BCOR - Blucora

[krazeenyc]

Blucora is extremely undervalued. It is comprised of 3 unrelated businesses - Infospace, Monoprice, and most importantly TaxAct.  (They also recently purchased howstuffworks.com for $42M to complement their Infospace business).  Given that the 3 business are completely unrelated, I think it's appropriate to value the company from a sum of the parts perspective -- it is clear that the reason the companies are combined under one umbrella is to take advantage of the NOLs.

 

Since I'm feeling lazy I'm going to refer you guys to the VIC writeup in 2012  by madler934 a couple years ago that walks you through the company (at the time) . Since that writeup a few things  have happened .

 

1) Blucora issued $201.25 million aggregate principal amount of Convertible Notes. 

2) Monoprice was purchased last year for $182M in cash.

3) Both the Infospace search business and TaxAct performed like gangbusters in 2013 and the stock price doubled.

4) in Feb 2014, Gotham issued a short report that can be found here:

http://ify.valuewalk.com/wp-content/uploads/2014/02/207697112-Blucora-i-e-Infospace-Worse-Than-Blinkx-plc-Babylon-Ltd.pdf

that crushed the stock.

5) Google renewed with Infospace but did not give Infospace access to mobile (this is not as horrible as it may sound as 85% of infospace's google business is on the desktop as well as 2/3 of their growth.

6) Infospace business needs to be find a new baseline based on this change (and is also going through a temporary hiccup due to some short term technology changes).

7) Monoprice business is a bit soft (I don't have a good feel on what their baseline is - I need to see more).

8) Purchased Howstuffworks.com for $45M. 

9) Most importantly TaxAct is still going gangbusters - up 5% customers, up 7% arpu, up 22% income , up 12% revenues.

 

My take on the situation is that buying BCOR at these levels ($17.50 after hours) is very similar to buying Yahoo! at $12-13 a share in 2011 when people were not giving them enough credit for their stakes in Alibaba and Yahoo Japan. The TaxAct business is asset light, high ROE, loyal customer base, growing rapidly, has strong industry tailwinds as well as a long runway -- basically almost everything you could want in a business. TaxAct alone should be worth at least the entire market cap of the company -- investors should be focusing on the performance of TaxAct first and foremost.  Investors then get the company's cash, Infospace business (which I think is misunderstood) as well as the monoprice business  all for free.  I think Mr. Market and Gotham City is giving investors a gift by offering BCOR at the current market price.

 

If this post is incoherent, it's because I'm a bit tired.

[LanceSanity]

I read the write-up and comments. This sounds like a good investment. The guidance doesn't seem that bad to me, but apparently Mr. Market thinks otherwise, enough to ding this 10%. Do you have an estimate for intrinsic value accounting for the guidance?

[krazeenyc]

I read the write-up and comments. This sounds like a good investment. The guidance doesn't seem that bad to me, but apparently Mr. Market thinks otherwise, enough to ding this 10%. Do you have an estimate for intrinsic value accounting for the guidance?

 

Again if you look back at 2011 -- when yahoo was trading around $14-15 or so, Yahoo would report earnings that reflected stagnant revenue growth and problems monetizing search and display ads. Yahoo's stock would nose dive 5-10% despite Alibaba, Yahoo Japan and net cash representing a value greater than the market cap at the time. Somehow the performance of the most insignificant piece of the puzzle impacted the company in a disproportionate amount.  It's similar here as TaxAct is still performing wonderfully with no signs of slowing down and a long runway ahead of it.

 

Now to value.  For me it's hard to value monoprice -- we've only seen it public (as part of BCOR) for a couple quarters now.  But I like the basic concept -- quality products, very reasonable prices, and good customer service. For now I think assigning a value equal to the price they paid is reasonable -- you could discount it somewhat if you like.  I value Infospace at 5x new ebitda (ie sans google mobile). I value TaxAct at 15x ebitda. Keep in mind that the balance sheet is strong with a nice cash position and the NOLs should augment FCF for many years to come (if it weren't for the NOLs it would make sense to spin everything off). I think these conservative valuations leaves us at $30 a share in value.

[thepupil]

have been following for 2 years, options issuance and management comp is on the heavy side from what i can tell and didn't like the convert offering as i feel it took some upside off the table, but i like the overall concept of buying low capex businesses to monetize a big NOL and i like the valuation here given solid results at taxact.

 

i bought for the first time today at $16.90

[yadayada]

At first sight this doesn't look cheap? But i guess I thought the same thing about OUTR. :) To list their businesses:

 

 

-Taxact

Op income: 40 million and growing as well. Not sure what the moat is here? Seems like these things largely compete in price and did anyone use it?

