Avantax Inc (AVTA) 2013 Q4 法說會逐字稿

Good day, everyone. Welcome to the Blucora fourth quarter earnings results conference call. This call is being recorded.

With us today from the Company is the President 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.

Good afternoon, and welcome to Blucora's investor conference call to discuss fourth-quarter and full-year 2013 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 businesses and growth initiatives, and anticipated financial performance for the first quarter of 2014, and tax season 2014.

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 Security 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-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 the 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 will turn the call over to Bill Ruckelshaus . Following his comments, Eric Emans will review the fourth quarter results and first quarter outlook, then, we will open up to your questions.

Thank you, and good afternoon. We have a busy agenda today.

I want to begin with a few brief comments in response to a report published recently about Blucora. As a matter of practice, we do not comment on individual reports. However, given the nature of the accusations this week, we feel it is important to set the record straight.

While we will not take time on this call to address every inaccurate statement in the report, we do want to specifically respond to the allegation regarding illicit key word search terms. I will be very brief, and then move to our operations where we continue to be focused.

Blucora and our InfoSpace subsidiary has zero tolerance for illicit key words of the sort referred to in this week's report, and we have longstanding procedures in place to suppress such search terms. The contention that our business is built around this type of traffic is irresponsible, abhorrent, and diametrically opposed to what we stand for as a Company.

Fully removing illicit key words from a search network is an ongoing battle for all industry participants. This is all the more challenging in the case of code words and euphemisms that are ever-changing.

While our systems and filters are robust, they require constant evolution. The suggestion that we are deliberately seeking this traffic, or that we are financially dependent on it, is false and despicable.

Other aspects of the report, too numerous to mention, including claims of involuntary and artificial clicks impacting the quality of our network traffic are also false. We will not dignify this report with further comment.

With that, I will move to updating on our businesses. The InfoSpace business performed above our expectations in both the fourth quarter and for the full year 2013. Our strong revenue growth can be attributed to, both our owned and operated properties, and the addition of new search distribution partners.

Our team has been working closely with Google over the prior months, and we are pleased to announce, today, we have renewed our contract together, effective April 1, 2014. The three-year agreement extends the partnership through 2017, with a mutual option to extend for another year.

Importantly, our new agreement applies to desktop only, and excludes smart phone and tablet search going forward. This represents a change from the terms in our current agreement, and will drive InfoSpace to evolve our mobile offerings going forward.

Mobile is a modest component of our search business today, but clearly, the potential exists for us to broaden our exposure in this evolving market in the future. By way of background, Google communicated to us late in our renewal discussions, they are reviewing their syndicated mobile search offering, and as a result, this renewed agreement does not include the mobile search product going forward.

Given our longstanding relationship with Google, we are optimistic we will find new ways to work together in mobile in the future. In the meantime, our search team is ready with alternatives to Google in mobile.

Our immediate response will be to display mobile search results from other sources, including Yahoo. Longer-term, we will continue to experiment with search and non-search solutions, including programmatic display, text, and video, to evolve our offerings in mobile, and remain relevant to users and partners as mobile usage further matures.

There are a number of important things to consider in connection with in announcement. First, I want to under score that the vast majority of our search business today is desktop related, and desktop will continue in the new contract, under the same rates that we have in our current contract with Google.

Desktop was 85% of our business in Q4, represented nearly two-thirds of our revenue growth from last year, and grew at a compound annual rate of approximately 28% from 2010 to 2013 . Second, our value proposition in the search marketplace, continues to center around bringing liquidity and quality traffic to our search engine partners, and differentiated content and monetization solutions to users and partners. This core equation remains intact, and continues to offer InfoSpace, and our partners, compelling opportunities going forward.

Last, the InfoSpace team is experienced, and our diversified model allows us to quickly adapt to market changes. We will navigate to a new baseline and continue to deliver value in this new chapter.

Now turning to tax prep. The tax season is underway, and the tax team is poised for strong performance.

