Avantax Inc (AVTA) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Blucora Q2 2012 earnings call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder this conference call is being recorded.

I would like to introduce your host for today's conference, Stacy Ybarra, Senior Director - Investor Relations. Please go ahead.

Good afternoon and welcome to Blucora's second-quarter 2012 earnings conference call. On the call today are Bill Ruckelshaus, President and Chief Executive Officer, and Eric Emans, Chief Financial Officer. Before we begin I'd like to remind you that during the course of this call our core 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 businesses and growth initiatives in anticipated financial performance for the third quarter 2012.

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 other current expectations or 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 Annual Report on Form 10-K on file with the Securities and Exchange Commission.

Blucora's assumes no obligation to update any forward-looking statements 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 have also provided supplemental financial information on 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. Following his comments Eric will review the second-quarter results and the third-quarter outlook. Then we will open it up to your questions.

Thank you, Stacy. Good afternoon. We are pleased to report Blucora results for the second-quarter 2012. Performance in both our search and tax-preparation businesses exceeded our expectations. Total Company revenue for the period was $100.9 million. Adjusted EBITDA was $24.5 million and non-GAAP net income was $21.8 million. Our second-quarter results reflect a strong end of the season for TaxACT, sustain the momentum in the InfoSpace search business and highlight the profitability and cash generation of our consolidated Company.

We are encouraged by the momentum and progress in our operating units and we believe we are well positioned to take advantage of the secular trends underway in the markets in which we operate.

I want to spend a few minutes discussing performance of our search and tax-preparation businesses this quarter. Search revenue for the second quarter was up 51% from the prior year, driven by strong growth in our B2B distribution partner network. Distribution revenue is up 70% versus the prior year and 10% sequentially reflecting search market growth overall, new partner performance and our ability to capture greater share of individual partner business through focused account management and client engagement. Our team is developing tools and technologies to enhance our monetization solutions for our global partners, and our sales team continues to identify new partnership opportunities to grow our network and expand our footprint.

For our tax-preparation business, TaxACT, our second-quarter performance was strong with topline growth of 11% from the prior year. The continued shift to online do-it-yourself tax preparation combined with the strong execution of the TaxACT team contributed to better than expected season performance.

Overall, our formula for building value is intact and we are executing successfully. We operate good businesses with focus strategies in growing markets. Our cash flow outlook is attractive and provides us the flexibility to invest back into our businesses where there is good return and to evaluate acquisitions that make sense.

With that, I'll turn the call over to Eric for more details on the financials.

Thanks, Bill, and good afternoon. Today I will cover our second-quarter consolidated performance, segment result, touch on unallocated expenses and end with our third-quarter outlook.

Starting with consolidated performance, second-quarter 2012 consolidated revenue was $100.9 million and adjusted EBITDA was $24.5 million. Non-GAAP net income was $21.8 million or $0.53 per diluted share. And GAAP net income was $9.7 million or $0.23 per diluted share. Our consolidated results are up significantly on an absolute dollar and percentage growth basis versus second-quarter 2011 due to the impact of the TaxACT acquisition, coupled with the continued growth in our search business.

On a sequential basis consolidated results are down as expected, which can be attributed to the seasonality of our TaxACT business which generates the majority of its revenue and profits during the first four months of the calendar year. As a reminder, we completed the TaxACT transactions on January 31, 2012 so the first quarter reported results only include February and March 2012.

Pro forma consolidated results on a trailing 12-months' basis including TaxACT and ignoring the impacts of purchase accounting and certain non-operating expenses or revenue of $365.9 million, adjusted EBITDA of $82.6 million, and non-GAAP net income of $70 million were $1.73 per diluted share.

Pro forma levered free cash flow for the same period would have been $75.5 million. These pro forma results highlight the potential of the combined entities operating performance in cash flow generation. We exited the quarter with cash of $141.9 million or $3.52 per share and cash net of debt of $66.9 million.

Turning to our segment performance. The search business had a very strong quarter with revenue of $81.8 million, up 51% versus prior year, and up 9% sequentially. Revenue growth continues to be driven by strong performance of our distribution business, which is up 70% versus the second quarter 2011 and up 10% sequentially.

A trend we would like to highlight is the better than expected sequential growth of our new distribution partners. As a result, our revenue concentration of our top five distribution partners decreased from the first quarter to second-quarter 2012. This is an encouraging trend and, as we look forward, we expect new partners to provide a catalyst for continued growth.

Search segment income was $15.1 million, up 31% from the second-quarter 2011 and up 13% versus first-quarter 2012, again fueled filled by distribution growth.

Moving to the tax-preparation business. Second-quarter revenue was $19.1 million and segment income was $12 million. Both revenue and segment income were down sequentially from the first-quarter 2012 due to the seasonality in the tax-preparation business as I mentioned earlier on the call. Comparing these results to the second-quarter 2011 on a pro forma basis which excluded the impacts of purchase accounting and certain non-operating expenses, revenue was $19.8 million, up 11% and segment income was $12.8 million, up 21%. These results reflect TaxACT's strong finish to the tax season.

