Match Group Inc (MTCH) 2002 Q3 法說會逐字稿

Good morning and thank you for standing by.

I would like to remind all parties that this call is being recorded at the request of USA Interactive.

If anyone has any objections you may disconnect at this time.

Also, all parties will be able to listen only until the question-and-answer session of the call.

I'd like to turn the call over to Mr. Victor Kaufman, vice chairman of USA Interactive.

Sir, you may begin.

Thank you, operator, and good morning, everyone.

Before we get started our lawyers insist that I say that we will discuss in this call our outlook for future performance and there are, of course, risks and uncertainties associated with these forward-looking statements and our results could be materially different from what we currently anticipate.

We refer you to the information regarding these risks contained in our public reports with the SEC.

Also on the call today are Barry Diller, our chairman and CEO;

Dara Khosrowshahi, executive vice president and chief financial officer;

Roger Clark, our vice president of investor relations and finance; and Ticketmaster CEO John Pleasants and CFO Tom McInerny are joining us also on this call since TM is not holding a separate conference call today relating to their earnings.

We thought it would be helpful to have John Pleasants and Tom McInerny available to answer any of your questions relating to TM's third quarter results.

To begin we had a very, very strong third quarter, increasing cash-- net income for our operating business by 56 percent.

All of our divisions and subsidiaries performed extremely well.

While the growth comparisons are overly strong due to 9/11 comparisons, we exceeded our budget and our revised forecast.

In addition, we generated substantial free cash flow.

In fact, year to date we've already generated about $470 million in free cash flow and we expect the fourth quarter to be strong and ahead of budget on an operating basis.

We're now the number one Internet commerce company in terms of profitability, ahead of eBay, Amazon and all others, generating $2.8 billion in gross transactions in the third quarter and future performance should even create a bigger gap between ourselves and others operating in our space.

We also filed today our preliminary budget for 2003.

In this regard, we've made certain changes which we hope will give a clearer and even more transparent view of our financial condition.

Our first change is the elimination of the distinction between operating and emerging businesses.

While this distinction has served us well over our initial years, we believe that we've finally reached a level of maturity that allows us to still invest in new businesses and ideas but grow our bottom line still at a robust way.

Second, we've changed our segment reporting metric from EBITDA to EBITA so that-- so we could better reflect our performance on as close to cash basis as possible.

And third, we've changed our primary form of equity-based incentive compensation from stock options to restricted stock and in this regard and, as required, there will be charge to GAAP earnings relating to grants of restricted stock.

We will highlight each quarter the amount of such charge.

Reflecting these changes, our budget for 2003 anticipates very, very strong growth.

Our cash EPS doubling, revenue growing by 28 percent, EBITA growing by more than 50 percent and, most importantly, we expect to generate almost $850 million in free, bottom-line, cash flow sticking to us.

This last budgeted item is truly extraordinary in our history.

I remember when we-- how we felt when it was a major accomplishment to reach a billion dollars in operating EBITDA when we still owned our entertainment assets and now in a very, very short period, without such entertainment assets, anticipating reaching almost that amount in real cash is amazing, even to us.

One final--

Well, well-- Nothing is really amazing to us.

One final thought, and it relates to our stock price and valuation metrics.

We believe cash EPS is the most appropriate bottom-line value-- valuation metric, because it captures all items that are ultimately settled in cash.

On this basis, if you compare our growth rate with the multiple inherent in our stock price, we are trading at a big discount to our peers in interactive commerce and all other even remotely relevant sectors, whether it's from media to retail or different areas of travel.

To illustrate, even with a sharp increase in our stock price over the past two weeks, our multiple to growth ratio is currently at .5, whereas virtually every other company and sector we study is afforded a ratio of at least 1 or higher, according to various Wall Street Analyst reports.

And with that, we will now turn to questions.

Operator?

Thank you.

If you would like to ask a question, please press star-one on your Touch-Tone phone.

You will be announced prior to asking your question.

To withdraw your question, you may press star two.

Once again, to ask a question, please press star one.

One moment.

Gordon Hodge of Thomas Weisel, you may ask your question.

Yeah, just curious on the free cash flow budget for '03 and actually for this year.

You show a working capital as a source of cash and I'm just curious if you could go through the dynamics of that?

Obviously, I know Ticketmaster's a big generator of cash.

Maybe discuss some of the other businesses, you know, the working capital needs and sources there.

And also, if you could just talk about why the-- what your economic scenario is or retail environment scenario is as a backdrop to the 12 percent growth on HSN U.S.?

Thanks.

Dara will handle the first question.

As far as the free cash flow goes, a number of our business have really strong working capital characteristics, chief amongst them our travel businesses, especially in the merchant hotel room category.

Both Hotels.com and Expedia require customers to pay for their hotel at the time of booking their hotel, which is often 30 to 60-- 30 to 45 days before they stay at the hotel.

Once the customer stays at the hotel, the hotel will bill Hotels.com and Expedia and Hotels.com and Expedia will pay that hotel 30 to 60 day whatever the billing rate is.

