Blucora Q1 2014: Growth Is Slowing!

  • Growth has slowed not only in search but other segments as well.
  • Q2 guidance is weaker than expected.
  • Revival of core business will be a huge positive but for now the stock is risky.

Blucora Q1 2014 Growth Is Slowing

Blucora’s (NASDAQ:BCOR) Q1 2014 earnings release came out on 1 May 2014. The company’s stock tanked nearly 10% in a day, reacting to the disappointing guidance for Q2. As for Q1, Blucora’s performance was close to expectations, beating EPS estimates and marginally missing revenue estimates for the quarter. The focus is now on how quickly the company can replace Google with another partner in its mobile search business, to return its core business to normalcy.

Blucora Q1 2014: Estimates vs Actuals

Guidance

Estimates

Q1 Result

Revenue ($ million)

213-222

217

216

Non GAAP EPS ($)

1-1.06

1.03

1.12

Blucora beat the upper end of its own Q1 EPS guidance by 5.6%. The company’s revenue was within the expected range and about 0.4% lower than the average analyst estimates.

Blucora Q1 2014 Revenue

Blucora recorded a revenue growth of 31% Y/Y (over Q1 2013). Though growth was lower than the company’s four quarters average of 41%, revenue fell within the expected range.

However, one must note that expectations were relatively lower given the headwinds in the search business after Google did not renew its partnership to power Blucora’s mobile searches.

At the end of Q4, Google accounted for about 85-90% of Blucora’s total search revenue, raising concerns over the company’s core search business. Google did renew the partnership to power desktop searches, which accounted for about 85% of Blucora’s total search traffic at the end of Q4. However, the suspension of the mobile search partnership is hurting Blucora.

Revenue - $ millions

Y/Y Growth

% of Revenue

Search

107

6%

49%

TaxAct

72

12%

33%

Monoprice

37

N/A

17%

Total Revenue

216

Q1 saw a 15% sequential decline in search segment revenues as against a 4% sequential growth in Q1 2013. On a Y/Y basis, growth in the segment slowed to 6% Y/Y from 34% in Q1 2013 and also from a four quarters average of 24%.

TaxAct’s revenue growth rate slowed considerably on a Y/Y basis. However, it earned a higher revenue in absolute terms vs Q1 2013 and was the primary driver of growth in Q1, its strongest quarter every year.

Blucora’s total revenue grew by 30% sequentially, down from its Q1 average of 72% over 2011 and 2012. Broadly, results weren’t bad, but the slowdown in the search business did have an impact.

Blucora Revenue and Profitability

Source: Blucora Income Statement, Blucora Investor Relations

Blucora Q1 2014: Profitability

Blucora recorded operating and net profit margins of 21% and 12% respectively, with operating and net income of $44.6 million and $26 million respectively. Profit margins were about 2% lower than those in Q1 2013, but higher than the expectations for the quarter.

Sequentially, Blucora’s sharp increase in profit margins were driven by TaxAct’s high margin business. Blucora registered a GAAP diluted EPS of $0.58 a share.

Blucora Q2 2014 Guidance

What rattled investors after the earnings release was a weaker than expected guidance. Blucora indicated that it was expecting a revenue of $135-145.5 million, lower than analyst estimates of $163.4 million.

Further, the projected EPS of $0.46-0.53 also came in lower than estimates of $0.64 a share.

Blucora Company Valuation

At $18.59 a share, Blucora currently trades at Price/Sales and Price/Earnings multiples of 1.25 and 29.3 respectively. As we’ve said before, going by the valuations we see the internet businesses space, Blucora is not too expensive.

However, one must keep in mind the risks that exist. Blucora has been accused of major frauds by Gotham City Research and if those allegations turn out to be true, it could mean big trouble. Though nothing has been proven on that front, it’s important to be aware of it.

The larger problem at hand will be to fix its core business by finding a partner to substitute Google. However, given Google’s massive dominance over mobile search, not having the Google partnership is likely to impact revenues anyway. Further, in an increasingly mobile economy, being cut off from Google is a big handicap.

Blucora had mentioned at the end of FY 2013 that it’s expects weak quarters in Q1 and Q2. We will be eager to hear the management commentary at the end of Q2 to understand how things have progressed on the mobile search front. Given that the segment is still its biggest segment, it’s imperative that the issue be fixed as soon as possible.

It is interesting to note that Monoprice has recorded a drop in revenue both sequentially and Y/Y, a worrisome trend post the acquisition which was expected to boost growth.

If Blucora manages to emerge out of these problems, at its current price, it’s certainly not expensive. Given the kind of growth it used to deliver, and the addition of Monoprice as an additional diversification, we wouldn’t write off the company just yet. However, we replaced Blucora with Baidu, on 10 April 2014 in our top stock picks.

Read our company analysis of Blucora.

To see Blucora’s current stock price, please click here: (NASDAQ:BCOR)

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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