multiple for the company, which would be an all-time low since Taxact was acquired. However, given that the EBITDA mix has swung strongly from low quality Infospace (e.g. 2x EBITDA maybe) to high quality Taxact (12-15x), I would argue an all time low multiple is not warranted. If you don’t think there is high upside, than maybe selling $15 and $12.50 puts is better.
Appreciate comments on why we're wrong on this.
|Subject||RE: RE: Anyone still watching this one?|
|Entry||08/08/2014 03:40 PM|
werd and slacktide,
I agree with your valuation sentiments. It seems absurdly cheap, but I do worry that management might destroy some value and does not seem in a hurry to get the stock closer to fair value. But there is a ton of mis-understanding out there on this name.
One other thing that bothers me is the $27mm (annual) of stock comp and other op expenses listed as "corporate level activity." Given that all stock comp is listed as "corporate level," they are including non corporate level expenses here. Surely, the people that run TaxAct and Search receive stock comp. But even so, there seems to be a lot of fat at the corp level that mgmt is not looking to cut.
one question: can anyone explain the nitty-gritty details of how the NOLs come through the cash flow statement? It seems to me that the company is paying considerable cash taxes, but this does not seem possible in light of the NOLs. I hope I am simply missing an accounting nuance.
From the 10-K, I see:
"As of December 31, 2013, the Company’s U.S. federal net operating loss carryforwards were $643.3 million, which primarily related to tax deductions for stock-based compensation. When the net operating loss carryforwards related to stock-based compensation are recognized, the income tax benefit of those losses is accounted for as a credit to stockholders’ equity on the consolidated balance sheets rather than on the consolidated statements of comprehensive income. If not utilized, the Company’s federal net operating loss carryforwards will expire between 2020 and 2031, with the majority of them expiring between 2020 and 2024. Additionally, changes in ownership, as defined by Section 382 of the Internal Revenue Code, may limit the amount of net operating loss carryforwards used in any one year."
Several related questions:
- how do they have so many tax deductions related to stock comp?
- are they not "recognized" when they have gains to offset? Or is there some other event needed to be recognized?
I overlooked the exact mechanism of realizing the value of these NOLs until now. It is an important part of the thesis, but I am not seeing the fruits of the NOLs on the income statement or cash flow statement.
|Subject||RE: RE: RE: RE: Anyone still watching this one?|
|Entry||08/08/2014 04:10 PM|
I see that but I cannot for the life of me understand where that comes thru on cash flow statement . . .
there should be a large add-back to net-income . . .
|Subject||RE: RE: RE: RE: Anyone still watching this one?|
|Entry||08/08/2014 04:17 PM|
this is exactly what I thought after reading the 10-k quote I included above, but then I noticed the offsetting cash flow in operating activities. So $34,369 positive in financing but same magnitude negative in operating activities.
So I guess my problem is why is there the negative $34,369 in operating activities?
|Subject||RE: RE: RE: RE: Anyone still watching this one?|
|Entry||08/08/2014 04:31 PM|
The only explanation I have (and it should be wrong) is that it also flows through "accrued expenses and other current and long-term liabilities." This makes zero sense to me, but that line is not correct for actual accrued expenses . . . so my guess is that:
- There is that somehow a negative liability is created -- and then converted to cash -- at the moment the NOLs offset. This negtive liability creation does not pass through the income statement.
- This somehow creates offsetting cash flows in ops vs financing. And then the real cash flow is shown as part of "accrued expenses and other current and long-term liabilities."
I recognize the absurdity of what I just wrote . . . but it is still my best guess.
|Subject||RE: RE: RE: RE: Anyone still watching this one?|
|Entry||08/08/2014 04:43 PM|
I agree with what you wrote. The NOLs are there and being used.
I was hoping that I would better understand exactly how these NOLs were flowing through . . . but that will need to wait for a future life as a corporate tax accountant. For valuation purposes, I have enough. Thanks.
|Subject||That was pleasant . . .|
|Entry||11/06/2014 09:40 AM|
Search and Content in Q4 is going to come in down 25% from where they guided just 3 months ago. And they have no clear path to regain footing. Will this business be dead in a year or two?
