BCOR - Blucora

[rmitz]

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.

 

Due to a minor complexity in taxes, my mother required a $90 version from TurboTax in 2013, and filing this year with TaxAct was only $20, and not any harder (including State).

[DanielGMask]

I've been following this one for a few weeks but I still have my doubts about the allegations stated by Gotham City Research (http://seekingalpha.com/article/2027391-blucora-i-e-infospace-worse-than-blinkx-plc-and-babylon-ltd). I actually contacted Harvard's professor, Ben Edelman. This is what he answered:

 

Manuel,

 

I share Gotham's broad concerns although I would have emphasized a somewhat

different set of behaviors.

 

Blucora's most controversial business line is InfoSpace.

https://www.google.com/search?q=infospace+site%3Abenedelman.org indexes my

prior writings about them.  I continue to find new examples in this vein.

If Google ever tires of these problems, G could kick InfoSpace out of its

network.  Switching to Yahoo wouldn't be a great outcome for InfoSpace due

to much lower payments.

 

 

Ben

 

What do you all think?

[siddharth18]

I would put a $0 value on InfoSpace. Google is an extremely arrogant and aggressive company to partner with. They don't give two hoots and can cut any publisher at a moment's notice. It's unthinkable to me that Google is unaware of the issues mentioned in the Gotham's report. Which of course begs the question why hasn't Google severed the relationship already? One theory is Google is completely aware of Bluecora's business model (yes it's shady) - but continues to tolerate it - to maintain a facade of "competition" in US Search market.

 

So valuing Infospace like an option is safer than valuing it like a business.

[krazeenyc]

I would put a $0 value on InfoSpace. Google is an extremely arrogant and aggressive company to partner with. They don't give two hoots and can cut any publisher at a moment's notice. It's unthinkable to me that Google is unaware of the issues mentioned in the Gotham's report. Which of course begs the question why hasn't Google severed the relationship already? One theory is Google is completely unaware of Bluecora's business model (yes it's shady) - but continues to tolerate it - to maintain a facade of "competition" in US Search market.

 

So valuing Infospace like an option is safer than valuing it like a business.

 

I assume you've read Gotham's report. If you look into it a bit further you'll see that their kiddie porn angle is pretty much complete BS. You would value a business that generates millions upon millions of FCF as $0?

[heth247]

 

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.

 

Looks like this is "replaying" again today...

 

[krazeenyc]

 

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.

 

Looks like this is "replaying" again today...

 

For sure.

 

I wonder if they would consider spinning off TaxAct -- even if Tax Act doesn't get the benefit of the NOLs it would really help boost shareholder value.  It's an interesting time for the stock -- no catalysts in the near future.  Not sure what the best timing/strategy for acquiring shares would be.  It should take a couple of quarters for search to stabilize on a new base. TaxAct performance won't really hit until Q1 of 2015.  And Monoprice isn't doing great -- we'll see if they can make improvements to the business. I added a little bit today.

[fareastwarriors]

I used TaxAct to file my personal taxes and my family's. I used to use Turbo Tax but I find TaxAct not only cheaper but easier to use as well.

[LC]

Taxact and mono price are both low cost competitors in their industry. I like both businesses as a customer and owner.

 

I disagree about the stickiness other posters mentioned. It's not hard at all to switch tax preparers, they are only sticky as long as the prices are low. Otherwise it's easy to move elsewhere. Same with mono price. Not harder to check amazon and see if the cable is cheaper there. Mono price has a spot in the game as long as they keep prices low and customer service satisfactory. Both areas are commodity businesses and low cost providers will retain marketshare

[siddharth18]

This is getting interesting with $650M market cap. I haven't followed BCOR's very much but I do understand their business model/products.

 

The price seems to be getting in the area of "Heads - I win, tails - I don't lose much" but not "absurdly cheap"

 

 

For those who have studied this name, what's the value of the company in the most pessimistic scenario? Also, why does the company keep so much cash on its balance sheet?

 

 

They'll likely do 60M in operating income in 2015 from their tax prep, and putting a 10x operating income multiple on it gives you $600M in value for TaxAct alone.

 

--------------

I assume you've read Gotham's report. If you look into it a bit further you'll see that their kiddie porn angle is pretty much complete BS. You would value a business that generates millions upon millions of FCF as $0?

 

Sorry I should have explained myself. Well it's not worthless (if we define its worth as finding the right buyer to pay the right price) but the way it is right now, I think the probability of Google waking up one day and axing it is pretty high. I could as a standalone, it'd be a good "bet"  to pay no more than 1x the annual cash flow, and keeping your fingers crossed.

