Match Group Inc (MTCH) 2006 Q2 法說會逐字稿

Welcome to the IAC/InterActiveCorp second Quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Mr. Tom McInerney, Executive Vice President and Chief Financial Officer.

Thank you and good morning.

Joining me on this call is Doug Lebda, President and COO, and Barry Diller, Chairman and CEO.

As you know, we may during this call discuss our outlook for future performance.

These forward-looking statements typically are preceded by words such as we expect, we predict, we believe or similar statements.

Also you are aware that there are risks and uncertainties associated with these forward-looking statements and our results could be materially different from the views expressed today.

Some of these risks have been set forth in our earnings release filed earlier today with the SEC and our other publicly filed reports.

We will also discuss certain non-GAAP measures and I refer you to our press release and the Investors section of our Web site for all comparable GAAP measures and full reconciliations.

After I highlight our financial results, Doug and Barry will each make some comments before we open the call for questions.

For the second quarter, revenue increased 18% to 1.6 billion and operating become before amortization grew by 34% to 165.1 million versus the year-ago period.

Excluding the results of IAC Search and Media, which we did not own in the year ago period, and excluding transaction expenses and inner company eliminations related to the spinoff, each of which expanded our corporate and other losses in the year-ago period, Q2 revenue increased 9%, operating income before amortization grew by 12% and operating income increased 15%.

Adjusted EPS was $0.32 for the quarter, compared to $0.28 in the year-ago period.

GAAP net income and EPS were both down on a reported basis because the prior-year period included significant gains on the sale of our interest in VUE and Euvía as well as interest from discontinued operations.

For reconciliations between the adjusted and GAAP figures, please refer to this morning's release.

For the months ending you than June 30th, free cash flow was 253 million up 19 million from the year-ago period due primarily from higher operating income and non cash expenses.

We're pleased with our free cash flow generation thus far as we expected to have a tough comp throughout the year due to the fact that we paid very little cash taxes a year ago.

Turning to the operating results in our principle areas.

Q2 marked the first quarter in which the April, 2005 acquisition of Cornerstone Brands was fully anniversaried and retailing results.

The catalog business posted revenue growth in the high-single digits, which was largely offset in the U.S. by a less than 1% sales decline at HSN.

Shoebuy, which we acquired in February, 2006 and is growing in excess of 60% on a comparable basis, also contributed modestly.

As you know, a confluence of executionable issues over the past year has led to disappointing top line results at HSN.

New leadership has brought tremendous energy towards revitalizing HSN's operations to which Doug will speak to in a moment.

As we said before, we expect to see this benefit over time.

While hardly good, Q2 was better than Q1, and we hope for continued gradual improvement.

In the back half of the year, however, while we expect to see somewhat improved top line performance, we also expect to see some margin pressure arising from cost pressures in the distribution area and in certain other operating expenses.

HSC Germany had a very disappointing quarter with a 17% decline in sales.

We saw a continually improving growth throughout 2005 and unfortunately that momentum reversed itself in the first half of this year.

There are some discrete issues we're in the process of fixing but we don't expect an immediate turnaround here.

In Lending, we grew transmitted QS by 32% and revenue by 26% in a very challenging operating environment.

Similar to the first quarter, lower close rates led to proportionally higher marketing costs and thus a year-over-year decline in profits.

As we outlined on last quarter's call, when market dynamics became clear in Q1, we took aggressive action to reduce planned marketing expenses.

Because Q2 amounts were largely committed, our actions would primarily affect the third and fourth quarters.

That said, in the second quarter, it cost us about 20% more to get every customer versus the prior year period, which is less than half the increase we saw in Q1.

For the back half of the year, we currently anticipate single digit year-over-year revenue growth but better margin performance sequentially.

Now let me speak to our Media and Advertising sector and specifically Ask.com.

On a pro forma basis, IC Search and Media grew revenue by 21%, a higher revenue per query and higher search query volume across most properties.

Let me give you some color on this.

Ask.com in the U.S., where we are investing real marketing dollars and product development resources, is showing very good growth in terms of queries and market share.

This is largely offset by declines at Ask.com in the UK.

We are also seeing strong growth in third-party distribution of our search results and growth in our fun web products tool bars which you may know as our Smileys product but a decline from partners distributing our tool bars.

