Blucora (BCOR) is a technology company that provides online search and tax preparation solutions as well as electronics and accessories retail. Its business is comprised of three segments; Infospace, TaxAct and the recently acquired Monoprice. Infospace is primarily a B2B service that filters and consolidates search results from search engines such as Google (GOOG) and Yahoo (YHOO) and provides the most relevant results to business partners for use on their websites. The company earns revenue per click on paid search results when search engines pass on a share of the payment they receive from advertisers. It also provides search services to consumers through its own search engines Dogpile.com and Webcrawler.com. The TaxAct segment generates income by providing online tax preparation services and software to final consumers as well as businesses. So far the majority or 81% of the company's revenue comes from the search segment while the remaining 19% comes from the tax preparation side. I was inspired by the company's strong performance in recent times to take a deeper look into its business as a potential investment.
The company had a strong second quarter with revenue being up 16% year over year for the search segment and 19% for the tax segment. The search revenue growth came primarily from existing distribution partners, although revenue from new distribution partners declined. While online direct marketing efforts paid off in attracting and retaining customers, they were offset by attrition in installed user base. Tax segment revenue was boosted by an increase in e-filings as well as a shift in the tax season adding two extra weeks of filing activity to the past quarter. Since Monoprice was acquired in August 2013, its operating results are not included in the company's Q2 financial results.
Profit as a percentage of revenue rose in Q2 2013 to 40% over 36% in 2012. The tax segment margin was a healthy 64% and the search margin was 19%. The search margin improved as more revenue originated from the higher margin company owned web properties. Although GAAP income declined over prior year with losses on derivative instruments, Non-GAAP net income increased year over year driven by better performance in each segment. The company has posted large positive EPS surprises in the last two quarters. The guidance for the third quarter reflects growth in the search segment and an expected loss in the tax segment due to seasonality. Management expects a net loss of ($0.04) to ($0.02) in Q3 2013.
In terms of liquidity the company had approximately $415 million in cash at the end of the second quarter and debt of $265 million. So it had a stronger net cash position $149 million year to date June 2013 compared with $54 million in the previous year, and over $10 in cash per share. Subsequently Blucora acquired Monoprice in an all cash transaction of $180 million.
Overall, in terms of financial performance the company has exhibited growing strength. Management is confident that they will continue to expand their business through customer growth, efficiency in existing business lines and strategic acquisition. They are optimistic about continuing to finance operating activities in the future with cash flows.
Blucora acquired Monoprice in August 2013 in an all cash transaction of $180 million, acquiring a revenue stream of approximately $130 million that has been growing at a compounded annual rate of nearly 30% since 2010. Monoprice also secures an entry for Blucora into a $37 billion (and growing) e commerce market for electronics. It sells consumer electronics and accessories at very affordable prices made possible by direct sourcing from its network of Asian manufacturers. Monoprice has over 30% margin that is still growing. It is supported by a loyal customer base and gets an impressive 40% of traffic from direct navigation to its website monoprice.com. Anecdotally, I have been a repeat customer of Monoprice prior to the acquisition and was impressed with the quality of products and customer service. This newest segment offers great opportunity to the company to step into new territory and grow through expanded product selections and greater marketing efforts.
The Tax-Act segment has been strong and an encouraging sign of future growth was the 8% growth in digital DIY e files in federal taxes in the 2012 tax season for TaxAct - nearly double the market growth. The company has also launched HealthcareACT.com in an initiative to lead customers in understanding the implications of the Affordable Care Act and is exploring further opportunities created by it. If the company is able to sustain growth in market share through superior products, ancillary services and mobile applications while beating competition from the likes of Turbo Tax and H&R Block, then the digital tax filing business could be a growth opportunity as consumer demand for the convenience of online services increases.
A point of concern for Blucora from my perspective is the increasing shift of search activity from desktop to mobile and tablet environments, and possibly to other newer platforms (watches, glasses ?) in the near future. While the company has seen healthy earnings from its search business in the desktop format, it is relatively inexperienced in the mobile market. Management acknowledges that it is in the early stages of development to make the non PC search results as relevant as its traditional counterpart, but I am concerned if is in fact too late to be an "early stage" in a fast changing technological environment.
As a search customer Google is by far the largest revenue provider (89% of search revenue) to the company. This reliance on one customer for a large share of revenue can create elevated financial risk in case the partnership ends. Also large search engines like Google and Yahoo create guidelines for usage that can limit the content that a provider like Blucora can publish to its distribution partners. For example, for the remainder of the year 2013 year over year revenue from Blucora's distribution partners is expected to decline due to policy changes by Google.
The company took on debt for its January 2012 acquisition of TaxAct of about $95 million with a $10 million revolving credit facility. At the end of Q2 2013 it had paid off about $35 million of the debt. The company also issued convertible senior notes of over $200 million which will require enough cash generation to make interest payments between $4-9 million through 2019. This debt can affect future liquidity of the business or cause dilution in shares. The company has a relatively high debt to equity ratio of 49.7.
At the time of writing the company's common stock was trading at approximately $22.9. This is approximately 20% above the 60 day low and only 3% below the 60 day high. Additionally, with a price to earnings ratio of nearly 30 it appears to be expensive. However the forward P/E is expected to be a considerably more reasonable value near 11. The price to book ratio of 1.9 is also within reasonable limits. I think that Blucora is a good investment opportunity with potential upside if it continues to build on its strong cash flows through organic growth, strengthen its presence in the non PC search market and diversify its operations through profitable acquisitions.