Blucora, Inc.
Q2 2014 Earnings Call Transcript

Published: 31 Jul 2015

[Operator:]

Good day, everyone, and welcome to the Blucora Second Quarter Earnings Results Conference Call. This call is being recorded. With us today from the company is Chief Executive Officer, Bill Ruckelshaus; Chief Financial Officer, Eric Emans; and Vice President, Investor Relations, Stacy Ybarra. At this time, I would like to turn the call over to Stacy Ybarra. Please go ahead, ma'am.

[Stacy Ybarra:]

Good afternoon and welcome to Blucora's conference call to discuss second quarter 2015 earnings. Before we begin, I would like to remind you that during the course of this call Blucora representatives will make forward-looking statements, including, but not limited to, statements regarding Blucora's expectations about its products and services, outlook for the future of our business and growth initiatives and anticipated financial performance for the third quarter and future periods. Other statements that refer to our beliefs, plans, expectations or intentions, which may be made in response to questions, are also forward-looking statements for purposes of the Safe Harbor provided by the Private Securities Litigation Reform Act. Because these statements pertain to future events, they are subject to various risks and uncertainties, and actual results could differ materially from our current expectations and beliefs. Factors that could cause or contribute to such differences include, but are not limited to, the risks and other factors discussed in Blucora's most recent quarterly report on Form 10-Q on file with the Securities and Exchange Commission. Blucora assumes no obligation to update any forward-looking statement, which speak only as of the date the statement is made. In addition, during this call, our management will discuss GAAP and non-GAAP financial measures. In the press release, which has been posted on our website and filed with the SEC on Form 8-K, we present GAAP and non-GAAP results, along with reconciliation tables and the reasons for our presentation of non-GAAP information. We've also provided supplemental financial information to our results in the Investor Relations section of our corporate website, at www.blucora.com, and filed with the SEC on Form 8-K. Now, I'll turn the call over to Bill Ruckelshaus. Following his comments, Eric Emans will review second quarter financial results and third quarter outlook. Then, we'll open up the call to your questions.

[William J. Ruckelshaus:]

