InfoSpace Plus TaxAct Equals Success
Nowhere does the expression "one plus one equals three" apply more than the January 2012 acquisition of TaxACT by online search company InfoSpace for $287.5 million in cash. Instantly, InfoSpace was two businesses instead of one. In recognition of this transformation, InfoSpace changed its name to Blucora Inc. (Nasdaq:BCOR) to keep some separation between the holding company and its operating divisions. Together these two businesses will forge a new future; one that investors should profit from.
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In its January 9 press release to announce the acquisition of TaxACT, Blucora said the transaction would be immediately accretive to earnings. As of Mar. 31, 2012, the combined businesses had 12-month pro-forma revenues of $336.4 million and an adjusted EBITDA of $76.8 million. TaxACT's revenues represent just 25% of overall sales but 45% of segment income. Its non-GAAP earnings per share are $1.63, which puts its price-to-earnings ratio on a non-GAAP basis at 7.6 times. Blucora paid 3.4 times sales and seven times operating income for TaxACT. It might seem high but the acquisition should pay for itself within five years. Not to mention its tax preparation business has an EBITDA margin that's approximately double that of H&R Block (NYSE:HRB) and 1.5 times Intuit's (Nasdaq:INTU). TaxACT is now and will continue to be a thorn in the side of the Kansas City-based company.
If you look at Blucora's stock chart since its initial public offering on Dec. 15, 1998, you realize that it's had two periods of tremendous growth over its 14-year history as a public company. The first was during the dot.com bubble of 2000 when its share price was over $1,100, and it had a market cap of more than $1 billion due to the hype and hysteria of the time. Its operating loss in fiscal 1999 was $32.8 million on revenues of $40 million. It was clearly the era for cheap money. Its second period of success came in late 2004 when its stock hit a split-adjusted high of $21.45. This too would be short-lived as InfoSpace was forced to restructure in 2006 after losing its contract with Cingular, now part of AT&T (NYSE:T), to enter into ringtone licensing agreements with record labels. InfoSpace laid off 250 people and took a $63 million restructuring charge as a result. While this drop wasn't nearly as precipitous as the first one, it hasn't come close to $20 since 2007.
While InfoSpace won't win any awards for hyper growth, it has managed to keep control of its overhead. In 2011, despite generating the highest revenues it's had since 2006, it delivered an operating profit of $20.2 million. That's its best result since 2005. In the first quarter of 2012, its search business grew revenues 46% year-over-year to $75.3 million and segment income by 21% to $13.4 million. While the increases are healthy, the segment margins contracted by 370 basis points due to lower revenue generation from its sites and more from its distribution partners' web properties. Not to worry though as they'll do just fine thanks to the increased profitability of the tax preparation business baked into the equation. This changes the business model completely.
The Seattle Times recently wrote about the ups and downs of Blucora's predecessor. The paragraph I honed in on is the one that said current CEO William Ruckelshaus took over InfoSpace in November 2010 with "... a modest but profitable Internet search business, nearly $156 million in cash, and $788 million in tax losses ... " That last point is what makes an investment in Blucora so attractive. It's bought a business in TaxACT that's extremely profitable with plenty of growth ahead of it. By bringing all of these tax losses to the table, it can shield itself from federal taxes for a significant period. Meanwhile it still has net cash of $45 million. If it could pull the trigger on another profitable Internet business, I'd be all over that. Stay tuned because this is going to get interesting.
The Bottom Line
Looking back a decade from now, analysts will recall the day Blucora carved a true path for its future. I don't know how far this stock can go, but I do know that it's got a much brighter future with TaxACT in the picture. Can lightning strike twice? We'll find out soon enough.At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.