Avantax Inc (AVTA) 2012 Q3 法說會逐字稿

Good day, everyone the welcome the Blucora third-quarter earnings results conference call. This call is being recorded. With us today from the Company is the Chairman and Chief Executive Officer Bill Ruckelshaus; Chief Financial Officer, Eric Emans; and the Senior Director of Investor Relations, Stacy Ybarra. At this time, I would like to turn the call over to Stacy Ybarra. Please go ahead, ma'am.

Good afternoon, and welcome to Blucora's third-quarter 2012 earnings conference call. Before we begin I'd 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 products and services, outlooks for future of our business and growth initiatives and anticipated financial performance for our fourth quarter 2012 and tax season for the first half of 2013. 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 annual report on Form 10-K, on file with the Securities and Exchange Commission. Blucora 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 a 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 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. Following his comments, Eric will review the third-quarter results and fourth-quarter outlook. Then, we will open it up to your questions.

Thank you, Stacy. We are pleased to report Blucora results from our third-quarter 2012. We had another great quarter. Total Company revenue for the period was $92.9 million, adjusted EBITDA was $12.1 million and non-GAAP net income was $10.4 million. Our second-quarter results reflect strong performance from the InfoSpace Search business. Search revenue for the third quarter was up 62% compared to the prior year, driven primarily by growth in our distribution network. Search distribution continued it's positive momentum, posting 78% growth versus 2011. We are encouraged by the performance of the Distribution Network and believe the cornerstones remain intact for continued growth in this area. As a meta-search provider we aggregate content from multiple sources to create a differentiated search experience for users and our partners. Our unique position in the marketplace, coupled with our long-standing experience, providing flexible implementation and high service levels to our partner network is a core advantage of winning distribution customers. And newly signed customers have significantly contributed to our momentum upswing in the past five quarters.

InfoSpace also represents a growing, trusted distribution channel for our search partners. We have been in business with Google and Yahoo each for over 10 years. We distribute the content and results of our search partners across owned and operated properties, and now more meaningfully, across our partner network. We operate in accordance with search partner policies and best practices. We introduce new distribution opportunities for our search partners and drive liquidity in their overall keyword marketplaces. Our Search business is defined by this mutually beneficial relationship with our search partners, and we keep their interests at the center of our future growth plan.

Looking ahead at the next quarter and beyond, we continue to see opportunity in Search Distribution. We do expect our year-on-year growth to slow in Distribution beginning in Q4 of this year, as year-over-year comparisons become more difficult. But we continue to invest in product features, content development and platform enhancements to evolve our solutions for partners. Additionally, we are increasing our investment in Mobile so that we are prepared to capitalize on new opportunities as mobile search continues to develop.

Moving now to our tax-preparation business. The market opportunity remains strong as we continue to see a secular shift to digital do-it-yourself within the tax-preparation market. TaxACT is well-positioned to leverage this trend. We remain bullish on the space, and we are leaning forward with additional investments for the coming season and beyond. During this off-season, we spent time understanding our customers to help inform our product enhancements going forward. Our DDIY customers are smart, they want quick, simple solutions and they increasingly want access across desktop, tablet and mobile devices. We are making numerous investments to the product in key areas including improved content, additional support services and new mobile offerings.

I want to spend a few minutes discussing these initiatives. We believe the tax law changes likely to be passed late in 2012 or into 2013, retroactive to January, may be confusing to taxpayers. To further improve the customer experience and in anticipation of potential tax law change ambiguity, we expanded our content to help our customers seamlessly navigate through the complicated tax code. We enhanced our TaxACT Tax Tutor Guidance tool with new, rich content written by our team of CPAs and experienced tax accountants. This new information is customized for individual taxpayers based on their responses to specifically tailored interview questions and includes easy to understand tax explanations, tips and potential savings. We also added new customer support features including tools to assist our customers through more than 35 life events such as marriage, children, college, unemployment, retirement and natural disasters. We developed new chat capabilities to offer immediate tax assistance online. We improved our search capabilities and our Answers Center to more quickly provide our customers with the guidance they are looking for. All of these resources, tools and content enhancements will not only improve the user experience but will help minimize customer service calls and reduce costs.