 

-Monoprice

Op income: 5 million and growing. What is their moat here? And how wide is it? Seems they compete against amazon?

 

-Infospace

Operating income: 82 million and growing. Seems this should be dying, but is kept alive and somehow growing by people who dont really know how to navigate the internet effectively?

 

-Howstuffworks

I think this will add to the Infospace thing?

 

-Corporate

I think you need to substract about 53 million here right? But like 27 million of this is depr and amortization. But they have some maintenance? So lets say it is -40 million total?

 

So what, like 85 million of operating income. It says 75 total in the 2013 10K.

 

Where is the hidden value here? Is it leverage over costs if revenue increases? It also seems that these 'questionable' businesses that seem kinda obsolete make up a large part of income. And because of their NOLS they barely pay taxes or no taxes? How would you model 2014 FCF?

[APG12]

I read the write-up and comments. This sounds like a good investment. The guidance doesn't seem that bad to me, but apparently Mr. Market thinks otherwise, enough to ding this 10%. Do you have an estimate for intrinsic value accounting for the guidance?

 

Again if you look back at 2011 -- when yahoo was trading around $14-15 or so, Yahoo would report earnings that reflected stagnant revenue growth and problems monetizing search and display ads. Yahoo's stock would nose dive 5-10% despite Alibaba, Yahoo Japan and net cash representing a value greater than the market cap at the time. Somehow the performance of the most insignificant piece of the puzzle impacted the company in a disproportionate amount.  It's similar here as TaxAct is still performing wonderfully with no signs of slowing down and a long runway ahead of it.

 

Now to value.  For me it's hard to value monoprice -- we've only seen it public (as part of BCOR) for a couple quarters now.  But I like the basic concept -- quality products, very reasonable prices, and good customer service. For now I think assigning a value equal to the price they paid is reasonable -- you could discount it somewhat if you like.  I value Infospace at 5x new ebitda (ie sans google mobile). I value TaxAct at 15x ebitda. Keep in mind that the balance sheet is strong with a nice cash position and the NOLs should augment FCF for many years to come (if it weren't for the NOLs it would make sense to spin everything off). I think these conservative valuations leaves us at $30 a share in value.

 

I looked at this in the mid 20s and decided to pass but now it's a heck of a lot cheaper. I think TaxAct is a bit difficult to value as there's not very much history and I think you need some foresight to figure out how the competitive environment is going to shake out. It really seems like a commodity product to me- is there anything to prevent a guy from H&R programming his own walk through tax preparation software? It doesn't even seem very difficult to map out TaxAct's software through flow charts and program your own. At the same time there looks to be some customer stickiness. If they save your previous year's tax return it can be a lot easier to use the e-file. I have nothing against commodity products if the business has a sustainable cost advantage. Clearly all of the preparation software companies have an advantage over the brick and mortars but against each other it seems like competition could get ugly. In BCOR's 10-K they list some competitive factors:

 

 

•   the ability to continue to offer software and services that have quality and ease-of-use that are compelling to consumers;

 

 

•   the ability to market the software and services in a cost effective way;

 

 

•    the ability to offer ancillary services that are attractive to users; and

 

 

•    the ability to develop the software and services at a low enough cost to be able to offer them at a competitive price point.

 

They don't have an advantage in any of the first three and so they seem to be competing primarily on price (by offering free federal filing). Anyways, that's one issue to think about for a business that appears pretty darn attractive based on trailing numbers/growth rates.

 

From where do you derive a fair value for TaxAct of 15X EBITDA? Assuming no D&A that's a P/E of 23. I know everyone throws out multiples willy nilly these days but what assumptions are you using to justify that?

[krazeenyc]

At first sight this doesn't look cheap? But i guess I thought the same thing about OUTR. :) To list their businesses:

 

 

-Taxact

Op income: 40 million and growing as well. Not sure what the moat is here? Seems like these things largely compete in price and did anyone use it?

 

-Monoprice

Op income: 5 million and growing. What is their moat here? And how wide is it? Seems they compete against amazon?

 

-Infospace

Operating income: 82 million and growing. Seems this should be dying, but is kept alive and somehow growing by people who dont really know how to navigate the internet effectively?

 

-Howstuffworks

I think this will add to the Infospace thing?

 

-Corporate

I think you need to substract about 53 million here right? But like 27 million of this is depr and amortization. But they have some maintenance? So lets say it is -40 million total?

 

So what, like 85 million of operating income. It says 75 total in the 2013 10K.