Unallocated corporate expenses for the second quarter were $2.5 million which is down sequentially caused in large part by $1.1 million in professional service fees associated with the TaxACT Acquisition included in our first-quarter results. Now for our outlook.

For the third quarter, we expect consolidated revenue to be between $90 million and $93 million, adjusted EBITDA between $10.5 million and $11.5 million, non-GAAP net income of $8.1 million to $9.4 million or $0.19 to $0.23 per diluted share and net income of $500,000 to $1.5 million or $0.01 to $0.04 per diluted share.

For search, we expect revenue to continue its sequential percentage growth rate. We expect segment income sequential percentage growth rate to slow due to continued mix shift toward distribution coupled with the second quarter benefiting from certain nonrecurring costs recorded in the first quarter.

For tax preparation, revenue will decrease significantly from the second quarter and we will record a segment loss as we are now inside the tax season. For the third quarter we expect revenues to be similar to the same period last year with the notable exception that revenue will be reduced by $600,000 related to purchase accounting. Segment loss when compared to the same period last year is also impacted by $600,000 for purchase accounting and is expected to be a bit worse due to increases in operating expenses related to assorted growth and integration initiatives. Quarterly historical pro forma operating performance for our tax preparation segment has been included in our second-quarter supplemental financial information package.

Lastly. Although unallocated corporate expenses return to pre-acquisition levels, we expect a modest increase as we ramp our infrastructure needed to support multiple businesses at the corporate level.

With that I will turn the call over to the operator and we will take your questions.

(Operator Instructions). Jack McCarthy, Craig-Hallum.

Can you talk about the adoption you are seeing with the new portal offering for ISP customers?

Yes, happy to take that question. We are excited about the offering. As you know we have existing portal customers so those are going to be the first areas where we roll out the product, and we are in discussions now with implementing it. It is a little early to give feedback as to the improved performance and client satisfaction, but the good news is we have a set of customers where we can introduce that and take learnings from that before we go out to a broader market.

Who is your extension in the mobile playing out? I'm wondering if you have identified a timeframe or an inflection point that sees more new partners coming from the mobile side rather than desktop or online?

You are right to point out origins are on the desktop. We are moving now into mobile. I think other players in the search market have observed that the migration from a consumer perspective is absolutely leading, and I think the revenue models as they evolve from desktop to mobile will lag. We are working with partners right now in a variety of different contexts in the mobile environment, and seeing a lot of success. Although I would say it is early days, there is a lot of testing, a lot of experimentation.

But we want to make sure that we are there with our partners in the desktop environment, as they want to pivot and migrate to mobile, and enable that as best we can. And then also use that as a greenfield opportunity to find new accounts.

As to when the inflection point happens, we are not there yet. We still have, we think, a lot of the runway on the desktop world and that is today where we are seeing a lot of our growth. But we do think that these early investments will pay off down the road.

Thanks. And what percent of your current search partners have a mobile asset and is the opportunity with these mobile assets more with search functionality or something else?

Yes, so I am not going to give you the exact percentage, but everybody is thinking about it. It is hard if you -- hard to be in digital content delivery these days without thinking about how it is you are going to exist in a mobile environment given the consumer trends. And I think that right now the models are varied. The -- some of those -- some of our partners are choosing to go to the browser predominantly. Some of them are distributing through an application.

But making sure that search utility and search monetization is present there with them and enables them, will allow them to extend their footprint. So that is what we are really focused on.

Thanks. And moving to the tax side. Have you made any decisions on marketing spends in the new season? What could we expect it to look like compared to the just-completed season?

Yes, so we -- as you might imagine with the conclusion of the 2011 tax season, the TaxACT team with us here at the Blucora level is actively evaluating the game plan going forward. There is a lot of product development efforts going on and, of course, there is a lot of learnings that we are distilling as it relates to what happened in the prior season and where we find opportunity for extending and where it makes sense to pull back.

As for the overall marketing plan we are not going to get specific in that regard. But as we have said before, we love the market segment. We like the secular shifting that is going on and we see opportunity to not only continue the success that TaxACT has had but build upon it.

Modeling question here. What level do you expect search gross margins to level off?

So, as we talked about on the call we think it will come down a little bit and you know to the extent -- sorry, this is Eric -- to the extent that we still have a portion of our business coming from our owned and operated. But [I will] continue to put pressure on the margins.

So modest declines is what I would look for from a modeling standpoint. And that to continue for the foreseeable future.

Last one here. Thanks, guys. What are your recent thoughts and strategy on how you might deploy cash for another acquisition and what are your thoughts towards using additional financing to pay for something like that?

I think the specific financing strategy for doing an acquisition will have a lot to do with the nature of that acquisition. And so, it is probably tough to be formulaic about that upfront. As you know, we spent a reasonable amount of our cash earlier this year in connection with the TaxACT acquisition although we didn't fully finance it with cash. We partially debt-financed. That may be a structure that we would employ in the future, but it has a lot to do with the nature of the transaction.

Thank you, Bill and Eric. Thank you.

Thank you.

This ends our Q&A session today. Ladies and gentlemen, thanks for participating. Today's program has ended. You may all disconnect.