BCOR - Blucora

[siddharth18]

All BluCora has done this year (from start to finish) is drop, drop and drop some more. I'm sure many sales are due to tax-loss.

 

I'm trying to get comfortable with the valuation on an absolute basis, so, at $567M market-cap you're getting a core TaxAct business worth a lot. Secular tailwinds, cap-ex light, low-cost product with pricing power and nice operating leverage. Pre-tax earnings around $70M. If we put the Buffett's 10x pre-tax multiple on it, it's worth $700M.

 

In order to establish a floor, let's be realistic and assume that infospace is, at worst, worth zero, and at best, an option worth something. Same with monoprice.

 

Discounted value of NOLs (160M) + net cash (30M) on balance sheet around $190M.

 

Compared to $568M current market cap.

 

BCOR's intrinsic value may not be set in stone due to each investors' own opinion regarding Infospace's and Monoprice's value. What's clear is that there's a lot of margin of safety and upside in case the market becomes optimistic.

 

What have I missed?

[radioheadok3]

Tax Act won't generate $70mm pre-tax this year, so that number's off - it'll be around $50-$54mm depending on the loss for 4Q14. The web search assets are worth something, but ascribing a low multiple to them is best unless you have an edge re: understanding steady state revenue. The web businesses are worth something as well, but not really in my area of expertise. I think this stock comes down to management and how well they allocate capital and if they're interested in empire building via acquisition or focusing on the few things they do well. I passed on this stock prior to the previous run-up due to my being uncomfortable with some of the acquisitions and the overall strategy the Company is undertaking. If you ask me, they should be growing Tax Act as aggressively as possible, run off the search business with clearly articulated goals and milestones, and then sell the Tax Act piece. I'm not sure management is interested in doing this, however... Still an interesting situation to look into at current levels.

[Southpaw]

"Voss sent a letter to the board of directors and management of Blucora (BCOR ), Inc. seeking a breakup of the Company. Attached you will find the full letter which includes a step by step analysis of our plan.

 

To summarize:

 

1)      Blucora is the cheapest free cash flow generating internet stock in the United States by a wide margin at 6x unlevered FCF (with a large net cash balance) despite having one the most profitable internet assets, TaxACT.

 

2)      We believe the stock can rise 90%+ with our plan, which would be a win for management, board, and most importantly long suffering common shareholders.

 

3)      The key components of the plan include:

 

a.      Remove Sentiment Albatross: Divesting the Search segment which is cash flow positive but has been an ongoing sentiment anchor and the myopic focus of bearish leaning analysts

 

b.      Create Tax Prep Pure Play: Divest other non-core business, Monoprice.

 

c.      Disband Parent Management: Role of parent management is purely for capital allocation and acquisitions as all business units are functioning independently. After three consecutive questionable capital allocation decisions, the market has lost all faith in them. Parent management’s compensation has been steadily rising and total unallocated corporate costs will rise to $18 million in 2015, the vast majority of which could be cut.

 

After this sequence of events, the company would be a lean Tax Software pure play that has grown revenues and EBITDA at a 13% and 17% CAGR the last two years, respectively, with nearly 100% free cash flow conversion due to low capex needs and no taxes. Technology companies with similar profitability and growth profiles command 20-25x free cash flow. At 20x free cash flow, TaxACT alone is worth 2x the current market cap.

 

In addition to these steps, there are other capital allocation decisions that could be enacted with the massive net cash balance that would remove concerns about questionable future acquisitions. The most obvious value enhancers would be a Dutch Tender before the divestitures while the multiple is still depressed, and/or a special dividend with all net cash after the divestitures.

 

Voss urges other shareholders to reach out to the Board and management to begin a constructive dialogue on unlocking value, firmly hold them accountable for their poor performance, and to remind them of their fiduciary duty to all shareholders.

 

https://www.dropbox.com/s/6fujngls1i57ok4/Voss%20Open%20Letter%20to%20Blucora%20Board%20-%20August%2031st%20-%202015.pdf?dl=0 "

[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?