So both companies, as they grow, essentially get floats on the customer funds that are deposited up front when they make the reservation.

Match.com is another example of a great free cash flow generator in that it's a subscription business.

Often when someone buys a subscription they'll pay up front for a three-month subscription.

We recognize revenue over the course of that subscription so the revenue recognition comes in after the cash comes in and, again, that creates a positive working capital situation.

So as long as we grow we will be in a positive working capital situation.

Great.

Thanks.

Gordon, on your second question, related to HSN and its anticipated revenue growth for next year, we think the 12 percent revenue growth is really kind of the normalized growth that we see for HSN, at least over the next several years.

We think after that it actually can expand as we get closer to the world of broadband.

But in terms of the next few years, we think this is a good growth rate.

This year, as you know, our sales are much lower-- our sales increase is much lower than that and that really relates to two factors and we've discussed both of them.

It's a big change in the mix of products from electronics and computers to more high-margin product and also the result of disengagement.

I think it's important to say that people should not look-- the-- HSN's numbers for this year are a little difficult to analyze because of disengagement.

We did our best in the beginning of the year to anticipate our lost sales as a result of losing our broadcast-only homes, but as we've gone through the year the actual losses, which really is a one-time loss just for this year on a comparative basis, have been somewhat higher than we anticipated and that has affected both the top line and EBITDA line.

But we think we're in a strong position to have HSN grow significantly next year.

If you look at HSN back kind of from the beginning of its history, it's really been able to grow really consistently around 20 percent a year.

Now that doesn't mean every quarter, every year in particular, but if you look with a straight line over our seven year history, that's been about it's growth rate and we think that's its growth rate in the years to come.

And just to add to that, Victor, you really can't underestimate the merchandise shift as far as the sales goes.

Actually, for the quarter, even though sales for HSN were down by 1 percent, gross profits, actual gross profit dollars, were up 9-1/2 percent.

So next year you're not going to have the same shift in merchandise, so really you're going to be on a much more comparable basis.

So to some extent we think that looking at sales is unfair.

You really should look at gross profits.

Great.

Thanks.

Cathy Steponius of Prudential Securities, you may ask your question.

Hi, thanks.

Also on free cash flow, which is, by the way, just tremendous in terms of what you've generated so far this year, I wonder if you could give us a sense, if you look at the budgeted numbers that you have, what the attributed number is, that is, taking into consideration the fact that both-- you don't own 100 percent of Expedia and rooms so what do those numbers look like if you wanted to think about it on an attributed basis?

And then, with respect to a couple of your businesses in the portfolio, recognizing that they're a small percentage, what are you thoughts in terms of how they fit into the businesses that you currently own?

That is PRC and ECS/Styleclick.

Also, if you could comment on the-- basically the improvement you're expecting to see in those businesses next year.

Where will that come from?

Thanks.

Just on the attributable cash flow number, we think it'll be north of $500 million next year on a attributable basis.

On PRC and ECS, I think, as we've indicated previously, these are not areas that we're going to emphasize as we move forward.

We do think that PRC can still grow considerably and we do anticipate better performance from them next year with respect to gaining new clients.

But this is not going to be the main area of our growth or even one of the main areas of our growth.

And certainly on PRC, relative to the industry, they-- they are outperforming.

Their EBITDA was up 22 percent versus same quarter last year and I think if you look at other call center companies, that's-- that's terrific comparable performance.

And hopefully we can improve on it next year.

Thank you.

Anthony Noto of Goldman-- Goldman Sachs, you may ask your question.

Thank you very much.

Two questions -- one related to HSN and then one on the online travel.

You know, the HSN business had, according to as far back as I have, through 2000, a record EBITDA margin relative to sales levels that are obviously done from record levels because of the shift in mix.

And if I look at your expense base, not including COGS, you've really been able to drive some productivity there and so your incremental EBITDA margin has become fairly significant in the quarter, obviously, driving 11 percent sequential increase in absolute dollars on EBITDA and only a $3 million increase in revenue.

And my question is really this: How shall we think about your incremental EBITDA margin or EBITA now as we go into a period where you will see growth at the top line in 2003 and today we're at 14.5 percent growth with nominal year-over-year-- 14.5 percent EBITDA margin with nominal year-over-year growth, in fact, down?

Thanks and then I have a follow-up on travel.

OK.

Two answers to that.

The margins this quarter are, obviously, affected by 9/11 last year considerably.

I think as you're-- as you're going forward this is kind of the strength of HSN's business and we've seen it this year and we think we'll see it next year.

For every additional kind of incremental dollar of revenue we will be able to bring 25 to 30 cents to our bottom line.

It is really a very strongly leveraged business in that regard and one that works extremely well.

So I do think you'll see fairly normalized kind of margins next year because the mix of product has really worked its way through this year and should be fairly stable next year.

But the real growth is leveraging off of our-- our sales growth to really have significant EBITA growth.

Do you think there's any more productivity savings?