 

Where is the hidden value here? Is it leverage over costs if revenue increases? It also seems that these 'questionable' businesses that seem kinda obsolete make up a large part of income. And because of their NOLS they barely pay taxes or no taxes? How would you model 2014 FCF?

 

Taxact -- DIY tax prep is sticky as hell. It is extremely painful to move from 1 company to another -- as it is an enormous pain for you to move data from 1 company to the next. Tax Act gives federal free and charges for state and other add-ons. While the operating history is short, it basically has everything you want in a business -- asset light, high ROE, growing, low cost provider, strong sector tailwind.  If you look at the price point they offer their services they compete very well -- case in point + 5% users + 7% arpu.  It's not like they raised their prices -- they were able to upsell more features to their customers and their customers chose to pay the extra $$ for those features.

 

Monoprice was created to be the anti-"Monster". Remember when Monster sold hdmi cables for $50 each. These guys realized they could make a nice price selling quality HDMI cables (and other cables for under $10) . They're not really a competitor to Amazon -- although Amazon basics might compete with them. 

 

Infospace -- I guess this is the controversial piece of the puzzle but it should still generated plenty of FCF for years to come.

 

Howstuffworks -- no idea. I'm sure they have a plan -- good or bad.

 

They generated around $128M of FCF last year. Probably will be less this year due to the issues at Infospace but still $110M+?  This is unlevered.

 

FWIW I originally bought around $15.50 and sold near $27 and have seen the stock come all the way back down and began buying in the low 19s. I added today and yesterday AH around $17.50.  I think the roundtrip is a gift for everyone. Again I think the market is overly concerned with what's going on at  Infospace and undervaluing TaxAct substantially.

[krazeenyc]

I read the write-up and comments. This sounds like a good investment. The guidance doesn't seem that bad to me, but apparently Mr. Market thinks otherwise, enough to ding this 10%. Do you have an estimate for intrinsic value accounting for the guidance?

 

Again if you look back at 2011 -- when yahoo was trading around $14-15 or so, Yahoo would report earnings that reflected stagnant revenue growth and problems monetizing search and display ads. Yahoo's stock would nose dive 5-10% despite Alibaba, Yahoo Japan and net cash representing a value greater than the market cap at the time. Somehow the performance of the most insignificant piece of the puzzle impacted the company in a disproportionate amount.  It's similar here as TaxAct is still performing wonderfully with no signs of slowing down and a long runway ahead of it.

 

Now to value.  For me it's hard to value monoprice -- we've only seen it public (as part of BCOR) for a couple quarters now.  But I like the basic concept -- quality products, very reasonable prices, and good customer service. For now I think assigning a value equal to the price they paid is reasonable -- you could discount it somewhat if you like.  I value Infospace at 5x new ebitda (ie sans google mobile). I value TaxAct at 15x ebitda. Keep in mind that the balance sheet is strong with a nice cash position and the NOLs should augment FCF for many years to come (if it weren't for the NOLs it would make sense to spin everything off). I think these conservative valuations leaves us at $30 a share in value.

 

I looked at this in the mid 20s and decided to pass but now it's a heck of a lot cheaper. I think TaxAct is a bit difficult to value as there's not very much history and I think you need some foresight to figure out how the competitive environment is going to shake out. It really seems like a commodity product to me- is there anything to prevent a guy from H&R programming his own walk through tax preparation software? It doesn't even seem very difficult to map out TaxAct's software through flow charts and program your own. At the same time there looks to be some customer stickiness. If they save your previous year's tax return it can be a lot easier to use the e-file. I have nothing against commodity products if the business has a sustainable cost advantage. Clearly all of the preparation software companies have an advantage over the brick and mortars but against each other it seems like competition could get ugly. In BCOR's 10-K they list some competitive factors:

 

 

•   the ability to continue to offer software and services that have quality and ease-of-use that are compelling to consumers;

 

•   the ability to market the software and services in a cost effective way;

 

•    the ability to offer ancillary services that are attractive to users; and

 

•    the ability to develop the software and services at a low enough cost to be able to offer them at a competitive price point.

 

They don't have an advantage in any of the first three and so they seem to be competing primarily on price (by offering free federal filing). Anyways, that's one issue to think about for a business that appears pretty darn attractive based on trailing numbers/growth rates.

 

From where do you derive a fair value for TaxAct of 15X EBITDA? Assuming no D&A that's a P/E of 23. I know everyone throws out multiples willy nilly these days but what assumptions are you using to justify that?