Of course, the Search biz was always going to end this way, I had just thought it qould be a few years off. But the most distressing part of that call was mgmt's discussion of M&A . . . including the idea of sinking more money into the Search & Content biz. If they do that, $14 could be high. On the other hand, they will have even more NOLs to utilize.
Of course, if they milk the Search biz for as long as they can; slash expenses and overhead; and focus on the TaxAct biz, stock is still quite cheap. But the more I hear this mgmt team, the less I like them.
|Subject||Re: worth a trade|
|Entry||02/12/2015 11:23 AM|
Turbotax also caused a small rebellion by attempting a stealth price increase that they eventually backed down from. I put this on as a trade as well.
|Subject||Re: Re: worth a trade|
|Entry||02/12/2015 04:26 PM|
what are your thoughts from press release?
- positive: search situation has not gotten worse and perhaps stabilized
- negative: monoprice results stink. port problems . . . my valuation of monoprice goes down every quarter.
and then I think you pick up the free option as they discuss Turbo Tax problems (maybe some market shr pick up talk) on call . . . but then you gotta worry about them discussing some potential acquisition they are excited about . . .
but overall . . . meh
|Subject||Re: Re: Re: Re: worth a trade|
|Entry||02/18/2015 03:47 PM|
Actually, our thoughts were pretty positive on the quarter.
|Subject||Re: Re: management|
|Entry||09/01/2015 01:31 PM|
"How many divisions does the pope have?" -- false quote from Stalin.
I know nothing about Voss, but I cannot find their holdings of BCOR. And their letter does not seem to state their holdings, but it does mention that they have been holders since 2014. Anyone have any color on Voss?
Of course, everything they write is true, but I am not sure that publicly shaming management in this way is going to have the desired effect. Perhaps it increases chances of big-holding activist getting involved. And the spin-off is not even necessary. the most important thing here is get management to remove "threat" of more acquisitions.
I do have one question:
I am checking if they would be able to retain all the NOLs with the TaxAct biz. How would that work? Would all NOLs be retained and how would they be distributed? Is this murky or clear cut under tax laws?
Assuming the NOLs would be retained and use-able in the future by TaxAct (and perhaps Search), this plan would certainly be value-add (probably closer to $20 than $25 stated by Voss). Of course, the issue here for a long time has been whether management would remove the "threat" of future acquisitions. This is even more important than separating the hard-to-value search biz.
|Subject||Re: Re: Re: Re: management|
|Entry||09/01/2015 02:12 PM|
Voss is under the required SEC reporting threshold and part of the challenge in going activist with a significant stake is that doing so potentially impairs the NOLs. It's our understanding that going above 5% would potentially impair the NOLs, so management hides behind this. This 5% threshold, however, does not prevent many sub-5% shareholders from aligning and pushing to re-shuffling the board. The way to get around this, as the letter indicates, is to get the larger shareholders and board members to agree to the plan.
It's our understanding (from speaking with the CFO) that the NOLs are at the parent level. Thus divesting Infospace and Monoprice AND retaining the valuable NOLs is possible. In fact, given that Monoprice is impaired the NOL balance might effectively increase under the stated scenario.
Straw, why do you say closer to $20 than $25, just curious? The only thing that is uncertain is how much remaining "corporate unallocated" would remain post a break up. Upon acquiring TaxACT the corporate unallocated only increased by about $1 million a year, so we think it would be minimal (but would assume $4 million for conservatism). 20x FCF for this business seems pretty fair given growth/profitability (Stamps.com is the best comp we can come up with).
|Subject||Re: Re: Re: Re: management|
|Entry||09/01/2015 02:12 PM|
"Am I the only one who is concerned about TaxAct's lack of user growth last year?" At 6x FCF this is factored in and less concerning.
|Subject||Re: Re: Re: Re: Re: management|
|Entry||09/01/2015 02:39 PM|
I just think Search will never get the multiple bulls hope for because it is always at risk of being crushed . . . and I also have TaxAct multiple a little lower than others . . . but this is quibbling and secondary. If Voss is successful, this is worth at least low 20s and a great time to enter.