Not trying to be a smartass (I'm not smart enough for that) but BCOR just announced a 580m acquisition. Mr. Market doesn't like it but at first glance I don't think it looks all the stupid (that said, information is limited).

http://www.streetinsider.com/Corporate+News/Blucora,+Inc.+(BCOR)+to+Acquire+HD+Vest+in+~$580M+Deal/10970030.html

[kab60]

Pretty good take on the situation: http://seekingalpha.com/article/3574216-blucoras-big-move-looks-like-another-bad-deal (it's free to read the the moment)

[kab60]

No position but getting more interested after 20 percent drop. Proforma EV of ~ 900m (consider zero value from monoprice and search).

[kab60]

Company announced new CEO, and the market has been spitting it out since my last post. Down 50 percent in three months.

 

http://www.streetinsider.com/Management+Changes/Blucora,+Inc.+(BCOR)+Appoints+New+CEO/11420152.html

 

New CEO is some dude from Charles Schwab and it seems some investors doesn't like his background. I'm not too worried since the leadership at TaxAct and HD Vest seem to be very capable and with the right incentives.

 

My back of the envelope has it trading at 8,5 EV/Ebitda with 160m NOLS that should probably get utilized. Both business are capital light and have been growing double digit for years (and are run my owner-operators) though there's some concern about how well HD Vest would do if markets turn sour and regulations increase.

 

They also have the Search business and Monoprice (not included in my EV/EBITDA ratio), which I suppose might fetch between 20-120m USD or up to almost half of market cap. They expect to close those sales midyear. I think of the NOLS and Monoprice/Search as free options. The historic concern has (rightly) been poor capital allocation, but now that they've levered the shit up, they don't have many options but to pay down debt, and then they'll start returning 30 pct. of cash to shareholders in 2017.

EDIT: I dipped in at 5,25.

[kab60]

Are nobody getting interested here and if so - why not? I'm really struggling to kill the thesis/valuation at this point so I'd love any input as to why this might still be a shitty investment.

 

EV is currently around 735m (190m equity, 545m debt) while company is guiding around 90m adjusted ebitda from continuing operations. This is for two growing and capital light business run by what seems like two savy owner-operators.

 

The biggest liabilities (lots of cash and a shitty CEO) are gone, while the corporate expenses will go from 18 to 12m next year and Company will start returning 30 pct. af FCF to investors.

 

If one considers TaxAct is worth 400m, HD Vest 300m (they paid 600m 3 months ago) and they can get 100m from discontinued operations or 3xEBITDA (Monoprice, which they paid 180m for+Search+HowStuffWorks) you have an EV of 800m or 35 pct. upside from here. This includes valuing 160m NOLS at zero.

 

35 pct. upside doesn't interest me one bit, but I think that's under a pretty damn bearish scenario.

 

Since the equity is just a bit more than 1/4 of the capital structure one doesn't need to change the assumptions very much to see this double or triple but obviously leverage works both ways. Here I actually think leverage is a good thing (capital light and sticky businesses with recurring revenue), and because the capital allocation risk has basically been eliminated for at least a couple of years. I really like TaxAct (+50 pct. operating margins(!), 16 pct. ebitda growth FY15) and now I think it's come on serious sale. People seem to worry about TurboTax each year, but TaxAct seems to hold its own and being the cheapest/lowest cost producer I'm comfortable they'll do just fine - maybe even really well.

[kab60]

Just thought I'd update with the bull thesis (which is managements guidance):

 

TaxAct/HD Vest grows around 10 pct. so Blucora does 100m adjusted Ebitda in FY'17 (somewhat BS due to stock compensation, but this is the bull thesis). Discontinuing operations is sold for 100-200m. Net leverage goes down to 3 times after tax season 2017 so 300m net debt.

 

That leaves one with an enterprise value of a bit less than 500m or 5 x Ebitda.

 

Slap a 10 x multiple on the equity (asset light, growing) and it should trade at a market cap of 700m versus 200m today or 250 pct. upside (shares at 17,5 versus 5 today).