In August of last year, we went to the 3 page length format, on Ask.com in the U.S. so our Q2 revenue growth was good in that we were comping against this higher monetization format.

As we move into the back half of the year, we'll be comping into the 3 paid link implementation partially in Q3 and fully in Q4.

We continue to be in investment mode for IAC Search and Media and are not focused on current profitability as we are working to drive volume and share growth while being mindful of creating a business that will scale to real profitability over time.

Our other largest business, Ticketing, Vacations, and Personals continue to deliver.

Ticketmaster's strong momentum continued in Q2, selling more than 30 million tickets for the third consecutive quarter and achieving all-time highs in revenue, which increased 14%, profits, and online penetration thanks to a healthy summer concert season and 21% higher international revenue with business in the UK and Australia performing very well.

Vacations' top line grew 9% and profits even faster year-over-year.

Intervals' results benefited from 5% growth in members, a 16% increase in online confirmations, and just overall great execution from one of our most seasoned management teams.

Personals grew revenue and operating income before amortization by 28% and 66% respectively on solid worldwide performance with each of our major markets contributing fairly.

Match's geographic diversity is really driving balance growth as domestic and international growth rates are each solidly in the teens.

Turning to the balance sheet, we've continued to repurchase our shares from early May when we reported Q1 results through last week, we repurchased 19.5 million shares at an average price of $25.84.

This brings the year-to-date total to 27.1 million shares at an average price of $26.80 leaving 15.7 million shares in our current authorization.

We finished the quarter with cash and securities of 2.2 billion and pro forma net cash and securities net of debt of 1.3 billion.

So our balance sheet remains very strong.

Taking into account the repurchases we've done since quarter end, the net cash and securities number would be 1.1 billion.

With that, Doug will make some remarks.

Thanks, Tom and welcome everyone.

I'll dive right into some comments on our businesses.

At retailing, new management has been in place for a few months, and we're very pleased with the job Mindy Grossman and her team are doing to get HSN back on track.

Core to this is merchandising, and Mindy is mapping out a rigorous game plan to ensure that the products we sell are compelling, differentiated, and intelligently priced.

Mindy and team are working through their merchandising plans [OVERLAPPING VOICES] from both a short and long-term perspective, In the short-term, making sure that we are utilizing every possible lever to drive minute by minute results while putting in place the merchandising talent, product, development plans, and vendor relationships that are critical to driving growth over the long-term.

As part of this, we've recently hired new senior leadership in both hard and soft home goods, areas where we've had some weakness in the past, and on the product front, we've added companies like Phillips Magnavox, Motorola, Samsung, and Dyson.

And we've integrated the number of shoe products on HSN. com, expanding HSN's already popular footwear and accessories business.

Mindy's team is also looking to revitalizing HSN's brand and is evaluating strategies to continue to accelerate the already strong growth we've experienced online.

With several million active customers across our retailing brands and many millions more that fit or demographic profile, the opportunity for HSN to sharpen what it stands for and effectively communicate that message through the live show, hsn.com, and all other consumer touch points is significant.

We now have a leader what is a seasoned brand builder and is, suffice it to say, more than excited by the potential in front of us.

Ticketing has been an outstanding performer.

What was really amazing is how this 30-year-old business with its solid market position just continues to innovate, expand, and consistently renew and add clients.

Ticket Master's global growth initiatives keep proving successful, and just last week Ticketmaster announced its entry into Spain, one of the top five ticketing markets in Europe with the acquisition of Tic Tac Ticket which works with more than 400 event organizers across the Spanish market.

We've talked in the past about all the ways Ticketmaster is helping clients sell more tickets.

Recent initiatives in this regard including our ticket exchange services, which are gaining good traction among consumers, who value the convenience and the security to purchase resell tickets, and Ticketmaster's event authorized secondary market site.

During the quarter, the number of tickets sold through our sports ticket exchange service increased 86% year-over-year.

Another way we are adding value for clients is through dynamic pricing initiatives.

Ticketmaster auctions continues to flourish.

In the second quarter, the number of auctions increased three fold and we extended our auction service into the UK, our second largest market.

Lending, we're in the midst of a contracting mortgage market which the MBAA expects to decline 18% this year.