And what I mean by that is your absolute expenses, not including COGS, were down to $303 million and down as a percent of revenue.

Do you think you continue to drive leverage in that line plus an absolute decline in that line?

I think we do but probably not to-- it's a factor but not a really significant factor--

OK.

--in what our growth will be.

OK.

And then the second question on online travel.

Both Expedia and hotel reservation or Hotels.com had significant market share gains in the broader online travel sector.

Many of their public competitors, as well as private competitors, will not see sequential growth or will see, you know, flat sequential increases where these-- both companies have had double-digit growth sequentially.

In your press release you talked about the two companies working together cooperatively in different areas.

Could you talk a little bit more strategically how you plan to use both Expedia and the room to continue to gain market share while the vast majority of your competitors in online travel are experiencing difficult times as it relates specifically to different pricing strategies within the lodging business, as well as supplier relationships?

Thank you.

Well I think the one note about their working together is that the companies have been able to gain share, essentially, independently.

You know, their working together is not necessary for-- for, we believe, for them to keep competing and to gain share in the market.

Both of them have terrific management teams with somewhat different strategies and they have a terrific consumer product and that is, ultimately, why they've been able to gain share.

And they're both spending more and more on marketing as they become more profitable.

So we certainly see that dynamic on a go-forward basis.

As to how they will work together, we'll determine that on an opportunistic basis.

It's not, you know, a key strategy of ours, necessarily, but-- but we do believe that opportunities will come up where they will work together and we'll take those opportunities as they do come up.

Is there-- is there any intention, from a strategic standpoint, in terms of segmenting their pricing in the lodging business where one may be a fighter brand and one may be at the higher end of the spectrum in terms of pricing?

No.

I mean-- this is Barry Diller.

I-- you know, that is not the intention of either or of us as the controlling shareholders.

The ability, though, for each of them to continue to grow is because they really do have different ways of approaching each of their businesses and where they are similar, i.e., on the hotel side, they also have different approaches.

They also each have great products and I think the real reason that they are doing better than most and that I think they'll continue to do it is because each of the products is not only superior, but the execution under the hood is better than anybody else's.

And you've just seen this with such consistency with both of these companies.

They-- they confront problems head on, they solve them, and they are just great at execution.

Great.

Thank you very much.

You're welcome.

Next question.

Victor Miller of Bear Stearns, you may ask your question.

Good morning.

I was struck yesterday by a comment that the Hotels.com management team made where they made a point that they felt they had .25 percent market share of the travel space, the hotel room space, and I was wondering when you-- when you look at your business, what are you seeing in terms of just the immense upside in terms of the markets you're in, either from, you know, metrics that you might be able to share with us in terms of what you think your market share is of-- of certain businesses you're in, and/or, as you expand into international markets such as Ticket master did in three markets this quarter relative to last year?

Could you just give us a sense of, you know, of the magnitude of the market potential, the untapped market?

Thanks.

Well, you mean-- In hotels it's obvious.

The comments of Hotels.com yesterday and just anybody's understanding of the fact that while there's been real online usage pickup of travel, very naturalistically, it is still very, very tiny in terms of the percentage of the actual business, not only in the United States but worldwide.

So there's a ton of opportunity in front of the interactive online travel space.

We think it's true.

Obviously, in the personals area where, in fact, you know, we're-- communications, flirting personals, as this category comes out of pages at the back of a book on a print basis or the characteristics of what it was before it was an online system where it was a little bit sleazy, or nutty and slutty to paraphrase Mr. Brock's book, but the-- the-- I would say the maturity of the business into what it is now becoming, which is a product that I think programming-- that everybody is going to use over time -- I mean, everybody who's not completely sedentary and maybe even those, too, for the thrill of it -- but it is at the very beginning of its growth.

So I think that-- that the areas that we're in, if you look, also, at online retailing in terms of HSN.com, it's still at the infancy.

So I mean-- I think all these areas have just immense growth ahead of them in that this interactive stuff that we're engaged in and this being able to do stuff through this box better than you can do it elsewhere is, every year, going to get easier to use and every year it's going to come-- more and more things are going to come online and we're going to be in more and more spaces online.

So what we've got has promise in front of us and what we've not got we'll have tomorrow.

How many more international markets could Ticketmaster approach and what percentage of the international market is now online?

International ticketing market?

Yeah.

Very little of it.

Yeah, this is--

John Pleasants is on the phone.

Rather than, you know, than a partially educated person, we'll turn it to a totally educated person.

John?

Yeah, absolutely.

Victor, the international market for us is a very big opportunity.

As you mentioned, we-- we moved into two new markets, but very small markets, in the Netherlands and Norway recently, but right now our overall business is about 20-- 20 percent of our volume right now is international.

It, from an Internet percentage, lags behind U.S. penetration by 15 to 20 points and so we're sort of hitting the steep part of the growth curve right now in online adoption internationally and we think that, obviously, you know, the international market is as big if not much bigger than the U.S. market.