This year bought another delayed start to the season, and we believe the filing pattern, overall, will be very similar to last year. Consumers are increasingly conditioned to start their tax returns later in the season.

TaxACT delivered and launched a record number of new products and enhancements this season, centered around user experience, website content, and decision support. We migrated our small business DIY tax solution online, launched a consumer-facing healthcare insurance site at healthcareact.com, and introduced a number of applications including a tax calculator, mobile refund tracker, and mobile donation assistant.

The team also launched ahead of this season, a differentiated smartphone APP for tax filing, TaxACT Express, or free federal tax filing. With TaxACT Express, TaxACT, now offers a suite of tax-filing products for desktops, tablets, and smartphones with anytime, anywhere access.

The team is firing on all cylinders, and I couldn't be more pleased with their progress. We entered the tax season with increased momentum, best-in-class products, an outstanding value proposition, and programs aimed at increasing consumer awareness. We feel good about how TaxACT is performing to date, and believe we are well-situated going forward to grow in digital DIY, and bring more value to our customers.

Now turning to E-Commerce. The condensed holiday shopping season, and soft consumer demand, led to fourth quarter sales slightly below expectations. Some of this offense has carried over to Q1, and while we don't believe the issues to be long-term, we are nonetheless, guiding cautiously in the first quarter.

We purchased Monoprice because of their compelling value equation. They provide quality products at fantastic prices, and deliver great service.

Their core customer base, strong product reviews, and high net promoter scores speak to the loyalty they generate. We continue to believe in the growth potential and remain committed to the multi-year of growing Monoprice into an established household brand.

In closing, 2013 was a year of growth and continued transformation for Blucora. We are executing well on the blueprint in place, and look forward to seeing our Companies advance on their respective paths in 2014. With that, I will turn the call over to Eric.

Thanks, Bill. I will start out with a quick review of our full year 2013 consolidator results, before moving into a more detailed discussion on our fourth quarter performance and end my comments with first quarter 2014 outlook, as well as some commentary on the 2014 search expectations, given our Google renewal.

Consolidated revenue for 2013 was $574 million, up 41% verses prior year, and adjusted EBITDA was $114.2 million, up 42%. These results reflect strong growth in our search business, which was up 24%, and 33% on a revenue and segment income basis.

Our tax business was also up considerably, in part due to a full year of results verses 2012, due to the timing of the TaxACT acquisition. Additionally, our 2013 results benefited there from the acquisition of Monoprice in the third quarter.

Non-GAAP net income for the year was $97.7 million, or $2.25 per diluted share, and GAAP net income was $24.4 million, or $0.56 per diluted share. On a pro forma basis, which includes the acquisition of Monoprice for the full year, consolidated revenue for 2013 was $666.2 million, adjusted EBITDA was $127.6 million, and non-GAAP net income was $106 million, or $2.44 per diluted share. Pro forma free cash flow for the year, was approximately $107 million.

Further detail on our pro forma results can be found in our supplemental information release in the IR section of our corporate website. We exit the year with a strong balance sheet with cash, cash equivalence, and short-term investments of $333.7 million, and net cash of $11.1 million.

During the year, we repurchased approximately 417,000 shares for approximately $10 million. Under the current share repurchase plan, we still have $40 million we can put to work.

Turning to our fourth quarter performance, consolidated revenue was $167.3 million, and adjusted EBITDA was $22.6 million. Non-GAAP net income was $18.1 million, or $0.40 per diluted share.

It is worth noting, that the non-GAAP diluted share count for the quarter included approximately 1.8 million shares, related to the conversion premium and our convertible debt, as our average share price for the quarter exceeded the conversion price. During the quarter, we recorded a GAAP net loss of $1.1 million or a loss per share of $0.03.

The net loss was driven by a non-cash loss of $5.7 million, or a loss per share of $0.13, related to a derivative instrument where a warrant that was exercised during the quarter. Normalizing for the impact of this charge, we would have exceeded our net income and diluted EPS expectation for the quarter.