In terms of mobile, the team significantly improved our capabilities with innovative new solutions. Our customers can already file on any device using their browser. However, this season we are taking it further. This week we launched our tablet app for both Android and iPad platforms. This new app allows consumers to prepare, print and file their federal and state returns using a tablet. Our tablet app is unique in that users can start their returns on their tablet or on the web at TaxACT.com, and can access their information in either location anytime, anywhere using the same username and password. We also plan to launch a new Smartphone app this season to assist with organization of tax data and completion of tax returns. I won't get into too many details about the product until it is publicly launched, but needless to say, we are excited about this new offering. As an online pure play we are benefiting from the secular shift to digital, and with the proliferation of mobile devices, consumers are increasingly demanding access to applications on any device. We believe mobile is a tremendous opportunity in the long term, and we are committed to offering differentiated products that provide our customers with a convenient, seamless experience on any device.

In addition to developing new products internally, we are evaluating opportunities to improve the user experience and optimize our operations. Or example, we are evolving our bank card solution strategy for the upcoming tax season. We are finalizing plans for a new partnership with a leading provider of prepaid products to offer our customers an improved prepaid debit card solution with better features for our customers and more predictable economics for us. We see a growing demand from filers for prepaid debit cards and our new offering provides a compelling alternative banking solution that will continue to serve our filers beyond the tax season.

So, we have a number of initiatives underway. Looking ahead to the coming season, we are very optimistic. Last season's strong performance reaffirmed our that TaxACT is extremely well-positioned to capitalize on the demographic trends and technology advances taking place in the DDIY space. Given these tailwinds and our positioning is the lead value brand, we believe we can be more aggressive in going after share growth in the long term. To that end, this year we are making significant investments in instrumentation and business intelligence to improve our strategy for attracting new users, retaining existing users and offering further service and value to our customers. We believe these calculated investments will pay off in the medium term. We think that DDIY category will grow units between 6% to 8% in the upcoming year, and our goal for the 2012 tax season is to grow our own units in line with the market. We believe we have a tremendous opportunity in front of us, and we are making smart strategic investments today that will accelerate growth well into the future.

Before I turn the call over to Eric to go over the financials, I wanted to take a moment to update you on how our strategy at the Blucora level is coming together. We are executing well against our strategic plan. Our mission is to own and develop leading businesses with excellent management teams that operate at the forefront of digital migration trends in more markets. Our framework for success is to leverage our experienced corporate team in Finance, Corporate Development, Human Resources, Legal and Business Intelligence to provide strategic direction and to support business unit growth and drive profitability. Our continued ability to generate free cash flow from our operations gives us flexibility for future growth investments. With that, I will turn the call over to Eric for more details on the financials.

Thanks, Bill. And good afternoon. Today, I'll cover the third-quarter performance, provide fourth-quarter outlook and end with some comments on our expectations for the upcoming tax season.

Let's begin with consolidated performance. Third-quarter 2012 consolidated revenue was $92.9 million and adjusted EBITDA was $12.1 million. Non-GAAP net income was $10.4 million, or $0.25 per diluted share, and GAAP net loss was $2.4 million, or a loss of $0.06 per share. GAAP net loss was impacted by a non-cash charge of $4.3 million, or a loss of $0.11 per share, related to mark-to-market accounting or a derivative instrument driven by third-quarter stock appreciation. We exited the quarter with $150.4 million in cash, or $3.70 per share, and cash and other debt of $75.9 million.

Turning to our segment performance. The Search business had a very strong quarter with revenue of $91.4 million, up 62% versus prior year and up 12% sequentially. Revenue growth continues to be driven by strong performance in our distribution business, which is up 78% versus third-quarter 2011 and up 12% sequentially. Our growth continues to be positively impacted by distribution partners launched in 2012. These new partners drove approximately one-third of the year-over-year growth and approximately two-thirds of the sequential growth. We are also pleased by our ending operating performance, which grew 12% sequentially driven by our direct marketing initiatives where we are focused on driving users toward our WebCrawler web property. Search segment income was $16.4 million, up 51% from the third-quarter 2011, and up 8% versus second-quarter 2012. Again, fueled by distribution growth. Moving to the Tax Preparation business, which is in its off season. Third quarter revenue was $1.5 million, and we recorded a segment loss of $1.6 million. As a reminder, outside of tax season, the business has historically generated revenue and segment losses consistent with the third-quarter results. Unallocated corporate expenses for the third quarter were $2.7 million, which is up sequentially, as we continue to invest in necessary infrastructure to support our businesses.