Down cycles can certainly be painful, but less so for those with an established brand and a differentiated value proposition as Lending Tree clearly has.

While we're not in the business of predicting the overall mortgage market, we're determined to do everything we can to ensure that we emerge from this cycle stronger than we were going in and with a greater market share.

Rising rates make refinance mortgages less compelling with every fed rate hike, but there's still billions of opportunity in refinance especially for consumers wanting to replace adjustable rate mortgages with fixed mortgages.

We're targeting customers who still have an opportunity to lock into relatively low fixed-rate mortgage rates as well as continuing to focus on growing our purchase and home equity products.

To that end, we've aggressively stepped up our efforts to increase purchase loan volume by significantly increasing the size of our purchase agent teams at Lending Tree loans and by adding more than 20 new purchase lenders to date who are obviously focused specifically on that market.

In Real Estate, we believe that our new e-brokerage business can give us a distinct advantage in penetrating this massive market opportunity.

With more than 130 agents on-board in Portland, Denver, Seattle, and Salt Lake City and over 270 real estate contracts signed with consumers over the past few months, we have real traction.

We're also in the process of overhauling RealEstate.com which is intended to accelerate the site's evolution from primarily a lead generator to one that is consumer friendly, listing centric, and feature rich.

This wasn't possible without a critical mass of listings, but we now have 1.9 million listings on the site representing approximately 75% coverage in the top 75 U.S. markets and up from 1.3 million listings last year at this time, very much putting us into the game.

Within Media and Advertising, Ask.com's marketing efforts have helped drive increasing amounts of traffic to the site, pushing query growth, frequency, and retention all higher.

Ask.com's market share has been growing fastest among the major search engines.

It's up 78% year-over-year according to comScore, albeit off a smaller base.

But our work here is really just beginning.

We're relentlessly focused only innovation and differentiation in this space and will continue to launch new products and features in an effort to improve the user experience and keep people coming back to Ask.com again and again.

As Tom mentioned, we are experiencing choppiness on the distribution side.

The loss of Dell will eventually impact or overall growth, and we're doing our best to manage through it.

Our goal over time is to add new distribution deals but even more so to add organic growth at Ask.com.

In that regard, we're certainly heading in the right direction.

At Citysearch, aggressive sales efforts and a stream of new products and user experience enhancements, including cleaner site navigation, a simpler user review process, and a great new map product as well as innovations in mobile are helping make Citysearch the go to local site for an increasing number of merchants and consumers.

With our unique monthly users growing significantly year-over-year, we estimate that as 21 million uniques in June alone.

Our biggest priority has been to add local merchants which we think is the heart of our competitive advantage in this space.

As of June 30th, Citysearch eclipsed 50,000 PFP merchants.

Last year our personals business was a turnaround story.

This year it's a bona fide growth story thanks to very solid execution.

Match.com has been particularly effective at marketing with successful off-line a campaigns in the U.S., USA, and Scandinavia during the first half of the year, helping increase paid members by 15% year-over-year at the end of June.

Domestically, Match.com's brand awareness has recently surpassed e-Harmony and it now leads the category of unaided brand awareness with 38%.

Internationally, match.com has entered an agreement with Yahoo! to power the Yahoo!'s personal service in the UK and Germany over a multi-year period.

Obviously a big win for this business.

Our discounts business has really struggled due to intensified local competition and a slower than anticipated migration online.

Last week we announced a new CEO, Maryann Rivers, whose successful background and direct marketing in Vallassis made her our choice to lead a turnaround at EPI.

For years, we've been selecting these assets with the ambition of them working together.

We've historically pursued opportunities such as consolidating vendor contracts and we have achieved some success, but we've now begun a more earnest process, particularly in two areas, institutionalizing company-wide best practices and building a world class human resource function.

Regarding best practices, this year we are focused on a few key areas, including: Online marketing, off-line marketing, search engine optimization, strategic planning, public relations, and information technology.

We've established a rigorous process to ensure that we reach the goal of shoring up areas that are weak and spreading better ways of operating around the Company, and this process is working.

In each area, we've established a concrete list of initiatives that will now be implemented, two of which are already underway and that I can address today.

The first is B-to-B telesales.