Moving on to our segment performance, beginning with our search segment. Revenue for the quarter was $125.6 million, and segment income was $25 million, up 30% and 44%, respectively, from the same quarter last year, carrying the momentum we had exiting the third quarter.

Owned and operating revenue was up $14.7 million verses prior year, as we continued to acquire new users through marketing investments. Distribution revenue was up $14.6 million driven by new distribution partners launched in 2013, of $16.9 million which offset a slight decline in our existing partners.

Segment margin was flat sequentially, but again, up verses prior year, benefiting from the growth of owned and operated revenue, as well as mix shifts in our distribution partner network.

Turning to E-Commerce, revenue for the quarter was $39.7 million, and segment income was $4.1 million. As Bill discussed, sales were a bit softer than expected.

With that being said, we were pleased with Monoprice's performance in the quarter, which on a pro forma basis, grew revenue and segment income 21% and 30%, respectively, while maintaining segment margin of 11%. Orders were up approximately 10%, and planned a healthy increase in average order value. So, all in all, a good finish to the year.

Touching quickly on our tax preparation segment, revenue for the fourth quarter was $2 million, and recorded a segment loss of $3 million, both in line with our expectations. Closing on the fourth quarter, unallocated corporate operating expenses were $3.5 million, sequentially down, as the third quarter included transaction expenses related to the acquisition of Monoprice.

With that, let's move to our first quarter expectations. We expect consolidated revenue between $213 million and $222 million, adjusted EBITDA between $51 million and $54 million, non-GAAP net income of $45 million to $48 million, or $1, or $1.06 per diluted share, and net income of $22 million to $24.5 million, or $0.49 to $0.54 per diluted share .

Let's talk through some trends at the segment level that informed our consolidated outlook. Starting with tax, we are tracking to the first half 2014 guidance, a revenue of $95 million to $97 million, and segment margin of approximately 52%, which was provided during our third quarter earnings call. We expect a bit north of 70% of the revenue to hit in the first quarter, at a segment margin in the neighborhood of 48%, give or take.

E-Commerce is off to a slow start, as Bill mentioned, and for the first quarter, we expect revenue to be up low to mid- single-digits verses prior year, but will be down sequentially. The E-Commerce segment margin is expect to compress from the fourth quarter, to 7% to 8% as we are making some investments, primarily in the sales and marketing side of the house, including improving our analytic capabilities.

Search, again, begins the year with headwinds as the team is working to adapt in phase-in changes related to our Google renewal. Additionally, and consistent with other folks in our space, we are seeing some pricing softness on our owned and operated properties.

As a result, we expect first quarter year-on-year revenue growth to be in the high single- to low double-digits. We also expect segment margin to compress to 17.5% to 18% range.

Before closing, I do want to provide an update on our 2014 search segment expectations, adjusted for the projected impact of the Google renewal. Given our current line of sight, we believe we can grow revenue in the low single-digits for the year.

We expect second quarter revenue will be down sequentially, and likely represent a low point for the year, as we transition to new mobile solutions. We also believe segment margins may further compress from the first quarter outlook levels, in essence, establishing a new baseline for the business.

As always is the case with the search business, our visibility out over a few quarters is limited, so we fully expect the 2014 expectations to continue to evolve during the year, and can be further impacted by unforeseen external factors. The good news is here, we have the support of our search engine partners, a diversified partner network, and an experienced team.

As we have stated before, the search business is volatile at times, but durable if we remain focused on driving free cash flow from this segment. With that, let's turn the call over to the operator, and we will take your questions.

(Operator Instructions)

The first question comes from Dan Kurnos from Benchmark Company.

Yes, great. Thank you for taking my questions, guys. Congrats on the quarter, and thank God you got the Google search renewal behind you. Hopefully we can all move on from here.