On so many of these ideas, valuation is secondary. The key variable is what probability (and timing) do you put on mgmt taking shareholder friendly actions.
|Subject||Re: Re: Re: Re: Re: management|
|Entry||09/01/2015 02:55 PM|
I am no tax expert but the Section 382 loss of NOLs would not be triggered by 5% threshold. But for publicly traded companies, all transactions by holders less than 5% do not count towards Section 382 Change of Ownership. So the 5% threshold is necessary but not sufficient to trigger Section 382 Change of Ownership.
So Voss or anyone could buy 6% and there would not be a Change of Ownership.
Anyone, please correct me if I am wrong.
As for valuation, I am guessing you are getting a valuation north of $25 . . . I do not feel passionate (or informed) enough to offer contrary argument. I would venture that gocanucks also gets a valuation closer to $20 based on his comment.
I do know that if I was confident Voss could start a snowball that forced mgmt to change course, this is is cheap either way.
|Subject||my 2 cents|
|Entry||09/01/2015 03:38 PM|
I'm not as negative on Ruckelshaus’ capital allocation as most. Let’s examine the M&A under his leadership.
First, he recognized that Infospace was a ticking time bomb and that he should reinvest the cash flows elsewhere. Good!
Then, when H&R block's deal for TaxACT fell through on anti-trust grounds, he shrewdly stepped in and made the deal for BCOR (for a fantastic price). This increased the value of the NOL and diversified away from the "bad business". Good!
His next deal, Monoprice, eroded this goodwill substantially. BCOR paid $180mm and just two years later it is probably worth closer to half of that amount. Not good.
The third deal, Howstuffworks, is underappreciated. Net of acquired cash, BCOR paid roughly $40mm. I estimate HSW has EBITDA of ~$5mm, growing double-digits. If my estimate is close, HSW is worth at least what they paid. Not bad.
In recent periods, BCOR has not made an acquisition. Given that M&A markets have been a bit frothy, this is a good thing. If there is nothing to do, do nothing.
So we have one amazing deal, one terrible deal, and a small one that seems decent. The strategy itself is sound. So, is the CEO a genius (TaxACT) or an idiot (Monoprice)? My base case somewhere in the middle. Given that point of view, the stock is cheap.
Also, breaking up the company is the wrong thing to do at this time. The entire point of the acquisition strategy is to make use of the tax asset. Sure, it might “unlock” value but it certainly doesn’t “create” it. A better approach would be for management to break up the company AFTER the NOL is exhausted.
|Subject||Re: my 2 cents|
|Entry||09/01/2015 03:59 PM|
I think the point is you can keep all the NOLs while disposing of $18 million a year in corporate costs that may or may not add value sometime down the line. Having talked to shareholders, your view is unfortunately in the minority. We spoke with a few former long shareholders who myopically focus on the declining search business and are now (I believe) out of the name.
Is Ruckelhaus a good capital allocator? Even under your more neutral view, it's still unclear.
As a shareholder, wouldn't you rather get a 80-120% gain now, still use the NOLs, and not hope that management pulls another great acquisition out in a frothy environment? Is the $18 million in corporate overhead really worth the risk of another poor acquisition?
We think the How Stuff Works deal was terrible, in that it signaled management's willingness to throw good money at bad. They also failed to dislcose any details, at all, about the acquisition (something about "not material" was all they said). Just curiuos but how are you coming up with the EBITDA number? So, absent details on accretion, etc. it appears from the outside they had also deviated from their NOL utilzation strategy.
I would also add that the convertible bond deal they did was pretty poor, given what I'm seeing other tech companies get on convertibles.
I think I'm speaking for the market when I say they've struck out on their last three capital allocation decisions (Monoprice, How Stuff Works, convertible).
|Subject||Re: Re: Re: Re: Re: Re: Re: management|
|Entry||09/01/2015 04:11 PM|
great point. I have queried IR about poison pill to preserve tax assets and will let VIC know the answer.