We're using PRC's platform to evaluate to what extent we can consolidate and rapidly grow B-to-B sales.

We're looking to streamline our recruiting and training processes as well as fairly -- favorably impact merchant enrollment.

The second area is off-line marketing.

Our businesses have spent the last several months working to consolidate our off-line media buying with one agency.

By getting greater scale in media strategy, planning, and buying, we can be more effective and cost efficient.

In fact, after going through a process of selecting a single agency, and coordinating our efforts at the businesses, we believe we can save at least $10 million annually.

We've also put a program in place to develop our highest performing leaders.

We're investing in this area to ensure that as our best and brightest look to develop their careers, they have every opportunity to do so inside of IAC.

In just a few months, we've internally transferred 25 senior engineers, business strategists, and legal and finance experts throughout IAC, parlaying their skills and rewarding them with new challenges and life experiences.

We have amazing brands, each with distinctive consumer offerings, extraordinary market potential and strong management.

And by arming each of them with resources, expertise and efficiencies, they can stay relentlessly focused on innovating for their consumers, executing with precision, and seizing new opportunities.

Now Barry will make some remarks.

Thanks.

I promise you that we're going to get into the questions quickly, but first since we announced the Expedia spinoff, it's been seven consistent quarters that we've reported good results.

As I've said in the past, we're an interrelated and interactive conglomerate, and we're proud of it.

We're beginning to prove we can operate multiple businesses across a wide spectrum, pushing fast growth here, husbanding resources there, reorganizing and retooling people and models whenever it's necessary, nurturing new opportunities, sharing the best practices of thousands of smart people, all the while growing the whole and sensibly allocating capital between opportunities and returning value to shareholders.

Currently we're returning that value in the form of pretty significant stock repurchases.

Whatever comes of this economy and its hopes and risks, our mix of businesses our steady progress and our strong balance sheet ought to see us better than through.

Now that all that pro forma talk has been completed by me and my colleagues, we'll be happy to answer any of your questions.

Operator?

Thank you, sir. [OPERATOR INSTRUCTIONS] Just one moment for our first question, that's coming from Safa Rashtchy with Piper Jaffray.

Please go ahead.

Barry, you just talked about the economy and how it could go up and down.

Could you give us your assessment of how cyclical or counter cyclical your businesses are?

Do you think you have a reasonably balanced portfolio?

It seems that certainly real estate is being affected by that cyclical trend and ticketing I would assume is quite sensitive to the economy.

Could you give us your assessment of that?

And then I have a quick follow-up.

Yeah.

Thanks.

Well, I mean, I think, like any good, multi piston engine, we've got lots of different characteristics of our businesses.

I don't know what -- I don't know what you would say is cyclical or counter cyclical, but I would say that generally speaking, I mean, the retail business -- our retail business has historically been to the economy.

When the economy has been poor, these electronic retail home shopping businesses have done quite well, and I don't know that I could go into other particular details on this that would be particularly illuminating.

I think the balance, the mix is pretty good.

You go from entertainment and ticketing to personals.

Things get worse, I think people will want to flirt more.

I could riff on and on about this.

I don't know.

Tom, Doug, do you have anything to add to this?

I think that, in general, these businesses have tended to perform quite well through different economic environments.

Ticketing Barry mentioned.

I think interval is the same.

We're driving a number of what I call cyclical growth opportunities, and our hope is that that outweighs anything that's going on on a macro basis, and history would suggest that's the fact, and we see no reason that that wouldn't change.

And the only thing I'd add is specifically in real estate, since you mentioned that, real estate obviously is impacted by overall interest rates and the real estate economy, however what we've seen in the past in real estate cycles is in a down market.

Leaders consolidating grow share, and our share is so small in that business that we clearly hope to grow it.

We're in the very early days of that particular business.

I think the important thing, and then I'll try not take all the time to do one question, I think the important thing about the Company is because it's this interactive, interrelated conglomerate rate, unlike other multi business businesses, they really do relate to each other, and yet they're in truly diverse and distinct segments of the economy, and they've all got their own cycles.

We've had a bad management patch in HSN.

We made a change.

As Doug spoke earlier, we're on the right course there.

We certainly have turned around Match.

Match is now, as Doug also said -- it's not a turnaround.

It's just really a growth story.