Let us start on Search and O&O, you had a pretty strong quarter, you know, Eric, you always just gave some good guidance going forward. Maybe you could give us a little more granularity on the quarter in how it broke down between clarity growth and pricing growth, and understanding that there is softness in CPCs right now in that particular space. Are you still anticipating pretty healthy clarity growth for the balance of the year?

Yes. Hey Dan, this is Bill.

On the O&O topic, we did see pricing softness in the quarter in many ways, persisting, you know, trends that we had seen throughout the year. It does vary pretty dramatically depending on the category, as well as, to an extent, geographically, in terms to how those trends have been strengthening, or holding, or weakening.

And as it relates to, you know, how we are feeling about going forward, I think Eric has captured it, in terms of where our emphasis is going to be and how we are going to respond. But it really -- it has been more weighted in the direction of volume, than it has been pricing driven, but the pricing issues are not across the board either. So I wouldn't say that, that is a uniform explanation.

That is fair enough. And just to, maybe, drill down just a little bit more there, you know, we all know that your O&O business is certainly not, I should say, as mature as I see, for example.

We talked about some leverage you can pull there. Maybe just go a little bit more to your strategy on how you are driving growth on that side of the business.

What often times veers in the direction of a marketing discussion here in our minds, much more has to do with the Northstar, which is how we are going to bring value to users, and that really becomes, ultimately, a content-centered discussion and strategy. And so, you know, there is nothing -- good marketing is not going to cure a strategy that does not have content at the center of it.

We are focused on not just bringing quality search results through our model, which is one where, as you know, we work with a multitude of partners and bring, you know, diversity of algorithmic and paid search results. But also, thinking more expansively down the line about how we can stay in front of users, not just when they are engaging in a simple key word, but when they are doing things like researching information and looking for idea generation, and things like that.

That is really going to be at the core of how it is we think about evolving the Owned and Operating business. If we get that right, the marketing and audience questions will, I think, answer themselves.

Great, thank you for the color. Shifting to the B2C side, help me understand here, a little bit more.

If 85% is desktop, your initial guidance was calling a belief for low double-digit Search growth for the year. You reduce that, understand there is a headwind on the mobile side of the business.

Maybe give us your high-level thoughts on the long term health, the B2C business. We had a number of new Partner wins this year, how would that factor into your guidance?

And just, generically, between pricing and conversion rates, whether it is shift alternative modernization paths that might be driving revenue a little bit lower. Just how we think about that overall.

Yes. So, you know, the -- one of the differentiating aspects of our B2B model, of course, is that, it is not always going to look like the market because the network is, itself, comprised of individual Partner relationships that we can enter into, or exit out of, within a given year. And that is very much at our election, and you know, depending on how the Partnership is evolving, and our perceptions as to the quality of the Partners that we are working with, and momentum trends, et cetera.

There is a reasonable amount of discretion as to how it is we grow the Partnered network, and a lot of that is really going to be driven by our views as to -- collectively the quality that we are driving, ultimately, of the traffic in the network. And I think that the comments that I made at the outset around, you know, desktop orientation, I think, are going to, in many ways be defining as to growth potential there.

The mobile alternatives that we are working on, and will ultimately introduce to our Partners, are going to be critical in terms of allowing our Partners to maintain relevancy in front of their users, both in the desktop and across smart phones and tablets.

I think the way Eric outlined is it, is probably the best way for us to characterize how we see things evolving this year, but it is, ultimately, a business development and new Partner identification-driven sales equation. And you can see the evidence of that having been successful over the last several years.

All right, great, thanks. Not to monopolize here, but one quick follow-up, or call it a two-part follow-up.

E-Commerce segment. You have done a lot on the ski launch side, love to hear how that is progressing.

I know that, that was a primary focus, and then you have got a lot of cash, timing, and thoughts on potential size in acquisition. Thank you.

Sure. So we had mentioned up front, you know, continue to be excited about Monoprice.