And so we look at-- we have a very sharp eye right now on Europe.

We have a strong beachhead in the U.K. and in Ireland and from there we look to expand into Continental Europe aggressively over the next several years.

And-- and of course, there's much of the world beyond that.

So it's a big opportunity for us.

Thanks very much.

Next question?

Tom Underwood of Legg Mason, you may ask your question.

Yes.

I have a couple of questions, actually.

First, just following up a little bit on Anthony's question about Hotels.com and Expedia working together.

You mentioned that they've worked together cooperatively in the past.

I was just wondering how they've done that and then how will they relate in the future with regards to Interval International?

Well, they've-- they've had some cooperation in the past but nothing really specific yet.

They are talking currently about one project where they would be working together with a significant supplier.

And I think what you'll find is that there are going to be areas where they can cooperate, where it's productive for them to cooperate, where they can make choices in terms of how they deal with certain aspects of the market which are perfectly appropriate to do.

And believe me, we are all over this, of course, on every level to be certain that, in fact, we're doing this within all of the appropriate regulations, et cetera.

So there are definitely areas and I think that it's a very interesting dynamic.

They compete head-on with each other quite joyously and one bashes the other in terms of saying they've got the better this or the better that and then there are actually-- there is a-- there is a growing relationship there where, in fact, they're able to talk to each other about joint projects and work together, as well.

So I think if-- and us being in this position of controlling both of them really does benefit that kind of process.

So I think we've got the best of all-- I mean, how could you be in a better position where, you know, your most significant competitor you also control and so you've got two people with different approaches to the business attacking it in their various ways and each, as we said earlier, executing terrifically and then you're able to get joint effort when it's appropriate, when both parties recognize it's appropriate.

So it's a terrific position for us to be in.

It's one of the things-- I mean, it was not the driving force, but it was one of the things that said to us that maybe it was better not-- for us not-- to, so to speak, acquire and scramble these things together, not that that would have been what we would have done the second day, but certainly, as we went through the summer months it became apparent to us that this competition between them was healthy and lively and ought to continue.

I agree.

And then on another question, you mentioned that you rank as the eighth largest group in terms of online reach with 26.2 million un-duplicated, unique visitors.

I'm wondering what is the duplication look like?

In other words, how many of the 26.2 actually visited multiple sites out there and what is the potential to increase that?

I don't know.

Do we have that figure in terms of people who have visited multiple sites?

I mean, these are unique, so that they're separate from each other.

Well, we know this the un-duplicated within our product.

No, we know it's un-duplicated, but we also don't know whether they've gone to multiple sites.

Yeah.

Because some of those, if ``Media Metrics'' is looking at it some way, you'd have to figure that they had to get out the ones that were duplicated.

I'm just wondering how many of the 26.2 were duplicated?

That's actually a great question, which there is a purpose to this phone call for us in terms of operating our business, because that's something we should really do.

We know this, of course, anecdotally, you got that much traffic you know they're using multiple sites.

That's for certain.

We also believe that as we continue to grow in this area there-- there are just the most obvious natural relationships between each of these sites in terms of cross-promotion, in terms of having product from one go to the other.

We've already started a lot of that work in terms of Ticketmaster to Citysearch, Citysearch to Hotels, et cetera, to Expedia, in this case.

So we think that you're getting close to a point where the aggregated audience is enough that you've got, you know, your own un-walled garden to function within.

But we will find that number out and we will get it to you.

Thanks.

You're welcome.

Next question?

Lanny Baker of Salomon Smith Barney, you may ask your question.

Thanks a lot.

As I look at the free cash flow numbers, which are really impressive and tried historically to reconcile the free cash flow numbers in the press releases with what I see in the 10-Qs, obviously, there are a lot of different adjustments and one-time items and the like, but I was wondering, as you look at the $850 million-ish target for next year, is that a number that if we look at the 10-K at the end of '03 you would anticipate cash from operations less capital expenditures will be about $850 or are there other adjustments that we should anticipate as well?

And I have one other question after that.

Yeah, we would hope that, on an after-tax basis, that would be the number that you see.

Obviously, there may be events that occur between here and then, but that is the number.

And we'll track it carefully for you as we do for ourselves.

It will be set forth in a very clear, easy, way to understand.

We actually changed the format so that it can-- you can track it off of our 10-Qs and 10-Ks easy-- more easily than the last format we had.

Yeah, I think that will be helpful.

The new format looks like it would be easier to connect the dots.

Even still, some of the entries historically have been hard to reconcile.

My second question was, the sort of first bold headline on the Ticketmaster results statement is the company expands the sports after-market ticketing business.

What are your financial expectations for that?

You know, you have a few dozen venues, I guess, and more teams all the time, but is this something that, you know, with that kind of prominence is a big '03 contributor to the growth of Ticketmaster or is it further out?

John Pleasants?

Lanny, thanks for the question.

We-- as you know, we signed up 10 teams since we last spoke and our after-market project does not stop at sports.