 

However, it would be interesting if management choose to sell it to IAC's mindspark division as there'd be a lot of synergies, and they are practically in the same business. In that case, it's worth more than 1x FCF in my opinion.

[WeiChiLoh]

http://chemiccapital.blogspot.sg/2014/10/blucora.html

 

Hi guys! Anyone have any thoughts? I am still starting out so some helpful critique would be great.

[peter1234]

http://chemiccapital.blogspot.sg/2014/10/blucora.html

 

Hi guys! Anyone have any thoughts? I am still starting out so some helpful critique would be great.

 

Adib Motiwala likes it. Not sure if you have seen his presentation.

 

http://tinyurl.com/klsoz4v

[WeiChiLoh]

http://chemiccapital.blogspot.sg/2014/10/blucora.html

 

Hi guys! Anyone have any thoughts? I am still starting out so some helpful critique would be great.

 

Adib Motiwala likes it. Not sure if you have seen his presentation.

 

http://tinyurl.com/klsoz4v

 

Thanks for the reply. I have not, so thank you very much! This was surely helpful. Very interesting I have to say.

[cobafdek]

I am still starting out so some helpful critique would be great.

 

Nice job.  As a beginner (an advanced one, I'd say), you'll also need careful consideration of portfolio allocation.

 

How much of your portfolio is devoted to this idea?

 

For what it's worth, I just happened to see it earlier this week on the magicformula.com screen.  So are you giving it the agnostic magicformula allocation of 2-3% of your portfolio?

 

Or, has the amount of work you've done on this idea given you enough confidence to assign it one of the slots to punch out of that mythical Buffett 20-hole punchcard, for a 10-20% position?

[WeiChiLoh]

I am still starting out so some helpful critique would be great.

 

Nice job.  As a beginner (an advanced one, I'd say), you'll also need careful consideration of portfolio allocation.

 

How much of your portfolio is devoted to this idea?

 

For what it's worth, I just happened to see it earlier this week on the magicformula.com screen.  So are you giving it the agnostic magicformula allocation of 2-3% of your portfolio?

 

Or, has the amount of work you've done on this idea given you enough confidence to assign it one of the slots to punch out of that mythical Buffett 20-hole punchcard, for a 10-20% position?

 

Hi. Thanks for the reply.

My current portfolio is really small, so the position is quite large. But assuming I am managing a larger account, I would say 8% seems to be the right number. There is still some hair on it, but the upside is attractive enough.

[mvalue]

I think BCOR is pretty interesting but be careful with your multiple for search. That is a long-term challenged business that deserves a very, very low multiple.

 

From my perspective BCOR's value might be in TaxACT being worth a pretty high multiple and looking at search as a free embedded cigar butt.

[plusalpha]

Amish Mehta: Here's Why We're Investing in Blucora

 

Amish Mehta speak about Blucora in Robin Hood Investors Conference 2014

 

 

http://www.bloomberg.com/video/sqn-s-amish-mehta-here-s-why-we-re-investing-in-blucora-jxxM8YdvRhipvjJvrWu31g.html

 

[sternalot]

Very interesting idea. Like many others have stated, I see the primary value in TaxAct. Based on what users of the platform are saying, TaxAct could basically raise prices 25-50% on its existing base and probably generate incremental $20-45m in incremental EBIT, and that ignores potential user growth.

 

However, I think the other acquisitions they've made have been terrible. For instance, Monoprice, they payed ~3.5x sales or 35x  EBIT or maybe at best 15x EBITDA for a company arguably on the brink of obsolescence. Monoprice was incredibly relevant 5 years ago when everything had nine cords you needed. I for one used to hoard cords for just about everything. Stereo to Stereo audio cord to send music to my TV, HDMI to Displaylink for TV. A bunch of ethernet cords, power cables, etc etc. The list is long. However, these days a lot of data is now transferred wirelessly making all these cords, with exception of power cords, worthless. Frankly, I'm surprised that business is even profitable. Ecommerce is incredibly tough (due to return and shipping cost profile), and they are selling commodity-like product. I just can't the thought of Radio Shack out of my head when I think of Monoprice. (I used to be a customer of both!)

 

As for Infospace, I don't really know what to think. If they were to switch to Yahoo due to Google kicking them to the curb, how much would their fees decline? How fixed is the cost structure? My assumption (key word b/c I really don't know) is that the cost structure is fairly fixed and that a 20% decline in fees would wipe out operating income.

 

If the company had a clear strategy (around TaxAct) or was making seemingly accretive acquisitions, this would be a great idea. Unfortunately, I have my reservations as the company looks today. More work to be done though....