I think you're going to have -- the good thing here, at least the model is you have multiple scenarios all whirling around, conservatively managed, so that I think, no matter what happens -- this could be a bad economy.

It's going to affect everything and everybody.

But I absolutely believe we'll get through anything better than most, and I think in normal conditions, as we go and as we continue to get better at operating and executing, then I think we've got frankly a better chance than most.

So I hope that helps answer this a bit for you, Safa.

It does.

It's helpful.

Thanks, Barry.

A quick follow-upon Ask.

Tom, can you give us some metric?

As you know compScore's numbers are highly suspect.

Can you give us a sense from your own log in terms of the core growth and how has monetization trended?

Safa, as you said, the compScore numbers are very different than ours and we do our best to try to reconcile them, but we're seeing really good query growth as well as good monetization growth.

At Ask.com, really a flagship property, we're seeing consistently now query growths year-over-year in excess of 40%, and I think that's what's driving those particular share statistics in compScore, seeing good query growth in other properties of ours as well.

At the same time, we also saw good monetization, up low double digits on a revenue per query basis in the first part or -- sorry -- in the second quarter.

Thanks everyone.

Next question, please.

Thank you.

Anthony Noto with Goldman Sachs, please go ahead with your question.

Barry, given the penetration of broadband use in the United States today, there's always been this opportunity longer term to better leverage the HSN Grand and the archives of the video content you have by using that content online to attract more shoppers or greater frequency of shoppers through the distriubtion channel and delivering that video.

When I go on the site today, I can really only access HSNTV Live.

I can't go into the archives and pick whatever product I want.

Could you give us a sense of how that strategy is going to evolve over the next couple of years?

Will you get to sort of appointment type of video delivery on products so that every product listed has an archive video?

And what kind of traction have you seen to date in that area?

How will you market it to get more traffic there?

It's early days.

We've got two experiments going in what you'd all interactive TV, and I think that's probably the next step before you get really rich archive value retrieval and appointment viewing and things like that.

Inevitably, of course, it's going to happen.

As the data possibilities grow, there's no question but that the video is going to be easily retrievable and you'll be able to kind of get exactly what you want when you want it from a whole array of things all with video and instructions and all the stuff that home shopping has been known for historically.

But in ITV, the experiment which is with Cablevision is the idea that you essentially on a big screen, just like you're watching today -- you like a product, and you point and click, and it's delivered to you within the next day or so.

You don't have to phone order.

You don't have to do anything.

It is, I think, the most natural evolution.

And I don't know, Tom, if you have the stats, but it's very early days here.

The amount of just additional purchases and amount of attention on this that people are using is really surprising.

It's very early days, but we're actually getting some reasonable order volume.

I think we have 200,000 of revenue from it, a very limited deployment in terms of subscribers.

It's primarily in Cablevision, certain select New York DMAs, and we have a small test going on with the Time Warner property in Hawaii.

Our platform is ready.

We are in conversations with all of the other cable and DVS providers I think this is going to roll out over the coming quarters and years and it's a very natural extension.

The only other thing I would add is, back to the Web, beginning a couple of months ago, we started capturing fully all of our life programming on a digital feed, and so we are very, very close, imminent to making available what you're talking about, which is kind of full archival viewing of all live programming via HSN.com, and that portion of the site, which is this Week in Review -- you can go back today and just look at products, but in the future we'll attach live video -- not live -- taped video to that.

That's always been the most popular.

So the live video stream we recently upgraded in quality as well, and that's seeing increasing traction.

I think we're on the precipice both through the dot com video on the Web as well as on the ITV platform to real growth in kind of interactivity broadly defined here.

As far as marketing, I think search engine marketing, both paid and just optimized, I think that's going to be the best way to market these things.

I think you're going to find, as you're able to get video and these products instantly deployed and as you get better at all these search processes for identifying things and promoting things through search engine marketing, I think that it will have a kind of natural easy marketing progression.

I don't think telling people about it is going to be a problem.

If I could just ask one other question about investment, a number of Internet companies have reported pretty strong robust growth in the quarter, but I think the thing that's been most surprising to investors and to us is the level of acceleration and capital spending over the next several quarters, even in full year in the first quarter results or second quarter results.