 

The good and the bad:

 

Good:

This is from the recent H&R Block CC:

 

Jason L. Houseworth - President, U.S. Tax Product Strategy and Development

 

Sure. As I mentioned, George, we feel like we started out a little bit slow. I think that we have seen some shift move to the category leader as they really worked with Absolute Zero and price on the desktop side in order to get that share. I think that there's been more share that's gone to TaxACT and some of the smaller players, and that's really where we're at at about halfway through the season.

 

Plus, he mentioned pricing power and how they've been able to increase prices at double the inflation rate.

 

Bad:

Google trends for TaxAct have come down, while TurboTax has been trending up (same thing happened last year, but TaxAct increased operating income +10 pct. via pricing). TurboTax has spent a lof of money on adds and gone after TaxActs customers.

 

So-so/contrarian:

TurboTax has bought a lot of leads with their ad campaigns of doing free tax returns, but while it lures people in, it might also push some away because it isn't really free. Reviews are pretty similar for H&R Block, TurboTax and TaxAct, but everyone seems to agree that TaxAct is the cheaper option for most users, and that's probably not a bad spot to be in.

 

Freebies: Interesting article on TaxAct and how it all started: http://www.wecreatehere.net/2014/04/03/story-of-taxact/ as well as a current update on the situation: http://www.richmond.com/business/ap/article_bc2affc1-739e-5c10-805a-2242ff8b569e.html (I like how they seem to stay very frugal and the fact that they're based in Iowa, which makes it harder for competitors to poach talent - and the shitty weather makes it more fun to stay inside and code than go outside)

[ratiman]

What are the chances the HD Vest business advisers get picked off? I don't think the market is worried about TaxAct, it's worried about HD Vest.

[kab60]

Picked off; how and by who? Numbers of advisors last year grew from 4.415 to 4.600 (recurring revenue @ 75,1 % in Q4, number of advisors down a bit sequentially from Q3). If you're talking about increased regulation, I'm not really sure how to handicap that, but I still like the odds since I think the downside is very much protected by TaxAct.

 

Even if we said for kicks that HD Vest is a zero (that would be hard to fathom, since they just paid 600m and it has existed since the late 80'ties) you'd be left with TaxAct, discontinuing businesses, 160m in NOLS and an expensive HQ at an EV of 735m. Say they sell their discontinued business for 135m (optimistic, but just to keep this simple and with round numbers) you're at 600m. TaxAct did 57m in operating income in 2015 (up 14 pct. y/oy) so that's a 10,5 multiple - I don't like to pay higher, but some would probably say it warrants 12-14x.

 

Obviously this doesn't take corporate costs into consideration (guiding for 12m in 2017 vs. 18,5m this year), but those costs could probably be taken out in a theoretical take-private transaction of TaxAct.

 

Clearly, this scenario isn't very bright, but I also think it's unlikely. What do you think?

[ratiman]

What is the bear case on HD Vest? I seem to remember SA had a good article making a bearish case against HDV.

[kab60]

I think it's increased regulation making tax professionels dump HD Vest and financial advisory - make it a double whammy with crashing equity markets so AUM goes down on remaining advisors (they say they're not too dependent on AUM, but I don't trust management). Number one I think they'll manage, I actually like their niche, while I'd say number two is probably more likely than not in the next couple of years, but I don't do macro calls, which is also why I didn't take a position till recently when the had written off 400m or 2/3 of the equity post HD Vest deal. I think the uncertainty is very much discounted.

 

My biggest issue with Blucora has been management and capital allocation, but the CEO is gone now (CFO should probably get kicked outas well), and debt levels and leverage targets means they won't have to decide where to allocate capital for at least a year (except on whether to do divys or buybacks next year - I don't think they can screw that one up, but they've surprised on the downside before).

 

I don't think there has been a good bearish case on SA since the transaction of HD Vest, but please do link if you find it. There's a recent article which is pretty bullish (when it was around 6-7 usd per share) while some of the comments are bearish.