Good afternoon, everyone. Thank you for joining. Second quarter performance for Blucora was consistent with our expectation. Consolidated revenue of 119 million declined versus Q2 2014 reflecting continued pressures at InfoSpace, on a year-over-year basis search and content revenue was down roughly 28 million, e-commerce was up slightly and TaxACT increased by 4.4 million. Consolidated adjusted EBITDA of 25 million tells the similar story. Downward pressure in search and content offset by positive growth in tax and e-commerce. The teams executed well in the quarter. Our goal across our business is to accelerate free cash flow generation for sensible investment and disciplined expense management. We continue to evaluate opportunities for capital allocation in our businesses and through M&A and buybacks guided by assessments of long-term shareholder return. The formula we have outlined on prior calls continues to apply. Growth profitability over the medium term transform InfoSpace through innovation and cost discipline. Identify and evaluate opportunities to expand and diversify the Blucora portfolio and communicate with candor and transparency along the way. This transition is admittedly bumpy. Our focus on value creation guides our decision making at each step. Now, to discuss our business segments in more detail starting with tax. TaxACT completed the season in Q2 and finished strong. Revenue was up 17% year-on-year for the quarter and 13% for the season reflecting ARPU gains and increases in tax rates to ancillary services. Segment income increased 16% for the quarter and 17% for the season. We are gearing up this off season focusing on revitalizing our value leadership position in consumer DIY and maximizing opportunities in ancillary services in adjacent markets like SMB and assisted track. TaxACT is well positioned and just getting started. There is considerable runway in tailoring our products to specific consumer and assisted prep segments and bringing additional value to filers through value added financial services offerings. In July TaxACT required simple tax, a web-based tax preparation software company headquartered in Vancouver Canada. Simple tax was founded in 2012 and its growing fast in the Canadian market with an innovative product flexible technology stack and clean new eye overall design. This acquisition is small from a financial perspective with attractive longer term. Simple tax increases our footprint in North American DIY and positions TaxACT for further growth in years to come. Moving now to search and content. InfoSpace performed in line with guidance this quarter. Transitions continue in owned and operate and our partners syndication network where tighten rules around downloadable applications reduced economic in mobile and emerging challenges in buying traffic and search are combining to limit opportunities. As discussed previously our focus this year is on maintaining the core business while redirecting to a pivot strategy. We continue to see opportunities with HowStuffWorks and have maintained their rate of content production and leverage social channels to grow the HSW audience. HowStuffWorks award winning podcast, Stuff you should know and stuff you missed in history class remained consistently in iTunes top 10 and HSW is expanding into new podcast and video markets aided by an exciting new partnership with product line. In May, we launched a new HowStuffWorks mobile application for iOS and Android. The app featuring video, articles, podcast and quiz updated daily was selected by Apple as a best of month in June. HSW content is seem double and triple digit growth on Facebook, Instagram, Pinterest and Twitter. We are just scratching the surface and delivering mobile experiences to reward HSW passionate readers, listeners and viewers with experiences that both entertain and educate. HowStuffWork is also serving as a test bed for new forms of traffic acquisition and monetization. Once proven solutions are brought to market through our sales team to a wider group of content publishers. Content publishers still represent a small portion of our partner network that we can grow this segment going forward. The innovation and velocity of the team is impressive and will drive our diversification. On the other front I am pleased to announce InfoSpace has entered into a direct deal with Bing to offer their search and advertising content through our network search properties and partner websites. Terms of this agreement are outlined in our associated filing today. Generally, this partnership strengthens the value proposition of our metasearch offering, improves mobile monetization and provides important business model flexibility. Overall to drive this stability we are reducing our dependencies by adding alternative search partners managing expense level, leveraging HowStuffWorks and pursuing sensible investments in our pivot initiatives. During these transitions we will guide conservatively in the second half of 2015 and remain focused on profitability. Now turning to e-commerce. The turnaround at Monoprice is advancing and we remain on track for double-digit top-line growth in the fourth quarter. Our focus continues to be on product innovation, marketing and site optimization and channel development. Monoprice's reinvigorating core CE categories with a wider assortment of offerings were used with the most sought after devices. As we mentioned last quarter Monoprice was first to market with USVC, a new specification in connector that will eventually replace all existing USB cable. In the quarter we added more than 350 new SKUs in two primary areas cables and adapters including the debut of two collections of Apple NFI certified lighting cable both lines allow compatibility with all lightening enable devices and apple laptops including the new Mac book and Mac book pro. Today’s consumers know the product they want and what prices are fair, there are comprehensive reviews and information inventory availability and fast shipping, the Monoprice value position is longstanding event. They are launching East Coast distribution center this fall in addition to our facility in California to reduce cost and speed delivery time for the holiday season. Monoprices emerging brands with significant upside in ruling ecommerce category the Monoprice team first rate and their progress is measurable and I look forward to their results. In conclusion, despite the transitions underway at InfoSpace, Blucora remains well-positioned, they have a strong balance that gives us flexibility to invest. The acquisition opportunity and near term focus and we remain disciplined in our approach. There is significant value we gained in our existing businesses and the right acquisition can be a major catalyst for shareholders. With that, I'll turn it over to Eric for more details on the financial performance.

[Eric M. Emans:]