I guess my question is Ask is experiencing very strong core growth at this time.

Do you think as you look out 12 to 24 months that you may be in a position where you may have to make those same increased levels of capital spending behind Ask post this sort of share gains that you're getting from a relaunch of the product?

It's a very dynamic area.

First of all, we're getting lots of query growth now, and it wasn't like we had lots of excess capacity so we are putting some new capacity into place for this year and the next.

It's a very dynamic area.

I think it's a place where you can willy-nilly, if you will, pour lots of capital.

We're trying to be very, very smart about it.

We have a great team on it, and we're evaluating all options for infrastructure in terms of working with partners buying, leasing, et cetera, and I think there will be incremental infrastructure capital that goes beyond query growth, but we're happy to have it.

It will more than pay for itself.

And it not be -- you know -- currently as we see it.

It is a dynamic area, but it will not be some huge step function in advance of that growth or not long in advance of that growth.

I think the important thing is that I think you'll see expenditures rising with sales.

With revenue.

And we'll husband it as best we can as we go.

It's not, sore than some of the infrastructure in terms of server farms and things, but other than that, it's not a wildly capital intensive area for us.

We'll continue again to put marketing in. much more targeted, so to speak, than in the first throe of it when we were really trying to to establish that Ask a global search engine for everyone, rather than Ask Jeeves for training wheel people.

So I think it will come in train.

Thank you.

You're welcome.

Next question, please.

Thank you.

Mark Mahaney with Citigroup please go on with your question.

Thank you.

Two things, one just to clarify the comments you made on the lending margins in the back half of the year.

I think you were saying that margins would expand sequentially as we go through the back half of the year.

I just wanted to get a confirmation on that.

Could you dive down a little bit more in the international retail weakness that was greater than expected?

Are there specific things you think you can do in the back half of the year to improve the performance of that group?

Thank you.

Yeah.

On the lending side, you heard it correctly.

I mean, if you look at our margins, they were down I think a little over 10 points year on year, Q2 to Q2, and we do not expect to see that type of margin contraction in the back half of the year.

We had very strong margins in Q3 and Q4.

We're not going to get to that level or don't expect to get to that level, but I don't expect to see the 10 points of contraction as well.

The same thing as you said, kind of up sequentially, which is in line with the restructuring of the marketing costs and other operating costs when market trends became apparent.

On international retailing business, it's been a big disappointment for us.

We had pretty good performance in 2005 with kind of accelerating growth throughout the year kind of quarter over -- quarter, each quarter better than the last, and we hit a number of issues this year that are executional as well as macro environment, least of these probably but kind of in the mix 'cause I don't think we've gotten any help from the general retail market there, more importantly we've been transitioning to a new distribution center that has presented a variety of operational challenges as well as some distribution issues and some very specific vendor and merchandise issues.

And the fact of the matter is the business was not strong enough or well enough into its turnaround and overall execution level to withstand these particular disruptions.

So we have to fix it, and we have to get it back.

We don't think it's a quick or easy fix this year.

Thank you.

Our next question is coming from Paul Keung of CIBC World Markets.

Please go ahead with your question.

Good morning Barry, Tom, and Doug.

A question on ticketing and a question on economy.

Ticketing, now that you have established ticket exchange and added pricing, I was curious what's the size again with this market you're going after both the U.S. and internationally?

What kind of penetration rates are you targeting?

For you guys it starts with a very untapped market.

On the aftermarket -- let me start with the aftermarket.

On the aftermarket products, the market is very, very large.

I mean, you can size it, and it's clearly not as big as the primary market, but it's a substantial percentage of the primary market depending on how you measure it, and we have a tiny tiny piece of that today, and so we think there's plenty of growth.

In terms of the share that we're after, it's certainly no target.

All we'd say is, when you consider Ticketmaster's advantages in terms of being the only one to authenticate a consumer transaction because of all of the bar coding equipment and the like that we have installed at venues, Ticketmaster's distribution advantage with the Ticketmaster.com site, client relationships, et cetera, we think we have very, very natural advantages that over time will prevail and should lead to real market share opportunities.

So there's plenty of runway, and we're getting good traction there.

We have now 44 teams using our team exchange product in the sports side, and we're just getting started on the single ticket side, which is primarily a music application.