Now for our outlook. For the fourth quarter, we expect consolidated revenue to be between $92 million and $95 million. Adjusted EBITDA, between $10 million and $11 million. Non-GAAP net income at $7.7 million to $8.9 million, or $0.18 to $0.21 per diluted share. And net income of breakeven to $1 million, or $0.00 to $0.02 per diluted share. Please note that our GAAP net income and EPS guidance does not include an expectation for non-cash gains or losses related to mark-to-market derivative instruments. Also note the impacts of such gains or losses are excluded from our non-GAAP financial measures.

For Search, we expect revenue to be flat to slightly up versus the third quarter, as we have seen some slowing in our growth rates, which is to be somewhat expected considering our recent growth trends. With that being said, year-over-year quarterly revenue growth is expected to be north of 35%. Search segment income is expected to be flat sequentially to slightly down on continued overall revenue mix shift toward distribution coupled with our owned and operated revenue mix shift toward revenue driven by our direct-marketing initiatives, which has a similar segment income contribution margin as distribution. For Tax Preparation, we expect revenue to decrease from the third quarter by approximately $500,000, and we expect segment loss to increase by approximately $1 million. The revenue decrease primarily relates to timing associated with our bank products revenue, while segment loss reflects the revenue decrease -- this revenue decrease coupled with increased investments in our operating expenses related to assorted growth and integration initiatives. Lastly, we expect unallocated corporate expense to continue to tick up as we ramp our corporate infrastructure.

Before we turn the call over for questions, I am going to just take a moment to comment on our expectations for the 2012 tax season, which will play out during the first and second quarter 2013. We are finalizing our 2013 plans, and as Bill indicated, we are moving down on a path to position ourselves for long-term share growth through increased investment. We expect to report Tax Preparation segment revenue for the first half of 2013 to be $86.5 million to $88.5 million and segment income of $45 million to $46 million. On an apples to apples basis versus the first half 2012, this represents an 8% to 10% growth in revenue related to our Tax Preparation business and 7% to 10% growth in segment income related to our Tax Preparation. Worth noting, our growth expectations incorporate the impact of our anticipated new prepaid debit card solution, which is expected to increase segment income profitability for the tax year 2012 and will slow year-on-year revenue growth rates by 100 to 200 basis points. With that, I'll turn the call over to the operator, and we will take your questions.

Thank you. (Operator Instructions)

Ryan Augustitus, Northcoast Research.

Thank you. Good afternoon. Will there be any changes in the tax marketing strategy for the upcoming season?

Hey Ryan, this is Bill. As you might imagine, we are going to be reluctant to talk too much about our marketing strategy for the coming season other than to say we have been -- continue to be impressed with the marketing team at TaxACT and their capabilities. Their emphasis in the past has really been in the direct response direction and focusing on retaining prior-year filers and finding the new filers that can come onto the TaxACT application and stay with us. And that's going to continue to be a focus going forward. We have some investments that I alluded to from a technology standpoint that we think will accelerate that effort.

And then I think also increasingly, we are going to be focused on getting the TaxACT brand out there and getting the message out there to the service and the fair price and to really try to establish an emotional connection to TaxACT that complements the direct response capability. And as you might imagine as well, part of that is going to be looking to social networks and the referral networks to help bring the whole thing together. So that's not a lot of specifics for you, but the effort is really continuing to do what the team has done in the past and then also complementing it with other legs to the stool.

Great. Thank you. One more question would be do you have any plans to change your pricing as of right now for your state returns or the financial product you guys plan offering?

You know, the fair price is a critical element to the overall value proposition that TaxACT brings to filers. The price is probably most often spoken to in terms of our rate card. And, certainly, from a rate-card perspective, TaxACT, we believe, is substantially more fair than either its DDIY alternatives or other methods of filing. But the other components of the price commitment really revolve around the free federal offering, and there not being any exclusions or restrictions around that offering for filers once they get to the TaxACT application, be it AGI restrictions or otherwise; we really don't play that game.

And the other commitment to price is really around the price lock guarantee. The price that is in place at the time of a registration is the price that is in place and charged at the time of filing, and those all together work in tandem. We're not going to get into specifics as to plans for the coming season, but those are the things we really keep in mind as we think about retaining filers and growing the overall filers at the TaxACT family.