Thanks Bill. Consolidated results for the second quarter were in line with our guidance expectations. Second quarter revenue was 119 million and adjusted EBIDTA was 25 million. Non-GAAP net income was 20 million or $0.48 per diluted share and GAAP net income was 4.3 million or $0.10 per diluted share. We exit the second quarter with cash, cash equivalents and short-term investments of $296.9 million and net cash of $65.6 million. Turning to our second quarter segment performance starting with tax preparation. Revenue for the second quarter was $30.9 million and segment income was $19.9 million for a segment margin of 64% exceeding our expectation. Putting these results in the context for the tax season in the first half 2015 revenue was 112 million up 13% versus first half 2014 and segment income was 64 million up 17% year-over-year for a segment margin of 57%. First half 2015 tax segment revenue growth was primarily driven by consumer ARPU gains of approximately 14% as a result pricing actions increases ancillary product attach rates and an overall mix shift to paid software products. First half 2015 revenue for assisted prep software in DIY small business finished strong growing 16% and 59% respectively versus the prior year. Segment income growth in the first half 2015 reflects revenue gains and operation leverage, operating expenses grow approximately 19% from an increased personnel related cost and marketing expenses. For the full year, we confirm our tax segment revenue expectation of 116 million to 117.5 million. We are updating our segment margin expectation to a range of 47% to 48% as we are evaluating additional investment opportunities and the addition of simple tax business. Now turning to the search and content segment. Revenue for the quarter was 52.1 million and segment income was 6.8 million both owned and operated and distribution revenue were down 11% sequentially. Entering the third quarter search and content volatility has persisted. Most recently one of our search engine partners adopted new marketing practices that impacted both owned and operated and distribution. The team is working to optimize and stabilize revenue performance of the impacted revenue streams but as now we expect continued downward pressure. On the product and diversification initiatives front, we are progressing but the revenue contribution at this stage is still relatively small. As we continue to push for stabilization, we are been disciplined balancing cash management and investment in product and diversification initiatives is our focus as we navigate through this transition. For the third quarter we are targeting the segment income of $4 million to $6 million at a segment margin of 9.5% to 12.5%. To provide a little color on the fourth quarter we are targeting the similar segment income range. With that let's move on to e-commerce. Revenue for the second quarter was $35.9 million while segment income was $2.6 million or a segment margin were approximately 7%. Revenue was up 2% versus prior year on a 2% decrease in orders offset by a 3% increase in average order value. In the third quarter, we are focused on execution and delivery of key initiatives that are expected to provide benefit in the quarter and position us for success for the holiday shopping season in the fourth quarter. Broadstrokes, the initiative priorities are new product additions, user-experience traffic acquisition and conversion on Monoprice.com launching the East Coast distribution center and lastly sales in channel and B2B expansion. Execution in the third quarter is paramount to keeping us on target to meet our goal of double-digit revenue growth in the fourth quarter. For the third quarter we expect Monoprice revenue of $38 million to $39.5 million and segment margin in 7% to 8% range. Finishing off, second quarter results unallocated corporate expenses came in at $4.3 million. We expect a sequential increase in the third quarter primarily driven by increased professional services. With that, let's finish off with our consolidated third quarter expectation. We expect consolidated revenue between $82.5 million and $90.3 million. Adjusted EBITDA between negative $1 million to positive $1.6 million, non-GAAP net loss of $5.7 million to $2.6 million or $0.14 to $0.06 loss per share, and GAAP net loss of $11.2 million to $9.4 million or $0.27 to $0.23 loss per share. With that let’s turn the call over to our operator and we'll take your questions.

[Operator:]

[Operator Instructions]. Our first question comes from Dan. Kurnos with Benchmark.

[Daniel L. Kurnos:]

Great thanks good afternoon guys. I was going to ask the tax question first but a lot of moving pieces in search. So let me just start off from some high level thought here because this is maybe a little bit different than what we were thinking and either Bill or Eric feel free to chime in on this. So 2Q all in all was down sequentially and while your segment income and you didn't give revenue guidance it's sounded like for 3Q or 4Q. While your segment income was pretty much in line with sort of our thoughts. It sounds like you're almost managing the business for profitability at this point and can you help us sort of think about either intentional churn B2B what is in that as we were expecting this quarter. Can you help us think about intentional churn? Can you help us think about how you manage your properties on a go forward? Do we get to a sequential bottom in Q3 and then uptake in Q4? And just any sort of generic way that we should be thinking about the search business over the balance of '15 and addition of the color you provided in your prepared remarks would be helpful sir.

[William J. Ruckelshaus:]

Yeah. Hey Dan, this is Bill. I'll take that. So the trends you're describing I think is accurate. I would also extend that in terms of Eric's guidance which he provided at the end. The issues that we both spoke about as it relates to some of the inefficiencies on the buy side and pulling intent based traffic out of search is really what is having more of a disproportionate impact on owned and operated. On our distribution network we have a variety of different partner segment not all of them which relay upon that particular mode of traffic acquisition. So that's where you're seeing the all-in-all softness. We expect that to continue in the Q3. On the upside, there is components of our all-in-all revenue these days that derived from HowStuffWorks which is somewhat insulated from that. So I think when answered that question. As it relates to sort of managing the network, we've gone through that I would say in the last 18 months. And at this point, feel like the network is pretty stable and in fact we continue to add new partners and so it's certainly not our viewpoint at that partner network will shrink in aggregate and that will looking for new partners that we can bring on this platform. The pairing of the partner network that's taken place over the last 18 months. In some cases it was because of the actions we took and then in some cases it was because our partner churn maybe went to a competitor and in some cases they are very business model to become less viable in the lot of a change that going on the search ecosystem.

