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Blucora Morphing From Online Search To Taxes And More
By: Investor's Business Daily
The online search company formerly known as InfoSpace has gone through many ups and downs since its founding at the dawn of the dot-com era in 1996.
Last year's name change toBlucora ( BCOR ) reflected yet another change, this time as a company with two distinct online businesses, search and tax preparation.
The latter came through the Jan. 31, 2012, acquisition of TaxAct, a low-cost provider in a business dominated by larger players TurboTax, part ofIntuit ( INTU ), andH&R Block ( HRB ), which has an "At Home" product.
CEO Bill Ruckelshaus says TaxAct represented a "corporate renewal."
The buy essentially doubled the company's profit. The change was striking in this year's first quarter, which saw net income jump 107% from a year earlier to $23.6 million. Per-share profit went up almost 90% to 53 cents a share.
After first-quarter results were released, shares soared 21% to around 18. Shares have grown about 40% since the acquisition.
"TaxAct is an example of how an acquisition can be a catalyst," Ruckelshaus said in a phone interview.
And it's just a start. Blucora intends to buy other businesses to further branch out from its roots in online search.
"It's important to find the right acquisitions," Ruckelshaus said. "But we're approaching it with a lot of urgency."
Though management is looking for one or more complementary businesses, it's possible it would add a third separate business, as TaxAct was a second business, he says.
But any deal would involve a "digitally enabled" enterprise, he added.
Blucora has more than $400 million in cash and credit to fund acquisitions.
"I expect (acquisitions) to be accretive and drive earnings growth faster," said analyst Joe Janssen of Barrington Research. "I believe we'll see something with critical mass by the end of the year."
From past stumbles, Blucora has amassed $700 million in net operating losses, or NOLs, it can carry forward. So profits up to that amount are basically shielded from taxes.
"The goal is to acquire profitable business that will help them achieve $700 million in profits over the next 10 years so they can fully exploit NOLs," said analyst Matthew Galinko of Sidoti & Co.
He says those losses came from "baggage from an earlier era."
Blucora's predecessor company was a highflier during the dot-com bubble years. InfoSpace shares had soared to as high as $1,300 in March 2000, giving it a market capitalization of over $50 billion.
But when the dot-com bubble burst, so did the stock price. By June 2002, it was down to $2.67.
New management teams came and went over the decade, shutting down businesses, adding new ones and then selling off pieces again. Some observers didn't expect the company to survive.
Ruckelshaus arrived in November 2010, fresh from a stint as CFO of Audience Science, a venture-backed advertising technology and services firm. Prior to that, he oversaw corporate development at Expedia.
Analysts give Ruckelshaus kudos for forging the TaxAct deal. "It was a large, transformational acquisition," said Galinko.
He says the product is consistently ranked high for its quality platform and added, "I've been using it myself for years."
Though the U.S. federal tax-return market is not a growth industry -- filings are growing just 1% to 2% annually -- digital do-it-yourself (DDIY) tax preparation is the fastest-growing segment of it.
The self-service digital tax market grew 4% in the 2012 tax season. TaxAct grew twice as fast.
The number of consumers using TaxAct to file their federal returns electronically rose 8% in the first quarter vs. the prior year, to 5.3 million filers. That translated to $64.7 million in revenue, a 60% gain.
Blucora says it holds a 12.2% share of the DDIY market and that more than 70% of customers are repeaters.
"Tax preparation is a sticky market. People will use what they are comfortable with," Galinko said.
Part of TaxAct's appeal is price. Its average filing cost is $13 vs. $54 for TurboTax and $33 for H&R Block At Home.
Add-on products recently introduced include will-preparation and audit-defense tools as well as mobile tax-document applications.
Blucora's legacy search business, which still goes by the name InfoSpace, has grown 27% on a compounded annual rate from 2010 to 2012. But growth could slow to 10% this year as clients adapt to software-related changes mandated byGoogle ( GOOG ), Ruckelshaus says.
During the transition, he says, search activity from its search partners could slow as they adjust and that would impact Blucora.
The firm aggregates search results from content providers such as Google andYahoo ( YHOO ) for a network of more than 100 Internet customers.
Blucora's sales team tries to reel in new customer partners. In 2012, new partners generated $38 million in revenue.
When visitors to partners' search boxes click on paid ads, Blucora gets a share of the revenue from, say, Google, and passes along a portion to its customer partners.
In 2012, Google accounted for 90% of search revenue, or 77% on a consolidated basis, according to Barrington Research.
While TaxAct made up 25% of revenue in the year, it comprised 55% of adjusted EBITDA.
Blucora also distributes aggregated search results through its own websites such as Dogpile.com and WebCrawler.com. It's a smaller piece of the business, but it's still growing in double-digits.
Blucora's biggest rival in the website business is digital-media powerhouseIAC (IACI), which operates Ask.com and a host of other websites, some search-related and others, such as Match.com, not.
The search business "will see bumps along the way," said Galinko, "but it can continue to grow in double digits." He says barriers to entry are high.
Analysts estimate that Blucora's profit will rise 41% on average this year over last to 76 cents a share and grow another 38% next year.