Blucora (NASDAQ:BCOR) has been in the news for all the wrong reasons lately. First, the company was hit with accusations of possible policy violations which resulted in the stock taking a plunge. A couple of days later the company released their fourth quarter earnings, beating both revenue and EPS expectations, but lowered guidance for the next quarter. Management revealed that Google (NASDAQ:GOOG), their largest search partner and contributor of the lion's share of their search revenue, had renewed their partnership but only partially.
The last time I wrote about the company in October 2013, I had analyzed its growth potential based on recent performance and acquisitions. In the same article I noted concerns regarding its relative inexperience in the mobile space and heavy dependence on Google, but overall it still appeared to be a good growth opportunity. Recently, in the light of events mentioned above, I decided to take a more cautious "hold" approach towards the company. This was because these events brought into sharper focus for me the importance of the following:
1. Blucora's dependence on Google.
2. Need for better information on the company's future strategy.
Dependence on Google
While I have no way of knowing about the accuracy of any of the accusations raised against the Company, it does make one thing very clear. Even the suggestion of a doubt on the future of the Blucora-Google partnership can wreak havoc on the stock. For context, the Search segment of the company's business is about 75% of their revenue and Google alone accounts for nearly 85-90% of it. So at least at present, Blucora's success is closely intertwined with its relationship to the search giant.
It helps that the company announced in its earnings call last week that Google had renewed its partnership with them until 2017 in the desktop search area. However the renewal did not extend to the mobile and tablet space. The immediate implication is the financial headwind, reflected in lowered guidance. The long run implication is the possibility of a further break in the alliance with Google in the future. Since the Android OS has the largest market share in the mobile market globally, it also implies that Google is the search engine of choice in that medium. So the end of Blucora's mobile/tablet agreement with Google is a blow to the company.
But to put this into perspective, mobile is a relatively small driver of the company's search revenue at present. Management stated that about 85% of the search traffic from Google comes over desktop, which is still covered under their renewed agreement. Alternatively, on the mobile front the company has other liaisons like Yahoo! (NASDAQ:YHOO) that will continue to power their searches. Also the mobile/tablet market still has a lot of uncharted territory; so the company could potentially carve a niche for itself in that space. Management mentioned plans during the recent earnings call to explore search and non-search solutions like text, video, etc. But there is still not enough clarity around the company's plans for mobile growth. In my last article as well I had concerns about the Search segment's lagged development in this field. But with this latest development with the Google partnership, this issue has become more relevant.
Needed Clarity on Long Term Strategy
In the recent past the company has made a move to diversify its revenue streams through the acquisitions of the DDIY tax business TaxAct and the ecommerce business Monoprice. Both segments have been performing fairly well, although ecommerce sales were softer than expected in the fourth quarter. Overall the ecommerce segment generated revenue of $39.7 million in the fourth quarter with order growth of about 10%. TaxAct revenue grew at about 75% year over year while recording a loss, in line with expectations, due to seasonality in the tax business. It is expected to track guidance in the 2014 tax season.
At present these two acquired segments combined comprise only about 25% of the company's total revenue. They are also very different from the company's core search business. But while they may not be obvious synergistic acquisitions, they may turn out to be useful diversification tools that the company needs. One advantage is that they open up the growing DDIY tax and ecommerce market to the company that could potentially grow into a larger proportion of sales in the future. In fact, if the company has more future acquisitions planned that are executed and integrated successfully, then this may be a way to reduce the heavy dependence on search and Google. But again, the long term strategy on acquisitions and vision of what the company wants to evolve into, is not very clear at the moment.
At present Google is certainly the mammoth in the search landscape. So in the near future at least, the success of Blucora's search segment is tied closely to its partnership with Google. Currently I am comfortable with a more cautious approach of having a neutral position towards the company. I would like to wait and watch how it operates in the mobile world without Google and get more information on what plans it has in the future of building a business that is not overwhelmingly dependent upon one partner.
Disclosure: I am long BCOR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am a self-taught individual investor and this article expresses my views based on my own research and is not professional investment advice. I am not being influenced or paid by any organization to write this article.