 

 

[kab60]

Just wanted to add a couple of notes;

 

It seems like LPL Financial Holdings is a decent public peer to HD Vest. Its share price has been slaughtered and is down 50 pct. since its 52-week high.

 

The market is worried about upcoming regulation from the Department of Labor which will increase compliance costs for advisors.

 

The Blucora 10-K mentions the upcoming regulation and that it might have a material impact but really doesn't say anything.

 

But management commented in the last quarterly call, and if true it sounds rather neglible (but I don't think one should base an investment on their words):

 

We plan expenses to fund current and future expected compliance, including the upcoming DOL rule. We expect a final DOL rule within next 60 days to 90 days, although the implementation deadlines are expected later in the year or beyond. If the rule is adopted as proposed, we see the most significant impact in disclosure requirements to clients with smaller IRA investments, resulting in additional annual costs estimated to be approximately $200,000.

 

From a materiality perspective, impacted smaller accounts represent approximately 2% of total assets under administration or $500,000 in equivalent of company gross profit. We can mitigate a portion of the rule’s impact by lowering account minimums and shifting balances to advisory accounts. Overall we do not expect the impact of the DOL rule, as proposed, to be material to our financial performance and we are working to best operationalize the new rule once finalized.

[Rasputin]

I just started nibbling at $4.85.

 

My math:

 

47 million shares outstanding (5 million + options not included in diluted shares for now because they're showing loss) = $228 million market cap

Net debt 12/31/2015 = $544 million

EV = $772 million

2016 EBITDA $86 million (this includes $17 million unallocated corporate overhead)

2016 stock comp $17 million

2016 interest $37 million (assuming no debt paydown, though they said they will pay down the 7% credit facility by $30 million in Q1)

2016 capex $5 million

2016 cash taxes $1 million

2016 fcf $26 million

2016 fcf yield about 11.5%

EV/(EBITDA-capex) roughly 9.5X

 

This math assume they'll get zero for discontinued operation.  Takes into account NOL. 

 

I like TaxAct, HD Vest is ok (nothing compared to BAC GWIM, but still ok).  I'm not that worried about DOL fiduciary rule on retirement acct impact on HD Vest.  I'm more worried about mgmt wasting those fcf but for now they have to pay down debt and they have stated they will pay out 30% of fcf in 2017.  Ruckelshaus is now the Vice Chairman of the board (leadership position on the board according to him) so he's still there. 

 

[kab60]

That pretty much matches my numbers though I have interest a bit higher since they've been paying 13m annually on their notes (not sure why?).

 

If one believes management it start getting really interesting next year. Say they get book value (just impaired) - 135m - for discontinuing operations, corporate expenses is reduced 6m, Ebitda grows mid-high single digit (they guide 5m synergies) and you have around 100m Ebitda next year. I think it's a stretch, but they said they intend to be at 3 x leverage in the beginning of 2017 (probably post tax season). That would mean notes are paid off as well as a chunk on the term loan. Say they "only" pay their 200m in notes and you're still around 60m in FCF in 2017. If they can pull this off, it's a tremendous bargain.

 

My biggest worry is continued M&A when they get leverage down to 3 times. Their bonus plan is pretty stupid. Segment CEO's (HD Vest/TaxAct) have decent targets (revenue/ebitda/synergies/growth in users) but Blucoras CEO has the wrong incentives I think - which might also explain all the stupid acquisitions. He is suppoed to grow revenue and Ebitdal, but there's no ROIC target, so it's perfect if one wants him to buy expensive shit. I hope somebody goes activist on the useless board. If I had a small hedgefund (or just a lot of cash) I think it would be an easy win. Not sure if Voss are pulling some strings or out, but he agitated for a split up of the Company end of August 2015. Instead they decided to splash 600m on a new acquisition two months later. Hopefully he didn't throw in the towel yet.

 

I also bought more today.

[Rasputin]

There was accretion of debt discounts of $4 million in 2015 wrt to the converts.  Cash interest expense was $8.6 million in 2015. 

