The big news for Blucora, Inc. (BCOR) is the announcement it entered into a deal to sell of TaxAct to an affiliate of Cinven, heralding a transition of the company to a "tax-focused wealth management business."
After the deal closes at the end of the year, Blucora will be strongly positioned to build out its newly focused business, as the net proceeds from the deal is estimated to be about $620 million, which will be used to pay down debt, with post-paydown capital estimated to be in a range of $400-$450 million, much of which will be returned to shareholders.
In the near-term shareholders will be rewarded, while further out the company will operate from a sound financial base as it targets a more specialized area of the market.
In this article we'll look at the recent performance of the company, and what the sale of TaxAct means for the future of the company.
As we look at earnings, bear in mind that TaxAct will be part of the company for one more quarter, so it'll have an impact on the results through the end of 2022.
Revenue in the third quarter came in at $171.7 million, down 1 percent year-over year. The bulk of the revenue came from its Wealth Management business.
There was a GAAP net loss of $21.8 million, or $0.46 per diluted share, up 20 percent from last year in the same quarter. Adjusted EBITDA was $7.7 million, significantly above the $800,000 loss in the third quarter of 2021.
For its Tax Software segment, it generated $6.7 million for the quarter, up $1.6 million from last year in the same reporting period. The improvement came from an increase in extensions volume against the previous year. Management expects this to continue in the fourth quarter, bringing about a modest increase in full-year revenue.
The segment had an operating loss of $12.5 million, up by $1.3 million year-over-year, mostly from the increase in revenue.
Turning to its Wealth Management, BCOR generated revenue of $165 million, down 2 percent from last year in the third quarter, but up 1 percent sequentially.
Commission revenue from transactions was flat at $17.9 million for the quarter, while operating income was $27.6 million, up 41 percent year-over-year, and 74 percent sequentially. That was attributed to an increase in interest rates. At the end of the reporting period BCOR had cash and cash equivalents of $91.1 million, with net debt of $434.3 million. During the quarter BCOR paid out the final installment of $23 million that was related to its acquisition of HKFS, while also paying down $35 million associated with its term loan balance. That was why cash and cash equivalents dropped from $134.8 million at the end of 2021.Taking into account BCOR is going to use part of the proceeds from the TaxAct sale to pay down net debt, the company is going to enter into 2023 running very lean, providing it with flexibility and options concerning executing its strategy.
As mentioned above, BCOR is selling TaxAct for $720 million in cash, with expectations it'll result in after-tax net cash proceeds of $620 million. That will be used to pay down company debt and returned to shareholders. The deal is expected to close by the end of 2022.
Management was asked what impact the departure of TaxAct would have on BCOR's business. The response was that the company has been building strong tech and marketing capabilities within the business that, in part, were learned from operating TaxAct. Consequently, BCOR doesn't expect to experience "degradation in the performance associated with the separation."
Over the long term I don't have trouble believing that, but I think that initially the company will struggle some to make up the revenue and earnings that came from cross selling to its other businesses that came from the use of TaxAct.
It was reiterated that the point of the sell, beyond the one-off benefit of cash proceeds, was that the company would now focus its efforts on working with CPAs, tax firms and others in conjunction with businesses that want to offer wealth management services.
Other growth vehicles mentioned were its incremental "transition to advisory, on-platform M&A into the RIA business," which enjoy wider margins.
I like the fact the company decided to sell TaxAct under the favorable terms and conditions it negotiated. In the near term it's obvious the benefit it'll have, as the company pays off its debt and returns a lot of shareholders. And since it has been working under the assumption of not owning TaxAct for several years, it appears to be prepared and positioned for revenue and earnings growth as it expands its Wealth Management unit.
It appears to me it'll take a little time to make up for the loss of revenue and earnings that came with TaxAct, but I agree, assuming the company executes on its strategy, that it could more than make up from the loss of TaxAct on its performance. There is also the added value of being able to focus a lot more on its core business.
The company share price jumped on the news of selling TaxAct, bringing it to a 52-week high of $27.50 on November 1. Since it has pulled back to close to its prior 52-week high.
I tend to think the stock could linger around the $23 per share mark, give or take, for the remainder of the year. It has traded volatile over the last year, so I would expect another dip in the price. Investors interested in the stock would probably benefit from taking a position on that dip.
But as I mentioned, I do think it'll take a little time for the loss of TaxAct to be made up for with its wealth management business. I think we'll know better by the middle of 2023 the progress it will make there.
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