I would say it is still early and our -- having acquired Monoprice and moving forward together with the team in California, but we are very excited, and a component of their growth in prior periods has absolutely been delivering great products within their core categories. So starting out in cable and switches, and developing innovative new products within those categories. So that has been a key component.

As you mentioned, broadening the category coverage within consumer electronics and surrounding categories, as a way of widening the audience and also giving more opportunities for a given visitor to transact with Monoprice while at the site. And that two-prong strategy is going to continue to exist.

It is critically important within the longstanding categories at Monoprice, to continue to innovate. And technology cycles continue to shorten within those categories, where you can see, sort of, break out a new feature sets and innovations within HDMI cables, as an example, which occurred last year, that proved to be a catalyst in the front part of year.

So, we are focused on both, which is innovation, inside of our existing categories, as well as smart editions of additional products to sell so we can broaden our assortment. And, as Eric mentioned, and I mentioned at the outset, we are seeing a little bit of softness that we think is carryover from Q4, so we want to be cautious as to how we sort of speak to the coming quarter, but we are very excited about the Business.

And as far as acquisitions, you know, we have done, as I think it is probably pretty clear, a number of acquisitions in the last couple of years which we think have been catalysts. And we are very much focused on driving the businesses we currently own.

I think there is more run way in each of the three areas. Obviously, each subject, a different dynamics, but we are very excited.

And in this environment, we are going to be opportunistic about further acquisitions, obviously, going to have to be disciplined as it relates to pricing. But the other alternative or opportunity, that Eric mentioned, around share repurchases, is another way for us to think about capital allocation.

Great. Thanks for all the color.

Thank you.

Our next question comes from Joe Janssen from Barrington Research.

Thank you for taking my call. I echo the previous caller's thoughts. Great quarter. Great year.

Going back to Google real quick, what was the thought process with Google? Maybe why they decided not to exclude mobile, and is it something that we might see either amended or renewed to include in the future, or is that something off the table?

Yes, so I think the comments up front are probably, you know, I can just reiterate them, which is in our discussions which, you know, took place over several months, it became known to us that there was an internal review, with respect to the mobile search project.

As a result of that review, we ended up where we ended up. It isn't our understanding, or belief, that, that review is in any way specific to influence base, but I would absolutely point you to Google for any more specifics.

Okay, fair enough. And then mobile is never really a big revenue driver within Search.

What percentage derived from Google came from desktop, verses mobile? I thought you said two-thirds in the prepared remarks, but I thought it would have been higher than that.

Go ahead, Eric.

The easiest way to calculate that is to understand how the concentration of Google in our revenue is somewhere in the 85 to 90, depending on what quarter you are in. And, I think, clearly, then applying to say that 85% of our traffic is desktop.

That is the best proxy that we can give you at this point. I don't imagine that it plays out too differently from a concentration standpoint, as you think about just the various components there.

Okay. And then one last question and I will jump back in queue.

In E-Commerce, you know, you mentioned, I heard the previous callers response, and what you responded to. Given they had a quarter to digest this, you know, you kind of set it off to a slower start, any reason, you know, can you take it a step deeper why we are off to a slower start?

Anything specific, in terms of, we need to digest it a little longer, or does it change how -- your go-to market strategy? Anything you could share with us?

Well, I would point it -- I would point you back to, kind of, two of macro or environment comments we made, which is, it is -- I think there is a sluggish consumer environment out there that has been discussed and, I think, identified, to a certain extent, as carryover from the holiday season where you saw the same dynamics.

I think it has been a pretty competitive environment, that, again, was, you know, observable in the holiday season. I think it has carried over in the new year.

And then, you know, specific to Monoprice, so, you know, much of this is our recently having acquired the company as we pointed out, in terms of the timeline last year, and just wanting to be cautious. And also, as Eric pointed out, we do see opportunity to make some investments, and in some respects investments that had not been made in the prior ownership, that we think is going to be a benefit to Monoprice over the median term.