And coming here in the next month we are going to be releasing a product for music and for the arts and for our family events so that we will have after-market trading products open for all the tickets that we currently service in the primary market.

We think this is a huge growth opportunity for the company.

It fits in with the strategy of not only capturing value in the after market but actually serving more dynamically the pricing and the movement of tickets in primary, as well as serving season ticket holders more efficiently.

So there's a lot of different revenue streams that come from it.

For '03 purposes, it is a-- it is a modest contributor next year.

I don't think we've broken it out specifically yet, again, because we're just building these things up and we're trying to get our own, you know, confidence in the numbers that we have.

Right now for '04 we do have it at-- starting to become a meaningful contributor.

We have higher margins associated with these products right now, we believe, because-- because of the amount of dollars that are tacked on in the after market and if we can extract some of that it's going to be good for us and for our clients.

So '04 is when you really start to see it make a difference.

OK.

Thanks a lot.

The key is-- is that we've now got installed equipment that enables all of this in 218 venues.

How many are we going to have next year, John?

Next year we're going to add-- we're actually going to add over a thousand venues with our e-entry service, which is the lighter version of it.

So we'll have-- we'll have, you know, basically all of the venues that we need covered.

I mean, what we're doing and what we've been doing this last year and a half or so is to put this equipment in, the scanning equipment in.

The more you get it in and installed and working and, obviously, get the pass-through more and more efficient -- this is still very young -- the more this whole secondary thing is going to-- is going to blossom.

Because the equipment is installed.

It's our equipment.

We own it and that doesn't that people can't not become our clients, but, in fact, we're going to, I think, be able to deliver them so many levels of revenue that I think it ensures Ticketmaster's growth way, way on into the future.

Next question?

Sopha Rushie of Piper Jaffray, you may ask your question.

Yes, good morning.

A couple of questions.

First, great quarter and it is impressive the level of free cash flow that you're providing.

I agree that's probably one of the more relevant metrics, but let me delve into some areas of potential concern.

I don't want to just keep beating a dead horse, but I'd like to get back to a HSN question.

I understand the dynamics that you have discussed about the mix, the shift in product mix and some of the other factors that have affected their sales, but nonetheless a miss is a miss and this is the second time that the targets and the budgets have missed.

How can we have confidence in the 12 percent growth when the current targets haven't been reached?

And let me just go to a couple of other questions, just to save time and just, you know, take my answers.

On the Citysearch, again, what your thoughts on next year's-- the budget appears to indicate a decline in revenue as you expect and when do you think we could see some results from the new strategy for Citysearch, which seems promising, but we would have expected some results in '03?

And finally, on the same-- on ticketing-- ticketing seems to have, I believe, only 6 percent growth in your budget and given all the new initiatives that John talked about and the fact that international is going to be growing, why wouldn't we expect higher growth for ticketing?

And I'll have a quick follow-up, finally.

Thanks.

On HSN, I don't-- I mean, I don't know that you can have confidence in the 12 percent figure.

It's a projection.

I think we can say this about it, which is that the electric shock, which is really what it was, of changing distribution, which is-- which happened within the last-- certainly within the last-- it's actually started, say, about 15-18 months ago and is still going on to a degree.

The-- what we call disengagement, which is not a worldwide political issue, it is the fact that the HSN is based upon broadcast distribution for almost all of its early life and then transited to cable distribution and the last piece of it is when, of course, we sold the Silver King stations and all of that distribution, which is about 25 million homes -- something like that -- were engaged in it and these were all the big city homes, given the nature of the broadcast-- where the broadcast distribution was most heavily concentrated, all switched in a short period of time, which changed channel lineups, et cetera.

Now, you know, it is-- and, as Victor said, we tried to, so to speak, pro forma it, to figure out what effect it would have and it was a good process but it's, by its nature, in accurate.

I think we're moving through that now and I wouldn't say we're at the end of it, but I think each month, just by the nature of things, it's stabilizes.

This is a business-- this electronic retail business where when you do anything, change the picture, change anything, you do get people not being comfortable enough to stay with it, buy, do the-- do the process they did before.

One thing we're sure of is, though, that we are operating the business in every respect better than we have at any time previously.

We've introduced more new products.

We've gotten out of this drug last year that was used to create additional sales on electronics at low margins.

And we've got a much better balanced business.

Now whether or not-- and I think its distribution absolutely has stabilized.

So certainly you won't have the same problems you had this year in that regard next year.

But as far as the retail climate and what you could project for sales, I mean, it's-- I'm not-- I would not tell you that you can have quote, ``confidence in it,'' close quote.

What you can do is look at it and see we have increased margins, you can see the facts and figures about how the business at its base has-- based in terms of the products offered has absolutely improved and the rest is really expectation.

One thing to add to that is that their business, which is product-driven, is a hit-driven business, much in the same way that, you know, the movie business is-- has those kind of factors.

In businesses that have those factors you really can't look at it on a quarterly basis.

You have to look at it on over a period of time when you kind of average out the performance of the various products that you have.