Alright, great. Thank you very much.

Jack McCarthy, Craig-Hallum Capital Group.

Thank you, can you hear me?

Yes, we can.

So regarding Distribution Search, what gives you the confidence that we can continue to grow that at a healthy clip over the long term?

So one of the good things about the Distribution business is that it is not an aggregate source of revenue. It is the collective revenue from a known set of partners, and so what we speak to as it relates to that piece of our overall search business is actually the bottoms-up understanding as to what each of our partners are doing, what trajectory they are on, what we can do to help continue that trajectory and hopefully improve upon it. And so, the fact that there our actually named entities on the other side of the equation is something that gives us comfort.

And at the same time, some of the comments that both I made and Eric spoke to with respect to the go-forward expectation, it's true that that partner business really picked up last year, specifically with respect to new partners that we signed, and we were able to get to a level of revenue pretty quickly. So the time to revenue boost, as well, with those partners. That really started to pick up for us in the middle of last year and toward the end of last year. We are now starting to overlap that which is going to slow the growth rate down. But we are still expecting to grow that overall business, and there's a lot of plans in place to do so.

How can Blucora play a role in mobile both with Search and Tax businesses?

So, you probably picked up on mobile themes in both -- in discussions around both businesses. The consumer shift to mobile via tablets or Smartphones is a very well-documented trend and something that we think is a really exciting opportunity for Blucora companies. It is going to take a lot of thought with respect to how do we push the user experience that we are now able to provide in desktop and push that out into mobile environments where the use case is often quite different, the format is going to be a lot different, and we are now thinking through not only how TaxACT can reach filers in those venues, but also how our partners in the Search side of things can do just that. And I think we are making inroads.

You can see that a lot of the product efforts in the off-season for TaxACT focused on just that, and we are working in a more behind-the-scenes way with our partners on the Search side so that they can pivot and that they can stay relevant, stay in front of their consumers. So, I feel confident about our ability to do this. The good news is while this shift is happening to mobile, it is not happening overnight, and it is not happening always at the expense of desktop consumption, and so we think there is an incremental nature to mobile that allows us to do both -- continue to be successful in desktop but also start to see signs of success in mobile. So, we are looking at this as an opportunity.

Thanks. With the upcoming tax season, what impact can we expect TaxACT to have on margins?

So, I will hand that over to Eric. I think that is somewhat implied in terms of the forward guidance expectations we gave, but we are happy to speak to that in a little bit more detail.

So just to clarify, are you talking segment margins?

Yes.

So, we are actually going to see some compression because I think the areas of growth are coming from distribution, as well as on the owned and operated where we've seen some growth is in our direct-marketing initiative which has a similar segment margin -- oh I'm sorry, TaxACT, my bad. So on TaxACT, we don't see a lot of change other than I think the opportunity to the store value card partnership allows us, which I talked a little bit about my script. Ultimately, we are shifting some of the responsibilities that we've done internally to an external partner, which we think is beneficial for TaxACT but also beneficial for our customers. Essentially, what this moves to is you had a gross revenue recognition, you're moving to net revenue recognition. So, other than that change, I think profitability will stay pretty much the same. It is just going to put a little pressure on our year-over-year growth rates on revenue.

Thanks. Just a couple more. What are your most recent thoughts on your next acquisition target? Is it likely to complement the Tax business or could be in a different area?

Yes. I think the good news is that we have a team that knows how to do acquisitions, and we have really great resources focused on identifying interesting acquisition opportunities. And the spectrum I think that we can now focus on with the addition of the TaxACT business I think has expanded, so we have strategies in place both in Search and TaxACT, and there's acquisitions that would make sense in either business, either directly supporting things we are doing or sitting adjacent and complementing. And so, I think there's a good effort against those two fronts and it's also possible that we could find a business that is not directly related to TaxACT or Search that could sit alongside and complement the overall story.

Thank you. Last one here. What types of products should we think about you developing in-house to broaden out the Tax offering?

So, I think we started a new [descent]. So, one of the great opportunities we have in the TaxACT business is the filer relationships, it's a trusted relationship. We have to safeguard that relationship first and foremost, but it is also a group that is -- their needs don't stop at tax filing. And so, being able to think creatively as to what complementary services we might bring to them, either during the tax season or outside of the tax season, is a real opportunity. TaxACT was already thinking about that before we came along, and we are now at the table with them evaluating those opportunities. Some of them are actually making their way into commercial partnerships that are getting put in place and will be introduced this coming season, and others might actually take the form of an acquisition, and we will just have to evaluate those and pursue the ones that we think are most interesting.