One thing I would note (and was discussed in notes 30-36) is that these are not ordinary NOLs, and they flow through the financial statements very differently. Does this make a difference with respect to tax laws such as Section 382? I have no idea. Any tax experts out there?
And I think breaking up the company is secondary. the market is probably valuing at a discount due to the nature of Search but splitting up NOLs is sub-optimal so they probably wash in the short term. But the real key here is getting mgmt to return cash, cut corp expenses, and promise to return all future cash. If mgmt took steps to make this happen, we all agree that the stock would fly.
As for the investing ability of mgmt, I am pretty cynical, but the market is very cynical. Whether or not they are value-add investors, it is clear that the pathway to significant price appreciation over the next 12-24 months is not via acquisitions. Maybe this is the next Berkshire Hathaway. I am confident that if they did an acquisition today that you liked, you would have plenty of opportunity to buy the stock at lower prices tomorrow.
|Subject||Re: Re: my 2 cents|
|Entry||09/01/2015 04:57 PM|
“Just curious but how are you coming up with the EBITDA number?
On the Q1 call, management said that HSW was up 39% sequentially and represented 21% of Owned & Operated revenue. This implies an annual run rate of $16.7mm. We did not get any metrics on Q2 call.
If you assume a ~$16mm run rate and a 25-40% EBITDA margin you get 4-6.4mm of EBITDA.
So hardly terrible if my numbers are in the ballpark.
|Entry||09/01/2015 05:58 PM|
I sharpened my pencil on valaution and actually read financials for first time in several quarters.
And related to Slacktide's point, the biggest question with respect to theoretical valuation (i.e. mgmt acts just as we want them to act) is how much of corp overhead and stock comp can be done away with. Voss seems not to consider stock comp and then slashes corp overhead. Normally, I would dismiss with disgust ignoring stock comp, but here, there is reason to believe it is management largesse that can be eliminated.
So, I would correct myself and say that under a completely theoretical valuation, where mgmt acts completely for shareholder interest, I think that Voss's base case ($26) is correct.
However, back to the real world, I have never thought that much o/h and stock comp would ever come out as a public company (and not PE eligible due to tax assets). In all seriousness, doesn't every one of these sum-of-parts valuations that tries to eliminate overhead over-estimate the possible cost cuts as a public company? This is the biggest difference and takes away $3/shr of value versus Voss. And then I give TaxAct a slightly lower multiple, but I give the rest of the business a slightly higher value than Voss (who is quite penal on the non-TaxAct/non-NOL value). All-in, I get $22 value.
|Subject||Re: Re: Re: my 2 cents|
|Entry||09/01/2015 10:11 PM|
rhubarb, i don't think you can trust mgmt on HSW's numbers. Just look at other ad-supported web businesses like TheStreet.com, DemandMedia (HSW is quite similar to eHow), etc. They are all getting killed by programmatic advertising. Heck, even LinkedIn is having problem with its display ad business because of programmatic. Unless you are Google or FB, I don't see how HSW isn't suffering. I couldn't believe BCOR decided to double down on Search/Media when it was clear that it was a bad business.
|Subject||Re: Re: Re: Re: Re: Re: management|
|Entry||09/02/2015 01:19 AM|
If you follow the plan that Voss lays out, the proforma EV/EBITDA is much lower than 10-11x, and since EBITDA effectively converts to FCF (very little capex needed, no taxes, no interest), a proforma pure play TaxACT wouldn't be too far off 7-8x FCF. That is far, far too cheap in my view. Most tech company's don't convert EBITDA at nearly a 100% rate to FCF. That would have to factor into the multiple.
I'm not sure I want to get into a long discussion/debate on TaxACT's long term projected growth, as reasonable minds can differ. I believe they can grow at least 8-10% for the next few years with continued leverage. I believe you are understating switching costs. It's not just some basic information, it's your entire tax history that is archived for you. I use Turbotax and it would take a lot for me to switch, but to each their own.
While one could say "I'm worried they didn't grow filers," another person could say "wow, they didn't grow filers but they still grew revenues 13% and EBITDA even higher." This year Turbotax was aggressive early in the season on adding "low quality" users, if you buy management's explanation. I would submit that both Intuit and H&R Block have margin targets and are likely to act rationally in an oligopoly structure, but again reasonable minds can differ.