And just to repeat, we, over time, have had a very good growth in HSN on a fairly consistent basis and we have had dips in that growth periodically.

Well, one thing, again, and I think it's important to rear it relative to the 12 percent.

These are our real budgets.

This is not something that we're making up and doing guidance noise.

This is the way we're operating the business.

This is the internal budgets with which we're going to drive the business.

Again, they are budgets.

You may hit them, you may exceed them, you may fall short of them.

That's the purpose of how we-- I mean, not the purpose, that's how we manage our business and it's how we've chosen to-- to also inform people not in the business of what we're doing, releasing the budget.

So it's kind of a-- you know, kind of-- it's not a multi-part system.

It's a one-part system and you can see it for what it is.

Ticketmaster, Mr. Pleasants?

Yeah, let me-- I'll just take it in order, Sopha, that you asked.

Let's start with Citysearch and then probably pass it Tom here for Ticketmaster.

On Citysearch, just a couple of points of clarifications, Sopha.

One is you said a little disappointed that next year forecast revenue declining still.

I just wanted to point out that I think the numbers that were released have us going up about $11 million up to $42 million in revenue for Citysearch next year.

So we are showing some significant double-digit growth there on Citysearch next year.

And from an EBITDA or EBITA perspective, either one, from between 2002 and 2003, we did see a $10 million improvement in that case.

That said, of course it is still an experiment.

It is a money-losing entity at this point and we are very focused on getting it to profitability and taking it far beyond.

We've talked a little bit, I know, about some of the things we're doing there and I won't go into the-- into the laundry list, but, obviously, focusing on making that revenue model more lead-generation oriented and some product improvements on the consumer side.

We have-- we have confidence in the numbers that we are releasing for next year.

I would just make one other point, too, about Citysearch that reinforces one of Barry's earlier points.

Citysearch is-- probably can attribute another close to $15 million of revenue that it's generating for our sister companies, primarily Match and Expedia right now, that is being generated because of the-- the leads and the consumers that it's passing on a transaction basis to those other properties.

And, of course, that's not revenue that's recognized inside Citysearch, but it is-- it points to a growing transaction line of Citysearch and a more important, you know, strategic raison d'etre inside USA Interactive.

So, again, we continue-- we'll continue to grow that, as well.

But we have confidence in getting close to a break-even position by the end of next year on an EBITDA basis a little-- and on EBITDA, a little less, obviously, given cap ex.

The two things to look at in Citysearch are the product itself, which continues to improve and it is gaining audience, it is going to get-- it is getting used more and more and the second thing is we have to begin, which we will begin to do, is to market it and get it out there and get people to start understanding it, which is the first step to getting its adoption and the rest will come.

Once the product is right and we get it marketed and we get people to understand that the product is right and it is a great utility, the revenue will follow.

Sopha, just on your last question on ticketing, I think the apparent-- the revenue growth at ticketing that you're referring to next year looks slowly than what current business trends would indicate largely because of the success we've had over the course of this year.

And in some sense, our thoughts and outlook on next year are still catching up.

We've had, really, three straight very, very strong operating quarters at Ticketmaster ticketing and over that period of time, our revenue and EBITDA or EBITA numbers for '02 have continually risen and at some-- in some sense, it's hard for our '03 outlook and budget to keep pace with that.

Over the course of this year, the ticketing EBITDA numbers have risen from an original budget of $125 to now a forecast in excess of $140 and our budget for next year, again, EBITDA, has risen from $145 to $155.

So I think we'll have to keep looking at it.

That top-line budget at this point in time does assume very conservative domestic volume growth trends, which we typically budget that way so we're not surprised and make sure we have enough other plans and actions to get us to the bottom-line growth that-- that we'd all like to see and then if volume trends end up being better than that, as they have over the last several quarters, that will accrue to our benefit.

You got a quick followup?

Yes, if I may.

More for you, Barry.

On the broad kind of portfolio of the companies and what you're keeping, do you have rationale for them, you obviously have a crown jewel in the travel space, a very strong ticketing.

On the areas that are not making money yet, let's take Citysearch -- and, John, thank you for the clarification.

Yeah, I missed the wrong line.

You know, you have a very credible and I would say a very strong argument that this area requires investment and it is highly, highly beneficial to other properties and a strong property in itself.

But looking beyond that to PRC, to Styleclick and some of the other areas that are not only either losing money or slow in growth, but it is not clear to us, at least, or maybe not clearly articulated what is the strategic fit of those properties within the family.

OK.

Sorry, I think I got the gist of it.

First of all, you forgot Match, which is very high growth and I think you have to add in also electronic retailing on the dot com side, which is high growth and I think will have even higher growth as we target at pushing more, which we did not do this year as much as we would have liked to have done.

It was just relatively far down on the list of priorities and HSN had lots of other things they had to get right first, which they have now gotten right.

As far as the others that you mentioned and you say it's not clear to you, well it is clear to us.

They are no longer businesses that we are targeting for, as businesses that we think are going to have the growth that we want.