Thank you very much.

Thank you.

Ned Davis, William Smith & Company.

Congratulations on the continued good execution. One quick question. Could you give us an update on the status today of the NOL, how much remains and how much cash flow over time, or pretax income, you can shelter assuming your businesses remain profitable?

Ned, this is Eric. So, the formal number we give is of the last audit period, it's about $780 million. Obviously, we've used some of that this year. I would expect to probably exit the year somewhere around $720 million $730 million of utilization, and that is on a gross basis. So, you could expect to utilize taxable income at that level.

Okay. Great. Switching back, the little refinement on the Search business, what you were discussing earlier. I understand your caution about guiding aggressively going forward on this. But you had such great success, you must be generating high rates of return on your marketing spend with these distribution customers.

Is it just that you have kind of run out of customers that can generate this high volume growth? Or is there increased competition for these types of distribution customers? And related to that, with the change in the regime at Yahoo and some of the things that have been going on at Google, they have pretty much left your distribution business kind of under their radars. Do you see any threat of encroachment by either of the big players or anyone else in this excellent distribution model you've been running?

I think that notwithstanding the year-on-year comparables dynamic, and I think we are still looking at solid expectations for growth in Q4, which is as far into the future as I think we are guiding at this point. I want to make sure that we are communicating that we're still seeing opportunity there and really speaking to some of the dynamics as it relates to the pickup in last year and the comparisons being a little difficult as opposed to anything intrinsic with respect to that business.

And then, as it relates to developments at Yahoo, developments at Google, or in the Search-partner landscape more broadly, I think we are viewing all of those as very positive. Which is, if we continue to serve as a partner and a channel partner for our search partners, that by definition, is intended and constructed as a complementary relationship and not an overlapping relationship, and I think there are segments in the market where we can represent our search partners with a degree of transparency and trust that is viable and not introducing of channel conflict issues, and so I think that we're encouraged by the renewed commitment that we seeing out there by our search partners and looking forward to working together in the coming year and growing our business.

Thank you very much. Appreciate it.

Thank you.

James Dobson, Benchmark.

I have one question regarding the strength in O&O. What caused that in the quarter, and do you think that that's sustainable going forward, and did that have a big impact on the profit margin in the quarter?

So, James, this is Eric. I think we have been pleasantly surprised by our direct marketing initiatives and the return, and that business as we've talked about before is really predicated on us spending dollars at a rate of return that we find favorable, and we've just been able -- we've had a lot of success at doing that. We've had momentum into the third quarter. We hope that momentum carries into the fourth quarter.

And as far as compression, I think the way to think about that business is it just has the same margin profile as the distribution business. So to the extent that we are able to grow our direct marketing initiatives revenue, it comes in at a similar margin. So, the more our owned and operated shifts, the more margin compression we would have. But again, as we've said in the past, we are very focused on absolute dollar growth, and we are very excited about the momentum that business has.

Okay. Great. And then regarding Tax. You talked about how the goal for this year is to maybe gain share in the market, and you mentioned that you are trying to grow units in line with the industry. Your long-term outlook of 8% to 10% for next year is in line with the number one player, Intuit, which they gave on their analyst day. So would you consider if you grew in line with them, gaining share, or how can you judge if you are actually gaining share in this market?

Yes, James, so this is Eric. So let's clarify a couple of things. When we say we believe we can grow in market, that's really a unit metric, and we believe that the DDIY, the digital-do-it-yourself marketplace is growing between 6% and 8% and that's our goal for tax year '12. We believe we are making investments that are going to allow us to grow share longer-term, but right now really just focused on growing within that market.

The 10% that you quoted is really what we believe we are going to do on an apples-to-apples basis versus essentially the tax season in 2012 for revenue. We think that that growth is being impacted a little bit by the store value card change that we are expected to make but really good growth coming out of revenue and maintaining some pretty healthy segment income margins.

Okay. Great. Thank you.

Thank you.

This will end our Q and A session. Ladies and gentlemen, thank you for participating in today's conference. Today's program has ended. You may all disconnect. Have a good day.