In terms of multiple for a pure play TaxACT, I suggest you survey the internet/technology/software landscape and find a company like TaxACT (>40% margin, two years EBITDA CAGR above 15%, two year revenue CAGR above 10%, ALL organic, low cyclical) and see what kind of multiple that company gets. I'm all ears if you find a comp that trades below 20x FCF, but I sure can't find one. Stamps.com is the best comp I can find (~25x FCF, higher revenue growth but a lot of that is acquired and lower margins). Intuit is a tough comp given it's going through a Quickbooks SaaS transition so their numbers are a little screwed up, plus it's obviously much larger and arguably exposed to TaxACT's low cost leader position.
|Subject||Re: Re: Re: Re: my 2 cents|
|Entry||09/02/2015 07:41 AM|
Fair point nathanj. Q2 likely decelerated a bit from Q1 due to the issues you mentioned. Do you think this is temporary or permanent?
|Subject||Re: Re: Re: Re: Re: my 2 cents|
|Entry||09/02/2015 08:43 AM|
Permanent. Supply (Internet content) growing faster than Demand (Ad dollars). Theoertically, supply is infinite while demand is limited. Programmatic driving prices down. Shift towards mobile usage also ain't helping.
|Entry||10/14/2015 09:59 AM|
Am I doing the math wrong because I have them paying 20x EBITDA for HD Vest?
With stock at $14, we have a TEV of $1,100mm and with synergies, we have $90mm of EBITDA from TaxAct and HD Vest. Good news that corp overhead now reduced to $12mm going forward. And we have the NOLs. And presumably no more acquisitions.
There was a lot of bad management built into the price and it looks like this acquisition met expectations!
|Entry||10/14/2015 10:29 AM|
Including stock comp and overhead and NOL, I have TaxAct and HD Vest producing about $65mm in unlevered FCF. That is probably worth about the current TEV. So if my numbers are accurate, at $14, we get Search and Monoprice for free.
It is cheap although I would argue not as cheap as before, and I do not see the market giving much value to Search and Mono.
Perhaps the bull case is that now people will value according to TaxAct/HD Vest (they are somewhat related) and my multiple is low.
|Subject||Re: Re: Acquisition|
|Entry||10/14/2015 10:35 AM|
thanks for that. I am out of pocket and just looking at the pro forma $86.5mm EBITDA number for combined TaxAct and HDVest. Isn't TaxAct producing high 50's EBITDA ($64mm in Q1 and Q2 and then they lose $5mm in Q3 and Q4)? so doesn't that imply HDVest producing less than $30mm EBITDA.
|Entry||10/14/2015 10:37 AM|
Straw, we are admittedly still working through it, but can you walk us through your 20x EBITDA math?
Purchase price = $580/ $41 million 2015 segment income= 14x. Or if you use their 2016 guidance, 12x segment income. Note with NOLs EBITDA is very close to uFCF.
In your TEV you are not accounting for any value for Monoprice and Infospace? If you assume at least $100 million in proceeds from those two (seens conservative)...I'm at closer to 10x EBITDA (and maybe 11x uFCF) for a business combiation whose three year CAGR is 10% for revenue and 16% for operating income.
We are not in fin-tech per se, so the comp may not be appropriate, but LPL financial trades at ~20x earnings.
|Subject||Re: Re: Re: Acquisition|
|Entry||10/14/2015 10:45 AM|
After looking again, I think their $86.5mm number must include all or some of $15mm-ish of corporate overhead. The press release language is very odd in that it includes corp overhead while excluding Search and eCommerce.
If this is correct, then I have TaxAct and HDVest producing $82mm of unlev free cash flow and $1.1bn TEV looks cheap again just for these two businesses.
$82mm = $91mm + $16mm (addback o/h) - $12mm (subtract new o/h) - $5mm (capex) - $8mm (stock comp for TaxAct).