[BG2008]

Is this a situation where some "parental over sight" in the form of a large shareholder or an activist is warranted? 

[krazeenyc]

This idea is not going very well. Results and guidance out:

 

http://investor.blucora.com/releasedetail.cfm?ReleaseID=880848

 

Very Ugly in the AH down roughly 17%.

 

- Search and Content business is definitely cratering in the near term. Must rethink what this part is worth. Howstuffworks seems to be suffering from some of the same dynamics that are impacting their search revenues.

- Nothing on TaxAct as it's not part of the tax season.

- Monoprice seems to have stabilized. But still not loving it. Prior to buying Monoprice LTM revenue was $131 Ebitda was $16M. LTM now is $151M in revenue, but only $13M in ebitda. Sigh. Definitely looks like a bad acquisition at a $180M purchase price.

 

Definitely concerned about whether or not they wasted $230M on Monoprice + Howstuffworks.

 

[WeiChiLoh]

Hey guys! I have done a mock up valuation work on BCOR, would you guys mind critiquing it?

 

Btw, I am an incoming freshman (class of 19) and I hope to eventually get into equity research. It would be awesome if you guys can critique this report this from that line of thought.

BLUCORA_UPDATE_VALUATION.pdf

[LC]

the format and presentation seemed fine to me, i disagreed with some of your comparisons (monoprice headphones vs beats, tax prep software vs car rental) as i think there's a bit of apple vs. orange going on. the car rental business has different marginal economics, barriers to entry, distribution, etc. from the software business, despite the oligopoly structure.

 

the reason i haven't totally pulled the trigger is i'm not sure about how much i want to pay for tax act. remember, tax act came from ex-turbotax developers as a lower-cost competitor to turbotax. what's stopping anyone else from doing the same if taxact decides to raise prices to turbotax/HRB levels?

[WeiChiLoh]

What I did not talk about is industry dynamics. I forgot where I read it but past the first year, retention rate for users are in the 90%+. It makes sense to me as well, why would I go through all that trouble of the first filling when I can just use a historical one. So it creates a form of stickiness. So Turbotax was dominant, the HRB came and undercut TurboTax and finally TaxACT. Now that the market share left to fight over is minimal, I dont see how these three players would descent into competition over price as the stickiness makes it hard to steal market share from each other. The only reason why undercutting helps in getting subscribers is when there are new users entering the industry. There isnt. So I am actually very comfortable with TaxACT pricing power.

 

the format and presentation seemed fine to me, i disagreed with some of your comparisons (monoprice headphones vs beats, tax prep software vs car rental) as i think there's a bit of apple vs. orange going on. the car rental business has different marginal economics, barriers to entry, distribution, etc. from the software business, despite the oligopoly structure.

 

the reason i haven't totally pulled the trigger is i'm not sure about how much i want to pay for tax act. remember, tax act came from ex-turbotax developers as a lower-cost competitor to turbotax. what's stopping anyone else from doing the same if taxact decides to raise prices to turbotax/HRB levels?

[WeiChiLoh]

Regarding your point on the differences in structure as a barrier of entry, I agree. I think TaxACT has it better, because of stickiness and margin economics. Thank you for replying!

 

the format and presentation seemed fine to me, i disagreed with some of your comparisons (monoprice headphones vs beats, tax prep software vs car rental) as i think there's a bit of apple vs. orange going on. the car rental business has different marginal economics, barriers to entry, distribution, etc. from the software business, despite the oligopoly structure.

 

the reason i haven't totally pulled the trigger is i'm not sure about how much i want to pay for tax act. remember, tax act came from ex-turbotax developers as a lower-cost competitor to turbotax. what's stopping anyone else from doing the same if taxact decides to raise prices to turbotax/HRB levels?

[kab60]

I've been following bcor and like taxact, but never pulled the trigger because I don't like their acquisitions of monoprice and howstuffwork and, unfortunately, expect more of the same. Even if valuation today looks sound, aren't you guys (bulls) worried about that?

[WeiChiLoh]

It is definitely a factor...but from the last earnings call, I got the sense of which that management realized that they have been quite unwise in their recent acquisitions (not sure about Monoprice), and this can be seen in their rhetoric. But yea..I think the discount to value is large enough to cushion bad capital allocation.

 

I've been following bcor and like taxact, but never pulled the trigger because I don't like their acquisitions of monoprice and howstuffwork and, unfortunately, expect more of the same. Even if valuation today looks sound, aren't you guys (bulls) worried about that?