They are-- they were ideas and not that it's terrible, by the way.

Certainly with PRC, PRC has competed really well in this very difficult year in tele-services and is-- as Dara Khosrowshahi said earlier, is doing better than most.

But-- but the idea of us playing big in tele-services and related kinds of back-room services is one that we don't think there's-- there's enough up there.

It's not-- it's not central to what we want to do.

What we-- and the same is true of ECS, again, back-room services, which is what ECS was for retailers.

To provide electronic commerce services to others for fees is not something we think is a business that-- either it's because we didn't execute it correctly, maybe it's somebody else's game, but for us and for our future, it's not central to it.

And Styleclick is another part of that same thing, fee-for-service kind of businesses.

The things that you will look for us to do and the things that we're concentrating on now are those things that are in the-- in the core of our life, which is this intersecting ground between supply and customers and we are on to, as you know, the most recent acquisition was Interval.

We have several others that I think probably will resolve themselves in the next, you know, I would say, 15 to 30 days, something like that, which are in that-- in that area.

We are up to speed here.

We-- meaning in the sense that we now have no drag at our figuring out what to do next and there's plenty of opportunity for us and part of this process is to invest in things or start things and if they don't work out, recognize it early enough and concentrate on those that do and we're now very sure-footed in where we want to go.

So you'll see some things drop off.

Those things that you mentioned are the things that will drop off.

And you'll see us concentrate more in the areas that-- that are allied to the areas that are in this broad part of interactivity and this intersecting ground and this way we've been able to take offline businesses and put them into online activity.

That's what you're going to see us doing.

That's what's got us up to being this, as Victor Kaufman said, the most profitable of these kinds of companies.

We're the only ones in it on a macro basis.

We're going to continue expanding what that macro means, although only within interactivity, and I think, again, the more we expand it, the more audience we get, the more we figure out different other ways to affect that-- that intersecting ground and add products to it is what-- is the work of the company.

And now we-- we don't have any drag at these efforts, which we did have, obviously, when we were exchanged in these exchange offers and certainly previous to that when we were engaged in the entertainment business as part of USA Interactive.

Great.

Thank you.

You're welcome.

Next question?

Steve Weinstein of Pacific Crest, you may ask your question.

Yeah, hi.

I think my question's inaudible by John and Tom.

Looking at Match.com, I think you're guiding towards-- or that the trend in profitability is downward and I'm wondering if you could talk about or help put that in perspective in terms of, well, how much of that trend is because of a shift in where new users are coming from versus trying to expand it to new markets versus just--

It's all marketing.

I'll just interrupt, sorry, and John can add if he wants to, but it's all marketing.

I mean, the reason that you're seeing-- it's not-- no less profitable, it is the fact that we are spending money on marketing, which we should continue to do.

We should, as a matter of act, in all of our business, we should spend more on marketing rather than less.

God knows we're generating sufficient cash flow to answer anybody's questions about whether we're in profitable businesses or not.

What we should be doing and we are going to do it in Match and we're going to keep doing it in Match, is we're going to keep selling the concept of this flirt dating process that we've got the best products in.

And we're going to make products for all audiences who do that, meaning all demographics and all types, over the next year.

That's going to take marketing money.

It's going to crimp early period profitability.

And one thing we have proven is, once you get the leverage, once you get to the-- to the point of scale and the leverage characteristics start to really kick in -- and in the Match area we are at the very, very beginning of the process -- then I think, you know, obviously then the money will come home.

John, do you have anything else to add to that?

Yeah, the only thing-- I totally agree and the only thing I would add to that is that part of what you're seeing on the margin side there is because of what we've done internationally.

We rolled out in over 10 countries in this past quarter a Match.com service.

We have over 4 million members now who have registered outside of North America under our Match and/or Soulmates platform and that-- the model internationally has historically been one in which we call a stamp model where people sort of pay per contact as opposed to a subscription membership.

We are converting that now, but that model had lower-- had a lower margin associated with it than the subscription model.

So part of our success of international expansion is actually showing up in a little bit of the dilution on the overall line.

But we're very happy with that, because we, obviously, want to build an international brand.

Next.

Thanks.

Hugo Patel of Deutsche Banc Securities, you may ask your question.

Yeah, I had three questions.

First of all, on HSN, you know, you put in the merchandising strategy change earlier this year, which was moving from, obviously, products that are consumed over the course of two to three years in terms of PCs and electronics to, you know, much more home goods and apparel and beauty products, which are consumed even faster.

Have you seen any trends in the customer base at this point in terms of buying more often or frequency of visits or frequency of purchases overall through the call centers?

And secondly, you're assuming about 26 percent EBITA margins at Interval for next year in the budget.

Can you talk about what percentage you assume will move online or kind of what is the progression towards online at Interval?

And then finally, you know, with the acquisition of Interval, can you talk about, you know, as you build out this online platform and try to create a powerful exchange there, who handles the infrastructure build there?

Are there core competencies in any specific business out there today that you have that could be applied here and what we should look for?