[Eric M. Emans:]

Dan, there are couple of things. In my third quarter it did give 9.5% to 12.5% segment margin half of the 46,000 you can back into your revenue there and then just for clarification what Bill said I mean we do continue to expect in the third quarter some sequential declined in the syndication network. I'm we are continuing that partner and we can't grow them as well as maintaining the existing partners we do have that as they've said for last 18 months that that business is going under pressure for numerous amounts of reasons and I don't think we are any different in some of the folks out there, that we are spending the appropriate resources to effectively maintain and when we opportunities grow where we can.

[Daniel L. Kurnos:]

Eric, what was the segment margin percentage you gave? I just missed that, that's why I think you gave revenue guidance.

[Eric M. Emans:]

9.5% to 12.5%.

[Daniel L. Kurnos:]

All right, thanks and then just high level thoughts on distributed and it seems like we are hearing from other people that it's getting less whereas obviously I see in my comments last night that they thought that it was strengthening. You guys have now signed to being relationship which seems in a way defensive. I understand that it gives you a nice mobile piece and probably some increase in traffic. I don't know how much you are going to end up shunting over to being even the monetization disparity. But just your thoughts on the trends and distribute since you talked a lot. We just talked about...?

[William J. Ruckelshaus:]

Yeah, so this is Bill. We still like the syndication market. It's as I had mentioned gone through a pretty significant period of dislocation. I would say that our partnered network is now we're seeing they expected sequential decline that Eric just spoke you in Q3 is significantly more stable today right now than it was last year. We had a lot more volatility in the network last year and some of the impacts of the new rules reign were setting in. And as I mentioned we're identifying new partners that we can bring on the InfoSpace’s fee and so I think the introduction of yet another search engine partner gives us added flexibility. I think it improves the strength of the product. It certainly makes it more differentiated we believe and so net-net we're not by any means turning up on the syndication network and still have some partners inside of that network that are growing.

[Eric M. Emans:]

And as I think about the third quarter I mean we from Q1 to Q2 is about 11% decline in distribution and I believe fourth quarter the first quarter was about 19% of the recall. We're not expecting declines more than 11% certainly in our forward guidance and on your question I will think I would say just from the guidance methodology standpoint. We're excited and looking forward to do a lot of testing and getting that implemented. But we really haven't assumed any upside from that agreement in our forward looking statement. So there is optimizing there, that there is some upside. But we just got get in and work on the migration and the integration and hopefully that will bear some fruits that's good not only for distribution. But also on the operative.

[Daniel L. Kurnos:]

Great. Let me just shift gears then Bill it's sort of off the wall question. I know it's always there in terms of competition. But from a tax perspective we seem Turbo get kind of aggressive in the S&B market. Just any thoughts on how that market is evolving and it sets maybe more of a difficult playground than you expected to be.

[William J. Ruckelshaus:]

No, I don't think so. The TaxACT team used that as a fairly wide open opportunity and to-date I would say there has been limited resources on the part of TaxACT team in that product and developing out the customer base that we think represent even greater opportunity in future season.

[Daniel L. Kurnos:]

How much is it going to cost you guys to open the market price distribution center?

[Eric M. Emans:]

Not a number I'm going to give. But it is a material. We are starting small and with anything we will show discipline out of the gate and if we find success then we will spend rapidly. But it's not what I will consider material or capital expenditure.

[Daniel L. Kurnos:]

Okay. And then just last for me and hop off. Bill, I'm not going to put words in your mouth. But from your commentary and from your forward guidance it looks awfully like a lot like an acquisition is eminent end or near, I don't know if you want to comment on that and addition to the color you gave already on the call.

[William J. Ruckelshaus:]

I appreciate you are not putting words in my mouth. Dan, we never in the game of making calls like that in my comments, my comments I have made in the past we are merely to emphasize that when it comes to the other responsibility that we have at Blucora as it relates to capital allocation and that's something we actively evaluate.

[Daniel L. Kurnos:]

Okay, fair enough. Thanks guys.

