According to its own website, "Blucora (BCOR) operates two leading internet businesses. Our InfoSpace business provides online search and monetization solutions to a network of more than 100 global partners. Through TaxACT, we provide online tax preparation solutions to consumers and professional preparers." Let's break these two businesses down based on information provided on the company's website and through the latest 10-K and 10-Q.
TaxACT offers three revenue streams: state and upgraded federal return preparation services, ancillary services, and selling the professional edition to professional preparers. The 10-K notes that the largest revenue generator is the online service. It also reports the biggest competitive advantage is that the basic federal preparation online is "free for everyone." It allows uses to file, for free, any form the IRS allows to be e-filed.
Toptenreviews.com did a recent report on the top ten tax preparation software packages in 2013 for the 2012 tax year. TaxACT came in number two behind Intuit's (INTU) TurboTax and ahead of H&R Block's (HRB) Tax Cut. Comparing these three, TaxACT's state filing is the least expensive starting at $8 while TaxCut starts at $27.95 and TurboTax's price is $36.99. TaxACT is the only one that does not offer a mobile app for filing, nor does it offer the ability to file business returns. For accuracy TurboTax and TaxACT got a 100 while TaxCut got a 95. TaxACT does allow for returns to be imported from other tax preparation software as does TaxCut; TurboTax does not offer this feature. Each company offers certain packages that include extra bells and whistles. The following is for the free federal filing option offered by each. In regards to customer service and support all three offer free email and live chat assistance. TaxACT offers phone support for a fee while the other two offer it free. TurboTax offers tax consulting, TaxCut offers it for a fee, and TaxACT does not currently offer it. All three offer audit support for a fee. TaxACT offers a deluxe version for $12.95 and an ultimate bundle for $21.95. TurboTax offers a basic for $34.99, deluxe for $49.99, premier for $74.99 and home & business for $99.99. H&R Block offers a basic for $34.95, deluxe for $49.95, and premium for $74.95. (Prices are current as of this writing taken from each company's respective website.)
According to Intuit's 10-Q for period ending Jan 31 2013, segment revenue for the segment that is mostly comprised of TurboTax dropped from $295 to $216M year over year. For its most recent quarter ended April 30 2013, Intuit reported the same segment revenue increased 14% for the quarter and guided to about 4% increase for the entire year. According to an H&R Block press release, at home preparation increased 3.2% for this year's tax season compared to the same period last year. In Blucora's latest 10-Q it reports an increase of 8% for returns this tax season over last season giving it the largest increase of the three companies.
In this segment, TaxACT needs to continue to be dynamic and work towards offering services to gain market share. It is already the lowest cost provider of the three and given the current economy, that is a great selling point. Between the time toptenreviews.com did their research and the writing of this article, TaxACT has begun to offer iPad compatible and business tax preparation versions. I like that TaxACT continues to evolve a solid product for a good price. I do think the company should increase the price on their first tier product to get a little closer to the competition. As it stands, TaxACT is currently $24 cheaper than either competitors first tier of paid product. A doubling of the price would be great for revenues and the bottom line and would still leave it $10 cheaper than the competition, but I think that would be a little drastic. A bump of $5 would prevent extreme sticker shock, or bump it $10 and then add in additional services. I am anxious to see what steps are taken during the off-season and what will be rolled out for next tax season.
In its search segment, it shares space with some gargantuan competitors: Google (GOOG), Baidu (BIDU), and, Yahoo (YHOO). While it does not directly compete, it relies heavily on the previously mentioned companies to provide results for its own custom searches. InfoSpace has several of its own sites and can customize search interfaces for customers and partners. Those search tools combine data from the big search engines in hopes that the combination will yield a better and more on target result for the person doing the searching. It has an agreement with Google until March 2014 and with Yahoo until the end of 2013. A note of concern is that Google accounts for 77% of Blucora's total revenues in 2012. Not just 77% of search, but 77% of total revenues. In the event Google refused to renew the agreement next March, BCOR would be in serious trouble. I think a key task for InfoSpace needs to be a focus on signing additional agreements so that the company is not completely dependent on Google. It should also be working on a new agreement or extension with Google, with a hope that it can maintain the same or get terms that are more favorable.
For the first quarter InfoSpace's revenue grew 37% compared to the same quarter last year. After the first quarter, the search segment has earned revenues of about $100M or 34% growth year over year. In total for 2012, search revenue was responsible for a total of $344M of the company total; this was about a 50% increase from 2011's total. I think this year's search revenue each quarter will continue to increase 30-35% year over year. This trend would put the search segment revenues alone near $450M for 2013. To achieve this InfoSpace needs to continue satisfying customers, adding search partners, and evolving technology.
For the end of 2013, I see revenues approaching $510M-$520M and EPS coming in right around $1.00. I think the current P/E of 22.9 based on EPS for the trailing twelve months is a fair value compared to the P/E ratios of other companies in this area. With that in mind, by the end of 2013 BCOR shares should be in the $22.00-$23.00 range. That would give investors approximately a 24% return over the next several months. I think BCOR is poised for more growth as it continues to grow market share for TaxACT. Two things I will be watching to decide about keeping my investment after 2013 are the search agreements that are set to expire and if the company signs any additional search agreements or finds a way to become less dependent on Google. Not that I think Google is going to go anywhere, it is just an unsettling feeling to have so much revenue tied to a single pipeline. Since shares just ran up with the recent rally I would wait for a pull back to around $18.00 or $17.50 to ease into a position.