First, talking about the customer base at HSN, clearly -- and this is the good news for next year -- your electronic customers, especially computer customers, are not great repeat customers.

As we switch into all of these new products and new-- and new areas, we're-- we're going in areas where the lifetime benefit of that customer and what they spend is much higher and much more stable.

So we think we're actually entering into a period which will be very favorable to us.

The second question, Dara, on Interval?

The assumption for online exchanges for Interval is 6 percent for next year, which is up from 2 percent earlier this year.

It's a relatively conservative assumption and I think that we can do better than that.

The gating factor is that we are still building the online exchange technology where all the exchanges that you can perform over the telephone aren't able to be performed online.

Once the exchanges-- once we fully roll out that technology, we do-- we do expect the percentage online to go up, which should push up our margins.

So on a go-forward basis, you will see Interval's EBITA margins improving significantly.

That's our expectation.

As far as infrastructure-- I think you were talking about IT infrastructure helping.

We're really at the beginning of that.

What we've really done is we've kept things very separate, just because the execution abilities of each of these entities of dealing with their own-- sort of the owned IT we have felt is better in trying to, so to speak, get benefit A to company B.

I think probably in the year 2003 we'll start those activities where we will have more of an interchange in terms of both IT and IT and things that will relate across our platforms.

But we-- we've decided to keep it separate and Interval has its own IT operations here that has been building this program and we're convinced as part of our due diligence that the product is-- will be able to be, first of all, good programming and then secondly, will scale, be robust, et cetera.

I will say that while we're not combining IT infrastructure, we certainly are leveraging our expertise.

For example, when we went forward with the Interval due diligence, we actually had an Expedia team come in, an online team come in and--

Tell us we weren't crazy.

--assess the technology.

Well, tell us we're not crazy, tell us-- they told us that, actually, the Interval people are quite good.

Yeah.

And also gave Interval some very useful advice on what to do and how to drive transactions online quicker, because clearly that's a core competency that we've demonstrated with Hotels and Expedia across-- across the board.

So it's really the IT sharing that I think is going to be very helpful going forward.

Yeah, I think it-- it's a next-year priority for us.

We should get more-- we started a few little things, one in Dallas, Texas, where both-- we have both Match.com, which is very sophisticated in lots of these areas, and Hotels.com, which has already, I think, started a little project on benefiting from what Match.com does.

So--

Actually, another example is a more pedantic example.

Someone asked about PRC previously.

PRC is actually pushing ahead very quickly on taking call centers off shore where you actually get a much better quality of call center personnel at a much lower cost and this is the kind of activity that unless you're a specialist in the area, you don't really take on, and they are now talking to HSN, they're talking to Hotels.com on being able to push customer service calls offshore, which we think will give them better performance at a better cost.

So, again, it's information sharing across the company.

It's beginning.

It's a just beginning process with us.

Anyway, let's do one last question and let everybody go back to their green screens or whichever color you all have.

Thank you.

Christopher Dixon or UBS Warburg, you may ask your question.

Thank you very much.

Can you drill down a little bit on your outlook for the International Home Shopping?

I'm pleased to see that Germany was actually moving into positive territory.

You shut down the Italian operations.

Where do you see that moving?

And the second follow-up is specifically about I delved into your budget next of about $120 million negative in USA corporate other adjustments.

What's going on there?

I'll answer the second one first.

On the USA corporate and other adjustments, that's actually an estimate for intangibles that we will have to put on our books relating to the Interval acquisition and the Ticketmaster acquisition.

So it's a non-cash charge and it's an estimate at this point and once we get the full estimate, we'll probably allocate it down to the various divisions.

So it's really--

It's rough.

It's an interim number which will change.

I think on HSN International, certainly--

It's getting better.

I mean--

The back end's getting a lot better.

Our gross profits are up, you know, to 32 percent from 29 percent last quarter.

The return rates are down significantly from 35 percent to 26 percent.

The back end is better, now we've got to drive the front end.

It's-- Sorry, Victor.

We had a record-breaking weekend.

The train is back on the track and the track is straight.

Those are the-- that's the significance-- I mean, the truth is, last year we had a-- as I think all of you know, I mean we had a real problem.

We had expanded far too quickly, far too many places and with about the worst execution man could devise.

I mean, we-- in train terms, I mean, we ran into a wall in Germany and we have spent-- And I think that John Watson who joined us in the past year, who essentially moved to Germany during this period, we have definitely gotten the thing under control.

As Dara said, the back room where there were huge problems has been fixed.

They're beginning to work to a degree on the front room to the extent that we're having better sales than we've had on a comp basis for sure.

We've gotten out of the territories we did not deserve to be in the way we had entered them, not that they're not good territories, but we entered them really stupidly and-- and that's contained.

So I think from now we have a base on which to grow.

I promise you one thing.

That train ain't going off the track.

I mean, it-- now the opportunity is to build back the German business and the opportunity is to start now doing carefully other things that we had done careless last year.

Thank you very much.