Blucora Builds Web Search, Tax Prep, E-Commerce Empire
Most American consumers know by now that whatever the brand label on their electronics, most of them were made in the same network of factories in China. Shoppers at the website Monoprice.com follow this to its logical conclusion: Why not cut out the middlemen, and buy the gadgets straight from the Far East?
Monoprice launched in 2002 selling cables and switches it had bought from Asia and offered at cut-rate prices thanks to its simplified supply chain. Since then, it's expanded into computer accessories and, more recently, audio and video equipment. And in August, it came to the stock market's attention whenBlucora ( BCOR ) acquired it for $180 million.
Search Engine Roots
Blucora might have seemed an unlikely buyer for Monoprice, since the only thing the two companies had in common was the Internet. Up until 2012, Blucora was known as the search engine InfoSpace, a by-its-fingernails survivor of the dot-com boom and bust that experimented with various business models before stabilizing under the leadership of CEO William Ruckelshaus, who took the helm in 2010.
In January 2012, however, it branched outside its core business by buying TaxAct, a provider of cloud-based tax-preparation software. Like Monoprice, TaxAct has carved out its place in a highly competitive market -- dominated byIntuit ( INTU ) andH&R Block ( HRB ) -- by undercutting its rivals on price.
TaxAct has "a product offering with substantially the same feature set as larger players in the space but at what we would characterize as a substantially more fair price for their filing," Ruckelshaus told the BMO Technology, Media & Entertainment Conference in December. "The cornerstone of their offering is free federal filing for everybody regardless of your filing type or complexity or AGI (adjusted gross income), without any exclusions."
Another thing that TaxAct and Monoprice have in common is the potential that Ruckelshaus sees in them for expansion. He estimates that the digital do-it-yourself tax market is growing 4% to 6% a year, but the company has also been broadening its product offerings with sites designed to help people write up their own wills or navigate ObamaCare.
Monoprice also continues to offer a wider variety of wares, with more than 5,000 kinds of product available at this point. Ruckelshaus believes the customer base can be expanded given the high satisfaction of existing customers -- some 70% of reviews have given the site a 9 or 10 rating, he says. Jefferies analyst Brian Fitzgerald wrote in his Dec. 31 initiation report that Monoprice should also benefit from secular growth.
"Monoprice operates in large markets that are rapidly moving online," he wrote. "Global consumer electronics is a $300 billion market growing at single digits. The $37 billion online subsegment is forecasted to grow approximately 15% annually through 2016, according to IDC."
Business In Transition
Even so, the majority of Blucora's revenue -- around 60% -- is still coming from its core search business. The InfoSpace unit doesn't generate its own search results, but aggregates the results of other search engines through sites such as Dogpile and WebCrawler, as well as through its partners' properties and through the distribution of toolbars. It has more than 100 partners but about 31% of search revenue comes from the top five, led byGoogle ( GOOG ).
Google has been the source of some concern for analysts, since early in 2013 it changed its software distribution policy in response to complaints about misleading toolbar downloads that wind up taking over the browser. Blucora changed its own policies in accord with Google's, which Fitzgerald says slowed search revenue growth by quite a bit last year -- from 62.5% in the third quarter of 2012 to 17.9% in Q3 2013.
Nonetheless, Blucora's third quarter handily beat expectations, sending its stock to a 12-year high. Profit rose 20% over the year-earlier quarter to 30 cents a share, nearly double analysts' consensus. Sales climbed 34% to $124 million, vs. analysts' estimate of $96 million.
On the conference call to discuss results on Nov. 5, Wedbush analyst Gil Luria asked how the company had achieved such growth in its search revenue, given the policy changes.
Ruckelshaus pointed to the advantage of using both the distribution-partner model and the owned-and-operated website model.
"You're starting to see evidence of our taking advantage of that on the owned-and-operated side, which is really reverting back to where the company had its origins, which is as a consumer-facing provider of search solutions that are differentiated in their nature," he said. "What you're seeing in recent periods is our ability to not just bring that product to market, but also to market it and promote it in a way that we think is a benefit to consumers and also a benefit to us."
Nonetheless, analysts still see an overhang in the expiration of InfoSpace's contract with Google at the end of the first quarter. Fitzgerald points out that both Google andYahoo ( YHOO ), another major InfoSpace partner, have refused to renew contracts recently with partners who they thought were abusing their policies.
However, Barrington Research analyst Alexander Paris didn't sound worried in his Dec. 9 research note.
"While customer concentration is indeed high, we do believe the agreement will be renewed at similar terms," he wrote.
Analysts overall expect continued solid growth from Blucora. They estimate that fourth-quarter sales jumped 62% over the year-earlier quarter to $158 million, with profit rising 63% to 39 cents a share.