Avantax Inc (AVTA) 2015 Q2 法說會逐字稿

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.

Good afternoon, and welcome to Blucora's conference call to discuss second quarter 2015 earnings. 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 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 speaks only as of the date the statement is made. In addition, during the 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 are reasoned 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 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.

Good afternoon, and thank you for joining. Second quarter performance for Blucora was consistent with our expectations. 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 a 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 businesses is to accelerate free cash flow generation through 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 - grow 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 prep. TaxACT completed the season in Q2 and finished strong. Revenue was up 17% year-on-year for the quarter and 13% full season, reflecting ARPU gains and increases in attach rate to ancillary services. Segment income increased 16% for the quarter and 17% full season. We are gearing up this off season, focusing on revitalizing our value leadership position in consumer DIY, and maximizing opportunities in ancillary services and adjacent markets, like SMB and assisted prep.

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 acquired Simple Tax, a web-based tax preparation software company headquartered in Vancouver, Canada. Simple Tax was founded in 2012 and is growing fast in the Canadian market with an innovative product, flexible technology stack, and clean UI and overall design. This acquisition is small from a financial perspective, but 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 operated and our partner syndication network, where tightened rules around downloadable applications, reduced economics 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 leveraged social channels to grow the HSW audience. HowStuffWorks award-winning podcasts - Stuff You Should Know and Stuff You Missed in History Class - remain consistently in iTunes top 10. And HSW is expanding into new podcast and video markets aided by an exciting new partnership with Spotify.

In May, we launched a new HowStuffWorks mobile application for iOS and Android. The app, featuring videos, articles, podcasts, and quizzes updated daily, was selected by Apple as a Best of Month in June. HSW content is seeing double and triple-digit growth on Facebook, Instagram, Pinterest, and Twitter. We are just scratching the surface in delivering mobile experiences to reward HSW's passionate readers, listeners, and viewers with experiences that both entertain and educate.

HowStuffWorks 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, but we can grow this segment going forward. The innovation and velocity of the team is impressive and will drive our diversification.

On other fronts, I am pleased to announce Infospace has entered into a direct deal with Bing to offer their search and advertising content through our network of 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 to stability, we are reducing our dependencies by adding alternative search partners, managing expense levels, 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 topline growth in the fourth quarter. Our focus continues to be on product innovation, marketing and site optimization, and channel development. Monoprice is reinvigorating core CE categories with a wider assortment of offerings for use with the most sought after devices. As we mentioned last quarter, Monoprice was first to market with USBC, a new specification and connector that will eventually replace all existing USB cables.

In the quarter we added more than 350 new SKUs in two primary areas - cables and adaptors, including the debut of two collections of Apple MFi certified lightning cables. Both lines allow compatibility with all lightning enabled devices and Apple laptops, including the new MacBook, MacBook Air and MacBook Pro. Today's consumers know the products they want and what prices are fair. They want comprehensive reviews and information, inventory availability, and fast shipping. The Monoprice price-value position is a longstanding advantage.

We are launching an East Coast distribution center this fall, in addition to our facility in California, to reduce costs and speed delivery times for the holiday season. Monoprice is an emerging brand with significant upside in a growing E-Commerce category. The Monoprice team is first rate and their progress is measurable. I look forward to their results ahead.

In conclusion, despite the transitions underway at Infospace, Blucora remains well positioned. We have a strong balance sheet that gives us flexibility to invest. The acquisition opportunity is a near term focus, and we remain disciplined in our approach.

There is significant value to be 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 financials.

Thanks, Bill. Consolidated results for the second quarter were in line with our guidance expectations. Second quarter revenue was $119 million and adjusted EBITDA 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 context of the tax season and 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 segment--tax segment revenue growth was primarily driven by consumer ARPU gains of approximately 14% as a result of pricing actions, increases in ancillary product attach rates, and an overall mix shift to paid software products. First half 2015 revenue for assisted prep software and 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 operating leverage. Operating expenses grew approximately 9% from increased personnel related costs 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 the 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 of now continue--as of 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 towards stabilization, we are being disciplined. Balancing cost management and investment in product and diversification initiatives is our focus as we navigate through this transition.

For the third quarter, we are targeting segment income of $4 million to $6 million at a segment margin of 9.5% to 12.5%. To provide a little color on fourth--on the fourth quarter, we are targeting a 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 for a segment margin of 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. Broad strokes, 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 B-to-B 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 revenue--Monoprice revenue of $38 million to $39.5 million, and segment margin in the 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 expectations. We expect consolidated revenue between $82.5 million and $90.3 million, adjusted EBITDA between a negative $1 million to a positive $1.6 million, non-GAAP net loss of $5.7 million to $2.6 million, $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 Instructions) Dan Kurnos, Benchmark.

Great. Thanks. Good afternoon, guys. I was going to be cute and ask a tax question first. But a lot of moving pieces in search. So let me just start off from some high level thoughts 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, O&O was down sequentially and while your segment income--and you didn't give revenue guidance it sounded like for 3Q or 4Q. While your segment income was pretty much in line with sort of our thoughts, it sounds like you are almost managing the business for profitability at this point.

And can you help us sort of think about either intentional churn--B-to-B wasn't as bad 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 uptick in Q4? And just any sort of generic way that we should be thinking about the search business over the balance of '15, in addition to the color you provided in your prepared remarks would be a helpful start.

Yes. Hey, Dan. This is Bill. I'll take that. So the trend you are 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. In our distribution network we have a variety of different partner segments, not all of them which rely upon that particular motive - traffic acquisition. So that's where you're seeing the O&O softness. We expect that to continue into Q3.

