- The end of Blucora’s mobile search partnership with Google will hurt revenue.
- Blucora’s diversification holds the key in the light of fraud allegations.
- With robust growth and potential improvement in profit margins, we remain bullish about BCOR
In recent times, Blucora’s (NASDAQ:BCOR) strong financial performance has been overshadowed by multiple factors. After a slew of fraud accusations by Gotham City Research, the fact that Google has not renewed their search tie up for mobile platforms has left investors vary about the future of Blucora. However, we remain bullish about the company’s prospects due to its robust growth and the potential improvement in profitability.
Blucora: Revenue & Profitability
Blucora ended 2013 with a great quarter (Q4) beating revenue and EPS estimates. In Q4 2013, revenue from Blucora’s traditional ‘services’ segment grew 31% over Q4 2012 (Y/Y) and its overall revenue grew at an astounding 72% Y/Y. The huge jump was due to Blucora’s foray into e-commerce with the acquisition of Monoprice.
Monoprice, Blucora’s $180 million acquisition contributed 24% of Blucora’s total revenue in its first complete quarter as a part of the company. Having generated $54 million for Blucora in FY 2013, Monoprice accounted for 9% of overall revenue for the year.
Blucora’s high margin tax preparation business TaxACT is cyclical with revenue peaking in Q1 every year. TaxAct which accounted for 16% of Blucora’s revenue in FY 2013, displayed a robust growth of 47% Y/Y.
Blucora’s search segment remained its biggest revenue generator, contributing about 75% of its revenue.
Blucora’s operating profit margins have been improving every year from 9% in FY 2011 to 13% in FY 2013. However, owing to non-operating losses, the same hasn’t translated to an improvement in net margins. Net margins have constantly declined over the last 3 years to reach its current 4.2% in FY 2013. However, as per the company’s guidance, net profit margins are expected to improve in Q1 2014.
Threats to Blucora’s core search business
It’s clear that Blucora will face headwinds in its search segment in the first half of the year. The fact that Google has not renewed its search partnership for search on mobile, is one of the reasons for Blucora’s weak guidance in Q1. The company expects this weakness to continue in Q2, its estimated worst quarter in FY 2014, as the company finds alternative mobile solutions.
Google being the dominant player in the mobile search market, lack of access to Google powered searches will bring down monetization rates. The fact that mobile search traffic accounts for just 15% of total search traffic should provide some comfort to investors. Since monetization rates are higher for desktop search traffic, the hit may not be huge, but it will still hurt Blucora.
This development also highlights the risk from Blucora’s heavy dependence on Google, which accounts for 85-90% of segmental revenue. For now, the partnership for desktop searches has been renewed and will last until 2017.
Blucora Q1 2014 Outlook
In Q1 2014, Blucora expects revenue growth to be sluggish in its e-commerce and search segments. The company also foresees a squeeze in segment margins for both segments with e-commerce margins declining 1-2% from about 9% and search segment margins declining 2-3% from about 20%.
However, growth and profitability in Q1 will be driven by TaxACT which is expected to generate about $67 million with a segment margin of about 48%. TaxACT’s performance over the first half of 2014 will be critical especially under the given circumstances.
Blucora’s consolidated revenue guidance for Q1 2014 is $213 - $222 million. The company also expects to record net profit margins upwards of 10%, potentially making Q1 2014 one of its best quarters in terms of net margins in last 2 years.
The click and traffic fraud allegations against Blucora could be a cause of concern. However, as things stand, treating them as a basis for decision making would amount to speculation. That said, the diversification provided by TaxACT and more recently Monoprice come as much needed comfort.
Blucora, at $18.32 a share, trades at a Price/Sales (P/S) multiple of 1.3 and a Price/Earnings (P/E) multiple of 31.7. Given the multiples that we see in the internet business space, that’s not too expensive. Further, the prospect of improving profit margins is a positive.
The focus in the first half of 2014 will be on how the company transitions into its new mobile search solution. That apart, the growth of Monoprice is something we will be watching closely.
We are bullish about Blucora’s future prospects. That said, we will be watching the stock closely for any further developments regarding the allegations against it.
To see Blucora’s current stock price, please click here: (NASDAQ:BCOR)