Trading at 13.4x $82mm and you get Search and eCommerce for free.
|Subject||Re: Re: Acquisition|
|Entry||10/14/2015 10:49 AM|
I was just getting from $86.5mm EBITDA number in press release less my estimate of $58.5mm for TaxAct = $28mm. 580/28 = 21.
But I think we need to add $16mm of overhead to the $86.5mm . . . so now we get $44mm of EBITDA for HDVest . . . which squares with their free cash flow multiple of 13.5.
|Subject||Re: Re: Re: Acquisition|
|Entry||10/14/2015 10:57 AM|
Just an observation as I have no position here, but this is the 3rd change of ownership for HD Vest. First sold to Wells Fargo, then Wells sold to Parthenon, now Parthenon selling to BCOR.
Also, wouldn't these p.e. firms maximized value by selling to a strategic buyer (i.e. another RIA firm)?
|Subject||Re: Re: Re: Acquisition|
|Entry||10/14/2015 11:02 AM|
There are a lot of positives here buried beneath the "we are buying another large company."
1) They basically said "this is it" on the call. There will be no more major acquisitions.
2) They will return 30% of FCF in the future to shareholders via buybacks and
3) They are divesting their two worst businesses that have been an anchor on the stock
4) The CEO is resigning
5) They are cutting 30% of corporate overhead
6) The acquisition is at least tangentially related to by far their best asset, TaxACT
7) Pledging to aggressively pay down debt over next year.
We are saying this without fully vetting HD Vest, but it strikes us as a massive overreaction and potentially the wrong directional reaction.
They claim proforma EPS of $1.09. Is 20x too expensive for these two businesses? That would put the stock near $22.
|Subject||Re: Re: Re: Re: Acquisition|
|Entry||10/14/2015 11:18 AM|
Looking at the 2011 press release when Parthenon bought HD Vest from Wells, it said "H.D. Vest provides independent financial solutions to over 1.8 million retail investors through an advisor base of over 4,800 securities-licensed tax professionals." https://www.wellsfargo.com/about/press/2011/20110629_ParthenonCapitalPartners/
Today, it says "The HD Vest platform currently supports more than 4,500 registered financial representatives managing more than $36 billion in assets for 360,000+ individuals, families and small businesses"
So, looks like the advisor base is down 300 reps in 4 years, and it's hard to figure out the difference in customer numbers. How could it have been 1.8 million then and 360k now?
Any idea the disparity?
|Subject||Re: Re: Re: Re: Re: Acquisition|
|Entry||10/14/2015 11:24 AM|
This is a direct comp to Cetera. HUGE DOL risk here as well. Roger is a character. Called his CFO Ronny Dangerfield in a bank meeting.
|Subject||Re: Re: Re: Re: Re: Re: Acquisition|
|Entry||10/14/2015 11:40 AM|
Would you be willing to expand on why it's a "clear overpay"? We don't know the space but so you may be right but given the profile of the company it doesn't strike us as a clear overpay (e.g. growth/multiples, etc.).
|Subject||Call with CFO|
|Entry||10/14/2015 01:30 PM|
We have a call with the CFO in two hours. Any questions the VIC community would like us to ask?
|Entry||10/14/2015 05:35 PM|
While strategically the deal seems reasonable, I can't say I'm thrilled with the price paid for HD vest. The net impact of the acquisition/divestitures shaved ~$1.5/shr off my estimate of fair value.
That said, the stock was quick to discount this "overpay" and now trades at a steeper discount to fair value vs. yesterday. We added to the position.
|Subject||Re: compelling here|
|Entry||10/30/2015 10:06 AM|
Did I miss something on the call? Stock now down to $9. I have them divesting search/monoprice for a total of $100mm, which seems reasonable. TEV now less than $800mm. And I have unlevered FCF from TaxAct alone at about $45mm in 2016. this includes all overhead ($12mm) and capex and no revenue synergies. It seems like market now valuing HD Vest at near zero . . . so my question is: Is there a potentially large regulatory liability they are taking on here with HD Vest?
|Subject||Re: Re: Re: compelling here|
|Entry||10/30/2015 10:46 AM|
I understand your point. Horrible acquisition. They should pay break-up fee, if possible. I do not think anyone will disagree. They got flat-out taken by seller.