And on the upside there's components of our O&O revenue these days that derive from HowStuffWorks, which is somewhat insulated from that. So that I think would answer 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. In fact, we continue to add new partners. And so, it's certainly not our viewpoint that the partner network will shrink in aggregate. In fact, we're out looking for new partners that we can bring onto the platform.

The paring of the partner network that's taken place over the last 18 months in some cases was because of actions we took, and in some cases was because a partner churned, maybe went to a competitor, and in some cases their very business models had become less viable in the face of a lot of the changes that have been going on in the search ecosystem.

So just--Dan, is there--a couple of things. My third quarter I did give a 9.5% to 12.5% segment margin off of the 4% to 6% range, so you can back into your revenue there. And then just for clarification of what Bill said, we do continue to expect in the third quarter some sequential declines in the syndication network. I mean, we are continuing to add partners and doing what we can to grow them as well as maintain the existing partners we do have. But as Bill said, for the last 18 months that business has been under pressure for numerous amounts of reasons, and I don't think we're any different than some of the other folks out there, that we are spending the appropriate resources to effectively maintain and when we have opportunities grow where we can.

Eric, what was the segment margin percentage you gave? I just missed that. That's why I didn't think you gave revenue guidance.

Sorry. 9.5% to 12.5%.

All right. Thanks. And then just high level thoughts on distributed then. It seems like we're hearing from other people that it's getting less worse. Obviously IAC made comments last night that they thought it was strengthening. You guys have now signed a Bing 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're going to end up shunting over to Bing given the monetization disparity, but just your thoughts on the trends in distributed since you talked a lot--we just talked about O&O.

So this is Bill. We still like the syndication market. It's, as I've mentioned, gone through a pretty significant period of dislocation. I would say that our partner network is--notwithstanding the expected sequential decline that Eric just spoke to 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 as some of the impacts of the new rules regimes were setting in.

And as I mentioned, we're identifying new partners that we can bring on onto InfoSpace's feed, 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 our backs on the syndication network, and still have some partners inside of that network that are growing.

And as I think about the third quarter, I mean, we--from Q1 to Q2 we saw about 11% decline in distribution, and I believe fourth quarter to first quarter was about a 19% if I recall. And we're not expecting declines more than the 11% certainly in our forward guidance.

And to your question on Bing, I would say just from a guidance methodology standpoint we're very 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 optimism there that there is some upside, but we've just got to get in and work on the migration and the integration and hopefully that will bear some fruit that's good not only for distribution but also owned and operated.

Great. Let me just shift gears then. Bill, sort of an off the wall question--I know it's always there in terms of competition, but from a tax perspective, we've seen Turbo get kind of aggressive in the SMB market. Just any thoughts on how that market is evolving, and if it's maybe more of a difficult playground than you expected it to be?

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

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

Not a number I'm going to give, but it is not a material--we are starting small and with anything we'll show discipline out of the gate, and if we find success then we'll expand rapidly. But it's not what I would consider a material capital expenditure.

Okay. And then just last from me and I'll 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 imminent and-or near. I don't know if you want to comment on that in addition to the color you gave already on the call.

Well, I appreciate your not putting words in my mouth. No I--we're--Dan, we're never in the game of making calls like that. My comments, like comments I've made in the past, were merely to emphasize that when it comes to the other responsibility that we have at Blucora as it relates to capital allocation, that that's something we're actively evaluating.

Okay. Fair enough. Thanks, guys.

Thanks, guys.

Gil Luria, Wedbush Securities.

Yes, thank you and good afternoon. A couple of questions on tax. So now that you've had a couple of months, or the team there has had a couple of months to look at the last tax season, Turbo Tax by going fully free took a lot of customers away. You weren't able to grow volumes this year. A 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 are those just not very valuable customers for you?

Yes, Gil, what I would say, that's 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 tale of two seasons in the sense that the early season was where you saw a lot of this activity, and then there was 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 as 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 add-on service. So the end game, I think, is to 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 or surround it and just bring more value to the individual filer, is to drive LTV in each of the segments we serve.

And you're 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 modality they'll use, but I think where TaxACT has been encouraged in the last couple of seasons is in fact in its ability to engage with those filers that in prior seasons had been entirely free and upsell them on a new product. And oftentimes that new product may not actually be tax software, it will be something surrounding the tax filing experience that they opt into.

Got it. And then in terms of some of the discussion post-tax season has been around fraud and the measures 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 reduce the swell of identity fraud next year? And then on earned income credit, do you expect the IRS to implement new requirements for digital filings that will screen better for earned income credit fraud?

Hey, Gil, it's Eric. We're very involved with the actor group, and I would say in general we are 100% as supportive of taking any measures that eliminate or work to eliminate fraud, and we'll 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 within our filer base or our filing numbers.

As to earned income, I think that's an ongoing dialogue, and we welcome it. Because like I said, anything for us that we can protect the consumer and make sure that fraud is not going through our network in general is a good thing. And that's what our brand stands for. And we'd welcome those changes and are prepared to make any changes that the IRS sees fit.

Great. Thank you.

(Operator Instructions) Brian Fitzgerald, Jefferies.

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

Yes. This is Bill. I think that one of the things that is true of the consumer electronics E-Commerce space is that it is evolving at a fairly rapid clip. And so as we talk to Bernard Luthi and his team at Monoprice, the recognition is not just in terms of what are the initiatives 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've got to be present there. Just as years gone by people had 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 web site, 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 them.

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.

Great. Thank you much.

Thank you.

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

Thanks, everyone.

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