[Operator:]

Our next question comes from Gil Luria with Wedbush Securities.

[Gil B. Luria:]

Thank you and good afternoon. Couple of questions on tax. So another you had a couple of months, so the team there has a couple of months to look at the last tax season. Turbo tax by going fully free, took a lot of customers away. You were able to grow volumes this year, lot of those volumes went to turbo tax fully free. Do you feel that it's worth going back next year and fighting for those customers or though it's just not very valuable customers for you?

[William J. Ruckelshaus:]

What I would say that probably a fair characterization of some of the shifting that went on and as I think you pointed out on an earlier call. It was sort of a tail of two seasons in the sense that the early season as where you saw lot of this activity and then there is sort of more of a back to normal view in the second half of the season. I think the way TaxACT evaluates it is not to make any presumptions segment by segment it's to where the LTV is but instead to drive LTV in each of the segments that it's going after whether that's through software or ancillary or some form of that on service. So the end game I think is actually because of the nature of your offering and then pricing it to value in each of the segments and then complementing that with services that are immediately contributing to the tax filing experience for surrounded and just bring more value to the individual filer. Just to drive LTV in each of the segments we serve and you are right there is a fair amount of the population in today's DDIY that is free and those tend to be more migratory from one season to the next in terms of which mortality they were used. But I think where TaxACT has been encouraged in the last couple of seasons is in fact in the stability to engage with those filers that in prior season had been entirely free and up sale amount of new product and often times that new product may not actually be tax software or will be something surrounding the tax filing experience that they often do.

[Gil B. Luria:]

Got it and then in terms of some of the discussion post tax even then around fraud and the measure that are going to be taken by the IRS next year to reduce that. So first on identity fraud, have you taken part in the discussions around that? Will there be any measures that you take in order to reduce to help the industry -- of identify fraud next year and then on an income credit, do you expect the IRS to implement new requirements for digital filings as that will they will screen better for or income credit fraud?

[Eric M. Emans:]

Hey, Gil its Eric. We're very involved with the act group and I would say in general we are 100% supporter in taking measures that eliminate or work to eliminate fraud and will take every opportunity to increase our measures and I would say that I think that the measures that we have in place have shown out over the years that fraud is not prevalent with in our filer base. So our filing numbers. It's just an earned income. I think that's an ongoing dialogue and we welcome it and like I said anything for us we can protect the consumer and make sure that fraud are not going through our network. In general it's a good thing and that's what our brand stands for and we welcome those changes and prepared to make any changes that IRS sees.

[Gil B. Luria:]

Great, thank you.

[Operator:]

[Operator Instructions] Our next question comes from Brian Fitzgerald with Jefferies.

[Brian P. Fitzgerald:]

Thanks guys, maybe a question on Monoprice first. You've got a relationship with Amazon as a partner but also a competitor and just thinking about with the recent launch of jet.com any view of that as an entrance into the market in terms of pricing pressure and maybe more broadly as you look at the back half of the year and how they season any change or thoughts around your competitive strategy with the likes of one of those entrances into the market.

[William J. Ruckelshaus:]

Yeah this is Bill I think that one of the things that is true the consumer electronics e-commerce space is that it is involving at a fairly rapid cliff until as we talked to Bernard Luther [ph] and his team at Monoprice. The recognition is not just in terms of what are the initiatives is underway at Monoprice but also what's going on in the marketplace and how do we best keep pace. One of the realities today is that more and more of the initial shopping and searching is going on inside of the large platforms like Amazon. And so you got to be present there just as you're as gone by people have made the same conclusion about the search engine. And so I think that Monoprice is well aware of market dynamics and yes it’s focused on Monoprice.com and building that brand and also driving transactions through that website. But they also have to be present in third party channels. And I think they're doing a good job of getting fully present in there. As it relates to Jet I'm probably not in a good position to comment on that but it will be an interesting thing to watch develop.

[Brian P. Fitzgerald:]

Great. Thank you very much.

[William J. Ruckelshaus:]

Thank you.

[Operator:]

And I'm not showing any further question at this time. I'd like to turn the call back over to management for closing remarks.

[William J. Ruckelshaus:]

Thanks everyone.

[Operator:]

Ladies and gentlemen that does conclude today's presentation. You may now disconnect and have a wonderful day.