[kab60]

So something like this in a Bullish 2017 scenario:

 

Base Ebitda: 96m

+6m corporate savings + 5m synergies = 107m

 

Debt = 3 x 107 = 321

 

FCF:

107m Ebitda

Less 23m interest

Less 12m stock compensation

Less 5m capex

Less 1m cash taxes

= 66m FCF or a levered FCF yield of 34 pct. at todays price (193m market cap, not including OTM options).

 

Edit: There was debt discounts in 2014 as well I believe. Not sure exactly how that works but it's a real expense, no? Anyway, it's not very materiel since the notes can be redeemed 1st of April.

[Rasputin]

It's not real expense.

 

The 10-K explains it:

 

The liability component of the Notes, as of the issuance date, was calculated by estimating the fair value of a similar liability issued at a 6.5% effective interest rate, which was determined by considering the rate of return investors would require in the Company’s debt structure. The amount of the equity component was calculated by deducting the fair value of the liability component from the principal amount of the Notes, resulting in the initial recognition of $22.3 million as the debt discount recorded in additional paid-in capital for the Notes. The carrying amount of the Notes is being accreted to the principal amount over the remaining term to maturity, and the Company is recording corresponding interest expense. The Company incurred debt issuance costs of $6.4 million related to the Notes and allocated $5.7 million to the liability component of the Notes. These costs are being amortized to interest expense over the six-year term of the Notes or the date of conversion, if any.

 

I think they will be paying down the $400 million term loan first since the interest rate is 7%. 

[ratiman]

I just started nibbling at $4.85.

 

My math:

 

47 million shares outstanding (5 million + options not included in diluted shares for now because they're showing loss) = $228 million market cap

Net debt 12/31/2015 = $544 million

EV = $772 million

2016 EBITDA $86 million (this includes $17 million unallocated corporate overhead)

2016 stock comp $17 million

2016 interest $37 million (assuming no debt paydown, though they said they will pay down the 7% credit facility by $30 million in Q1)

2016 capex $5 million

2016 cash taxes $1 million

2016 fcf $26 million

2016 fcf yield about 11.5%

EV/(EBITDA-capex) roughly 9.5X

 

This math assume they'll get zero for discontinued operation.  Takes into account NOL. 

 

I like TaxAct, HD Vest is ok (nothing compared to BAC GWIM, but still ok).  I'm not that worried about DOL fiduciary rule on retirement acct impact on HD Vest.  I'm more worried about mgmt wasting those fcf but for now they have to pay down debt and they have stated they will pay out 30% of fcf in 2017.  Ruckelshaus is now the Vice Chairman of the board (leadership position on the board according to him) so he's still there.

 

The fcf yield is 3.3%, not 11.5%. It makes zero sense to ignore the debt. Thanks for laying out your research, but I have to disagree with you. 3.3% is an anemic return for an overleveraged turkey like Bluecora. I like TaxAct and the NOLs but at 3.3% yield and a ton of debt and lousy management and a third rate advisor like HD Vest, it's not an interesting opportunity, imo.

[kab60]

I just started nibbling at $4.85.

 

My math:

 

47 million shares outstanding (5 million + options not included in diluted shares for now because they're showing loss) = $228 million market cap

Net debt 12/31/2015 = $544 million

EV = $772 million

2016 EBITDA $86 million (this includes $17 million unallocated corporate overhead)

2016 stock comp $17 million

2016 interest $37 million (assuming no debt paydown, though they said they will pay down the 7% credit facility by $30 million in Q1)

2016 capex $5 million

2016 cash taxes $1 million

2016 fcf $26 million

2016 fcf yield about 11.5%

EV/(EBITDA-capex) roughly 9.5X

 

This math assume they'll get zero for discontinued operation.  Takes into account NOL. 

 

I like TaxAct, HD Vest is ok (nothing compared to BAC GWIM, but still ok).  I'm not that worried about DOL fiduciary rule on retirement acct impact on HD Vest.  I'm more worried about mgmt wasting those fcf but for now they have to pay down debt and they have stated they will pay out 30% of fcf in 2017.  Ruckelshaus is now the Vice Chairman of the board (leadership position on the board according to him) so he's still there.