Together, those are driving some of the sentiments we expressed.

Great, thank you.

Our next question comes from Scott Schneeberger from Oppenheimer.

Good afternoon. This is Daniel [Hoffer] filling in for Scott. Thank you for taking my questions.

I have a two-part question and I am going to ask them both up front. The first question is, if you give us some color on how filing trended week to week, through February 15th? And the second part is, if you contribute an increase in DUI followers at the IRS to weather-related issues?

Can you mind repeating the first question, I am not sure I heard that?

Week-to-week filing trends.

So I think, and, Eric, jump in here, I think what we are doing is the stick to the approach we took last season, which is to point back to the guidance we gave for the first half of the year, which really was at the end of 2013. And as you hear, we feel good about how the season is progressing thus far, and stand behind the guidance that we have already provided for the tax year 2013 through the first six months of 2014.

As you can pick up in our Q1 guidance, and the TaxAct component of that, you can get a better sense for how it is we see the seasonality breaking between January through March, and then the final months in the second quarter. So that is probably as far as we want to go in that front.

Eric, is there any more color that you think--?

I think that's right. And in regards to weather patterns, I don't think we have a comment on that at this juncture.

Okay. Great, thanks.

Thank you.

(Operator Instructions)

The next question comes from Mitch Bartlett from Craig-Hallum.

Hi. I know in the past you have been a little bit low to talk about your distribution network, the Partners involved, and things like that. But given the pressure on the stock, can you give us some idea of where the screen for your traffic is coming from within that network or anything, or any color you can provide?

Mitch, this is Bill. The way that we have discussed our Partner network in the past, is really more from a quality perspective, because that, in our view, is how, ultimately, we are going to build and grow our volume on the distribution side.

We have a Partner network that is north of 100 Partners. They, year-in and year-out are going to vary in terms of their contribution levels to the network, and the geographic split is going to vary.

But, as I had mentioned earlier, a key driver of the growth, ultimately, is going to be, not necessarily in adding to the aggregate number of Partners, but finding the right mix of Partners, to finding the right quality traffic within that Partner network, and then also finding the Partners that are able to grow by bringing value to users and working with InfoSpace and, you know, as a modernization and as a content solution.

So, it is very much of a Partner-driven growth formula, and that includes both existing Partners, who have been with us for years, as well as finding new Partners that can help us grow in the current year.

So if I could push you just a little but further, the traffic gains that you experienced this year, was it concentrated to a few very large Partners, or was it fairly well dispersed?

I think it was fairly well dispersed. (Inaudible)(multiple speakers) And jump in here -- we do on a quarterly basis provide, essentially, symmetrics around that, and, as far as concentration on our top five Partners, and how their concentration was this year verses last year. We continue to lower that number, and so I would say, we are starting to see more traction with more quality traffic, across more Partners, which is what we want to see.

Great to hear. Good quarter. Thanks.

Thank you.

Thank you.

The final question comes from Brian Fitzgerald from Jefferies.

Thank you, guys. I wanted to ask about whether you are approaching things differently this year in terms of marketing the TaxACT brand. It seems to be a little more front and center to us from a casual basis, so any color there would be great.

Yes. You know, I would say that the marketing mix is not dramatically changed. I think the -- some of the creatives you might have -- be getting exposed to focus on empowerment themes, and, you know, the TaxACT filer tends to be well-educated, confident, and financially well-off comparatively, on a relative basis.

So, we feel like we have a great brand to expose across that demographic, and get the message out; and so, we definitely have evolved the core messages around TaxACT, but, really, also tried to stick to a lot of the attributes that we emphasized last season around honesty and integrity, and matching the messaging in our outbound marketing to what we ultimately deliver on, in terms of the product experience.

Trying to evolve out of what were some of the core messages last season, but also trying to make it feel new and fresh this season.

Great, thank you, guys.

Thank you.

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation.

You may all disconnect. Have a good day.