Blucora (BCOR) is a company that fits within our basket of "special situation" investments, securities whose underlying dynamics do not easily lend themselves to conventional analysis. Although it was a fairly well-known company in prior years under its former name InfoSpace, today it largely flies under the radar of Wall Street investors and analysts (in part due to the June 2012 name change) and in some respects,we believe, is misunderstood.
InfoSpace saw revenues grow by more than 50%compared with 2011. With TaxACT, the business continues to benefit from the ongoing migration of tax preparation away from paper and professionally-prepared filings toward electronic and self-prepared filings. In 2012, TaxACT saw revenues grow by more than 10% compared with 2011.
In addition to these strongly growing businesses, Blucora benefits from a large "hidden asset"—more than $700 million of net operating loss (NOL) carry forwards (from years ago when the company was unprofitable) that will largely enable Blucora to manage its tax bills over the next decade. As Blucora generates more profits more of the inherent value in the NOLs will be unlocked. Just as this was a significant part of the rationale for Blucora's acquisition of TaxACT, management, stacked with private equity experience, is actively looking to acquire another profitable business as we write this letter. In fact, Blucora just issued (in March )$200 million of convertible debt to combine with its current net cash of about $150 million for the very purpose of making another attractive acquisition like TaxACT. The issuance of that convertible security was the proximate cause of a temporary drop in the stock price, a catalyst for us to initiate our position at a very attractive entry point.
A further consequence of Blucora's NOLs is that the market valuation of the company does not necessarily appear inexpensive on the surface. The company's non-cash tax expense combined with other non-cash expenses (e.g., amortization of intangibles from the acquisition of TaxACT) causes Blucora's reported GAAP1 earnings to be dramatically lower than its cash earnings. As a result Blucora Common will likely miss those investor screens dependent on earnings-based analysis. In our case, we were able to invest in Blucora at a valuation of less than five times the company's trailing adjusted EBITDA2, a multiple normally attached to shrinking or highly cyclical companies.
Shortly after the Fund's quarter-end, Blucora reported strong results for its own fiscal first quarter with continued growth in both of its businesses (as well as market share gains in the case of TaxACT) and very strong free cash flow generation. We expect that the ongoing strength within the two businesses and/or another acquisition by the company will continue waking investors up to this special situation holding
From Third Avenue Management's semi-annual 2013 commentary.