But was there something particular on the call or release that is responsible for stock falling another 20%? I did not hear anything particulary new (except that Search and Mono continue downward performance).
And is there some reason to believe that HD Vest would bring a large liability rather than simply a bagel (in a DOL world)?
We had tiny position but have now established real one below $9.50. Seems like someone dumping.
|Subject||Re: Re: Re: Re: compelling here|
|Entry||10/30/2015 11:10 AM|
The only incremental news we heard on the call was preliminary 2016 TaxACT guidance. By our calcs they guided to 10.3% revenue growth for the first half (actually above our model) but they have firsrt half operating margin declining 170 bps, so only about 7% operating income growth.
For the first quarter it's more like 9%/8% I think (thinking from memory since my model is not in front of me but close).
They've actually consistently beaten their guidance with TaxACT, so we still think 10%+ on both top and bottom line is possible, but they did say they are changing packaging and trying to grow share more aggressively. The CFO characterized the guide as "conservative" if you want to believe him.
The only other update was they were about to start the sales process of Monoprice and Infospace, and expected "multiple bidders to unlock value."
We have them at about 8.5 uFCF for 2016.
LPLA trades at 16x NTM earnings now if that is a resonable comp for HD Vest.
|Entry||10/30/2015 01:15 PM|
I think it is too cheap here as well. Here is my crack at a valuation that I think is reasonable conservative.
As another way to look at it, I have them earning $.80/shr pro forma in '16. With over $3/share of PV of NOLs you are creating the business at <8x P/E.
Anyone have something substantially different?
|Subject||Anyone continuing to follow?|
|Entry||04/28/2016 01:24 PM|
Anyone have thoughts on today's release and call?
- Today's release seems to dismiss the disaster case. TaxAct transitioned to its new marketing model smoothly. HDVest results were a bit weak but probably understandable in light of markets. The debt covenants are now less threatening and should be irrelevant in 12 months if they can sell monoprice/search and generate expected cash flow.
- The increased EBITDA guidance was nice, but the $3mm increase was offset by a $2mm increase in stock comp. And this has been the trend since the acquisition . . . stock comp has increased significantly. My 2016 EBITDA (including stock comp) has not increased since deal announced.
- At present (with stock at $7.50), we have TEV of $772mm. After selling two businesses, probably paying about $700mm for TaxAct and HDVest. I have unlevered 2016 FCF (including stock comp and minimal taxes due to NOLs) pro forma for reduced overhead of about $73mm. So trading at 9.5x unlevered here.
|Subject||Re: Anyone continuing to follow?|
|Entry||04/28/2016 05:36 PM|
straw, solid quarter. i especially liked how management retired $28mm of converts for about 72 cents on the $1. Keep it up! This is the first value adding transaction i've seen this management team do in a while. the stock is quite cheap on all metrics if you factor in the PV of the NOL and the disposition proceeds. I am assuming 110 of proceeds (down from 135mm I referenced in post 89 written last October). It looks like stock comp is shaking out more like 15mm on a normalized basis vs 12mm i had previously assumed. Tax EBITDA looks like it will be north of 70mm. They clearly made a play for ARPU at the expense of share. I'm ok with that. The HD vest business was as expected. over time, i think people will realizes that HD vest is not facing imminent doom over the fiduciary standards (instead, the impact will be a greater mix of advisory business vs. brokerage). I don’t think their competitive position will be impacted (as opposed to LPL which is now in a much weaker competitive position – as their value prop was primarily on the brokerage side).
|Subject||Re: Re: Anyone continuing to follow?|
|Entry||04/29/2016 10:23 AM|
Thanks for your thoughts. I am likewise impressed with their ARPU vs mkt shr play for TaxAct and more importantly, it seems to have worked right away. And they feel that they have more levers to play with to increase profitability of TaxAct.
I had assumed $70mm of proceeds from Search/Monoprice sales just to get a round number.
I just assume they never pay taxes since they will not be paying taxes for a long time (over a decade) due to amortization shield, NOLs, and interest deduction.
The news flow since this was last at $8 has been quite positive.