 

Intuit trades at a higher valuation I think 17x EV/Ebitda I have to double check. And I'm attributing 0 value to the NOLs -- which should augment the value. I would argue TaxAct has an advantage in all of the 4 points you copy and pasted. It's like saying Hyundai doesn't have a quality advantage over Lexus -- of course it doesn't but it's operating at a completely different price point. I would argue that it has a quality advantage over the companies competing at or near its price point. Also I would argue that they are doing an excellent job of offering ancillary services (+7% arpu).

[yadayada]

How do you get 128 million in FCF?

 

If you take out cash provided by change in operating liabilities and assets they generated even less then the 95 million$ in net cash.

 

And it seems taxact carries this thing. a 15x multiple on next years 50 million in FCF probably, would make almost the entire market cap. And then you would get the rest for free basicly.

 

And it seems a bit worrying that margins of taxact are shrinking. You want them to expand really.

 

Reviews on taxact and other tax programs:

http://www.moneycrashers.com/taxact-vs-turbotax-vs-hr-block-best-tax-prep-software/

 

[oddballstocks]

Just a data point, yes, DIY tax prep is sticky.  I use TaxAct, someone recommended it to me years ago, I've never considered moving.  I'm familiar with the software and they can import last year's return to make it easier.  Price isn't the consideration for me.  I think it's $20 a year to file, if it were suddenly $30 it wouldn't make a difference.  They could probably raise it to $50 or $100 and I still wouldn't care, much cheaper than hiring an accountant.

 

I used them for my business taxes as well.  I was able to upload a file from Quickbooks and they generated my tax returns based on it.  Slick product.  I don't even know the price of it, whatever the price it was well worth it.  If they raised the price 25% next year I wouldn't care.

 

For whoever said this is something an ex-H&R employee could throw together....good luck.  I'm guessing you've never filed taxes by hand with a pencil or done enterprise software development.  With a 1,000pg tax code this isn't just some simple logic tree, the tree would be almost infinite.

[yadayada]

you have the same impression as the above review? It seems the other 2 competitors do much better in those reviews. If they are really that much worse, and consumers aren't that price sensitive, how sticky would their business really be?

[LanceSanity]

I looked at this in the mid 20s and decided to pass but now it's a heck of a lot cheaper. I think TaxAct is a bit difficult to value as there's not very much history and I think you need some foresight to figure out how the competitive environment is going to shake out. It really seems like a commodity product to me- is there anything to prevent a guy from H&R programming his own walk through tax preparation software? It doesn't even seem very difficult to map out TaxAct's software through flow charts and program your own. At the same time there looks to be some customer stickiness. If they save your previous year's tax return it can be a lot easier to use the e-file. I have nothing against commodity products if the business has a sustainable cost advantage. Clearly all of the preparation software companies have an advantage over the brick and mortars but against each other it seems like competition could get ugly.

 

I actually used to use H&R's online tax prep, but switched to TaxAct this year because of price ($30+ vs $10- slickdeals!). TaxAct seems to be the least stressful DIY tax prep out there. There are too many annoying quirks with H&R and I'm very satisfied with TaxAct, so I'm probably going to stick with that.

[oddballstocks]

The other thing is I have a Mac, TaxAct is online.  When I first looked at tax software in 2005 OS X versions were expensive or didn't exist.  So I went with the online version.

 

Maybe I'm a skilled user or something, but I have no issues with TaxAct, I do have a fairly complicated set of taxes.  One of my brothers who is financially illiterate does his taxes with them quickly and easily.  My dad as well.

 

I never looked at the reviews, but I'd assume TurboTax is the most popular.  They flood Costco and virtually every store with their software.  I don't like their business model of having to install the program, then needing to re-install or upgrade yearly to get the newest forms.

[krazeenyc]

How do you get 128 million in FCF?

 

If you take out cash provided by change in operating liabilities and assets they generated even less then the 95 million$ in net cash.

 

And it seems taxact carries this thing. a 15x multiple on next years 50 million in FCF probably, would make almost the entire market cap. And then you would get the rest for free basicly.

 

And it seems a bit worrying that margins of taxact are shrinking. You want them to expand really.

 

Reviews on taxact and other tax programs:

http://www.moneycrashers.com/taxact-vs-turbotax-vs-hr-block-best-tax-prep-software/

 

Segment margin on TaxAct was up (almost has to be with arpu up 7%)  Q1 last year 48% vs Q1 this year 52%.  Tax Season margin is 55% this year.

[krazeenyc]

The other thing is I have a Mac, TaxAct is online.  When I first looked at tax software in 2005 OS X versions were expensive or didn't exist.  So I went with the online version.

 

Maybe I'm a skilled user or something, but I have no issues with TaxAct, I do have a fairly complicated set of taxes.  One of my brothers who is financially illiterate does his taxes with them quickly and easily.  My dad as well.