 

The fcf yield is 3.3%, not 11.5%. It makes zero sense to ignore the debt. Thanks for laying out your research, but I have to disagree with you. 3.3% is an anemic return for an overleveraged turkey like Bluecora. I like TaxAct and the NOLs but at 3.3% yield and a ton of debt and lousy management and a third rate advisor like HD Vest, it's not an interesting opportunity, imo.

No, leveraged FCF yield is 11.5% (per the above math). That's not ignoring the debt since that's after interest. You're double counting by looking at the enterprise value (including debt) and FCF (after interest).

 

This is a business with recurring revenue (competitors mention 10 pct. churn with tax software), and HD Vest has 75 pct. recurring revenue as well, so it should be able to easily manage some leverage (that's not to say debt isn't high at the moment).

 

When/if debt comes down to 3 x Ebitda mid 2017, then Company could return 100 pct. of FCF to shareholders.

[ratiman]

You might be right about common definition of fcf yield, but if Bluecora were a bond, yield to the investor would be 3.3%. I think that's the best way to think about if you want to level the playing field between companies with varying levels of debt. It's certainly the most conservative way to value the company. Otherwise you get into absurdities where, as you mention, the yield is 100%.

[Rasputin]

I just started nibbling at $4.85.

 

My math:

 

47 million shares outstanding (5 million + options not included in diluted shares for now because they're showing loss) = $228 million market cap

Net debt 12/31/2015 = $544 million

EV = $772 million

2016 EBITDA $86 million (this includes $17 million unallocated corporate overhead)

2016 stock comp $17 million

2016 interest $37 million (assuming no debt paydown, though they said they will pay down the 7% credit facility by $30 million in Q1)

2016 capex $5 million

2016 cash taxes $1 million

2016 fcf $26 million

2016 fcf yield about 11.5%

EV/(EBITDA-capex) roughly 9.5X

 

This math assume they'll get zero for discontinued operation.  Takes into account NOL. 

 

I like TaxAct, HD Vest is ok (nothing compared to BAC GWIM, but still ok).  I'm not that worried about DOL fiduciary rule on retirement acct impact on HD Vest.  I'm more worried about mgmt wasting those fcf but for now they have to pay down debt and they have stated they will pay out 30% of fcf in 2017.  Ruckelshaus is now the Vice Chairman of the board (leadership position on the board according to him) so he's still there.

 

The fcf yield is 3.3%, not 11.5%. It makes zero sense to ignore the debt. Thanks for laying out your research, but I have to disagree with you. 3.3% is an anemic return for an overleveraged turkey like Bluecora. I like TaxAct and the NOLs but at 3.3% yield and a ton of debt and lousy management and a third rate advisor like HD Vest, it's not an interesting opportunity, imo.

 

If I pay 772 million and wipe out the debt, my coupon will be 63 million or over 8% yield. That 26 million fcf is after paying interest. 

 

There will be zero interest expense once I wipe out the debt.  So 772 million should be compared to 63 million or 228 million should be compared to 26 million.

[Graham Osborn]

If you are using EV you want to use unlevered FCF.  As long as you do, both EV/ EBITDA and EV/ FCF are acceptable measures.

[ratiman]

Let's say there was an LBO of Bluecora and the equity holders got Series E debt that pays out only once all more senior had been retired. And let's say it would take 7 years for Series E bondholders to see their first check. What kind of yield would they demand? Considering that Bluecora debt currently has a ytm of over 15%, I bet that Series E bondholders would demand a yield significantly higher than 11.5%.

 

I've never taken a finance course, so I don't want to get into a debate about the right way to calculate FCF yield. I assume you guys know what you're talking about. But it's not "double counting" to include both the interest and principal. Both the interest and principal have to be paid. In your hypothetical, the interest is ignored. In my hypothetical, the interest and principal are not ignored. I would say that in the case of Bluecora, the hypothetical 11.5% "yield" is not a helpful way to value the equity.