Blucora: Company Transition After TaxAct Sale (NASDAQ: BCOR)

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MosqueFMS

The big news for Blucora, Inc. (NASDAQ:BCOR) is the announcement that it has reached an agreement to sell TaxAct to a Cinven subsidiary, announcing a transition of the company into a “tax-focused wealth management business.”

after the deal Closing at the end of the year, Blucora will be strongly positioned to build on its newly focused business, as net proceeds from the deal are estimated to be approximately $620 million, which will be used to pay down debt, with post-payment principal. it is estimated to be in the range of $400-$450 million, much of which will be returned to shareholders.

In the short term, shareholders will be rewarded, while later on the company will operate from a solid financial base as it targets a more specialized area of ​​the market.

In this article we will look at the recent performance of the company and what the sale of TaxAct means for the future of the company.

Latest earnings

As we look at earnings, keep in mind that TaxAct will be part of the company for one more quarter, so it will impact results through the end of 2022.

Revenue in the third quarter came in at $171.7 million, down 1 percent year over year. Most of the income came from his Wealth Management business.

There was a GAAP net loss of $21.8 million, or $0.46 per diluted share, up 20 percent from last year in the same quarter. Adjusted EBITDA was $7.7 million, significantly above the loss of $800,000 in the third quarter of 2021.

For its Tax Software segment, it generated $6.7 million in the quarter, up $1.6 million from last year in the same reporting period. The improvement came from an increase in the volume of extensions from the previous year. Management expects this to continue in the fourth quarter, generating a modest increase in full-year revenue.

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The segment had an operating loss of $12.5 million, an increase of $1.3 million year over year, primarily from increased revenue.

Returning to its wealth management, BCOR generated revenue of $165 million, down 2 percent from last year in the third quarter but up 1 percent sequentially.

Transaction fee income was flat at $17.9 million for the quarter, while operating income was $27.6 million, up 41 percent year-over-year and 74 percent sequentially. That was attributed to a rise in interest rates. At the end of the reporting period, BCOR had cash and cash equivalents of $91.1 million, with net debt of $434.3 million. During the quarter, BCOR paid the final installment of $23 million related to the acquisition of HKFS, while also paying $35 million associated with the balance of its term loan. That’s why cash and cash equivalents fell from $134.8 million at the end of 2021. Considering that BCOR will use some of the proceeds from the TaxAct sale to pay off net debt, the company will start 2023 with very little, giving you flexibility and options to execute your strategy.

TaxAct sale and implications

As mentioned above, BCOR is selling TaxAct for $720 million in cash, with the expectation that it will result in net cash proceeds after taxes of $620 million. That will be used to pay down company debt and be returned to shareholders. The deal is expected to close in late 2022.

Management was asked what impact the exit from TaxAct would have on BCOR’s business. The answer was that the company has been developing strong technology and marketing capabilities within the business that, in part, were learned from operating TaxAct. Consequently, BCOR does not expect to experience “separation-associated performance degradation.”

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In the long run, I have no problem believing that, but I think initially the business will have a hard time offsetting the revenue and profits from cross-selling to their other businesses that come from using TaxAct.

It was reiterated that the purpose of the sale, beyond the unique benefit of cash proceeds, was that the company would now focus its efforts on working with CPAs, tax firms and others in conjunction with companies wishing to offer wealth management services.

Other growth vehicles mentioned were its “incremental transition to M&A on RIA business advisory platform”, which enjoy wider margins.

conclusion

I like the fact that the company decided to sell TaxAct under the favorable terms and conditions that it negotiated. In the short term, the benefit it will have is obvious, since the company pays its debt and returns many shareholders. And since it has been working under the assumption of not owning TaxAct for several years, it appears poised and positioned for revenue and profit growth as it expands its Wealth Management unit.

It seems to me that it will take a bit of time to make up for the loss of revenue and profit that TaxAct generated, but I agree, assuming the company executes on its strategy, that it could more than make up for the loss of TaxAct. about their performance. There is also the added value of being able to focus much more on your core business.

The company’s share price jumped on news of the TaxAct sale, taking it to a 52-week high of $27.50 on Nov. 1. Since then, it has pulled back to close its previous 52-week high.

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I tend to think the stock could stay around $23 a share or so for the rest of the year. It has been trading volatile for the past year, so I would expect another drop in price. Investors interested in stocks would likely benefit from taking a position on that dip.

But as I mentioned, I think it will take a little while to make up for the loss of TaxAct with your wealth management business. I think we will know better in mid-2023 the progress he will make there.

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