 

I never looked at the reviews, but I'd assume TurboTax is the most popular.  They flood Costco and virtually every store with their software.  I don't like their business model of having to install the program, then needing to re-install or upgrade yearly to get the newest forms.

 

the competitors offer an online only product as well (turbotax online).

[jschembs]

I've been following BCOR for a while, but didn't pull the trigger after the stock popped (almost a year ago to the day). Thought the TaxAct purchase was genius - huge NOLs to shield taxable income, and the asset was highly coveted by HRB, who couldn't acquire due to competitive reasons. Not so sanguine on the howstuffworks.com purchase, although perhaps that's just my aversion to the AOL-type roll-up strategy of buying random sites.

 

I think there's tons of value to potentially be created here, but I'd be weary if they continue to burn cash on questionable acquisitions.

[APG12]

For whoever said this is something an ex-H&R employee could throw together....good luck.  I'm guessing you've never filed taxes by hand with a pencil or done enterprise software development.  With a 1,000pg tax code this isn't just some simple logic tree, the tree would be almost infinite.

 

That whoever was me! I'm glad someone with more knowledge on the subject chimed in because I'm clearly pretty ignorant here. I have very limited experience with software development so your point is well taken. Does anyone know if the TaxAct software has the capability to file for people with complex tax issues? I used TaxAct this year, my taxes are very simple, and the logic tree that was used in my preparation appeared to be very simple as well- that's the only reason I made that comment.

 

From personal experience, there are only two things I care about when it comes to my own taxes: How big of a pain is this going to be? and How much am I going to have to pay? The value proposition vs. brick and mortar is clear but is there any reason to say that TaxAct offers a better (or worse) service than TurboTax? That's all I'm getting at. Is this going to be a commodity product in 5 years? 10 years? Ever? It seems to me that if you're going to put a high multiple on earnings you should be fairly certain of what the economics of the business are going to be in the medium term and so I'm just trying to look at this with a critical eye.

[yadayada]

It seems that with a few rational large players, barriers to entry are high, due to higher fixed costs and it is hard to convince people to switch when it is cheap already. And if there are a few rational players, I doubt they will start a price war with a sticky product like this? Seems that you would have to run close to break even, and people probably don't care that much if it goes from like 10-15$ to 7-8$ if it is a hassle.

 

 

[CorpRaider]

Very interesting.  I like/patronize TaxAct and Monoprice. 

[Steve]

 

some stats on howstuffworks.com: 

 

https://siteanalytics.compete.com/howstuffworks.com#.U2PflV6TTfc

 

Anybody have the financials on this piece of the business? 

 

-Steve

[yadayada]

I met with a person associated with H&R Block today. They tried to buy TaxAct but were blocked by the Department of Justice on anti-trust concerns. My friend said that TaxACT has great management which was what they really wanted to buy.

I do not own BCOR yet, but I think that it is doing some very interesting things and maybe a real winner.

from VIC comments.

 

ALso reading comments on reddit, and it looks sticky indeed. A lot of people like tax act and seen a lot of comments that there isn't much difference.

 

So getting warmed up about that part of the business.

 

how is this, 80 million income for search. Give that a 6x multiple? so 480 million$.

 

Taxact, give 15x multiple on 50 million$ income = 750 million.

 

Monoprice income is like 16 million a year? Seems steady, but cannot figure out their moat. So like 6-7x 16million is roughly 100 million$

 

Then there are corporate costs. Which is like 30 million? How do you factor that in here. If search dies, will those costs be lower? Over 10 years, 300 million reasonable?

 

That would be like 1350-300 = about 1 billion$.

 

They do seem to pay taxes now? This does not include taxes, so likely valuation is even a bit lower then that. Doesn't seem upside is that great? Especially if they waste some of that FCF.

[thepupil]

yadayada, they don't pay cash taxes, companies that are monetizing NOLs have tax expense in income statement but it is not cash tax expense.

 

instead it represents that usage of the NOL (the expensing/depletion of an asset).

[heth247]

I am a TaxAct user as well (6 years). Very easy and intuitive to use. Their customer service respond email question pretty fast.

[gokou3]

What is the likelihood of Google not renewing the contract in 3 years?  What's the value of infospace without partnership with the big search engines?

[PatientCheetah]

It seems obvious that we shouldn't for any growth except for Taxact because moats are uncertain. Taxact is a sticky business but it has less brand equity compare to its competitors so 13-15x looks reasonable to me. Price target should be conservative. If stock price overshoots, the extra is just bonus.