At what point will you do, like, a major branding of this product at a consumer level?

The focus is on getting the tickets accessed and enabled.

Because Tcketmaster has so much pull it's like our position on the primary market side.

We have 20 plus million uniques coursing through Ticketmaster.com.

We are not hurting for audience.

It's not so much about branding.

Well, I think the branding is going to be Ticketmaster.

We have rather a strong brand name in Ticketmaster.

We've got some other products, of course, but Ticketmaster is the only thing that I would sink any teeth into in terms of future branding.

What you'll find, over time you will go to the site to be purchasing tickets for whatever it is you're purchasing tickets for and you'll see not only primarily but also secondary.

Inside primary, you'll also see auctions.

As the inventory, the challenges Tom alluded to is simply getting more inventory in for us.

We can only do that with the cooperation, the partnership of our clients, and the great news is we're getting more and more every day.

And then my second question on the economy, are you actually seeing signs of weakness at the consumer level outside of just real estate?

Retail for example.

And I guess specifically what are you doing at the management team level to prepare your different teams for that if it does happen into '07?

First of all, we don't really see any negative signs.

I mean, we're not going to predict the economy.

A fool would do it.

I predict global warming, but I won't -- not global warming.

It's global freaking hot.

Almost everywhere.

But that we can predict.

As far as our prep, we're really conservative in terms of how we plan for things.

So we're always going to have plenty of reserves.

We're always going to keep things within bounds.

Year not -- we're not going to go over gassing, not relative to the price of oil.

We're not going to push beyond what we think of tolerable levels.

We'll pull back when we think it's necessary and if we could do it relatively quickly.

We're not shy about being, I think, sensibly reactive if something this way comes.

Okay?

Great.

Thanks.

Pleasure.

Justin Post with Merrill Lynch please go ahead.

First, on HSN, can you talk a little about inventory levels?

I notice they're down a little bit year-over-year and how the linearity of the quarter went.

Do you feel June was better than April?

And then I have a follow-up on your free cash flow.

Inventory levels were down.

The number you're looking at, the balance sheet is a composite of different businesses.

At HSN, they were down quite sharply, in fact probably too much so, and so one of the --

Definitely too much so.

So one of the tasks of the new leadership team is making sure we have the right products and inventory.

Just a bit of insight here.

One of the problems that we found we faced really began about a year ago is that the previous management at HSN got very risk averse and really began to skinny down the inventory, so inventory is of course opportunity, if it's good, which is what really more than anything hurt us.

We went through a period of about six months where we were inventory constrained.

I think we're just now starting to come out of it.

So I think that I don't -- I don't think that will be our problem.

I think we now have a really good editor and a really good merchandising leadership, so I guess I've gone on too much about so to speak the inventory, but it does relate to explaining a bit more context what has been happening with HSN over the last year or so.

Tom, sorry, anything else?

Yeah.

The second part of your question, I think you were asking about June.

As Barry said, June was better.

It was markedly better than April and May.

We're hesitating from drawing a straight trend line.

I mean, in this business, you get obviously generally four weekends a month.

Those are big days.

You have specific vendors, programming calendars, and the like.

There's also in any 30-day period a number of things that affect it.

The business did definitely feel healthier to us in June than it did earlier in the water, but that's what we know.

You can't extrapolate more than that and say it feels healthier

On free cash flow and clearly ahead of our estimates, do you still expect it to be down on a year-over-year basis and what drove maybe some upside to your earlier comments earlier this year?

There's a number of moving pieces, and we've been working on all elements of that.

We've gotten some good tax effects where we got higher NOL utilization out of the Ask acquisition than we had planned on.

When you do these things, you make an estimate.

Because you don't know -- a lot of NOLs we did not think had been utilizable.

We've controlled capital spending in certain areas.

Good job on working capital.

So it's really across the board and a credit to our people who are all focused on this.

In terms of year-over-year numbers, if you look at last year's number and there's this definitional thing we went through on last quarter's call where the 123 R benefits are now excluded from that definition -- if you back that out, I think we have a shot to be up year-over-year.

That was 150 million of our roughly 700 million in free cash flow last year.

And with a solid back half, we've certainly got a shot.

And last thing real quick on Ask.

Do you think you can get some pretty interesting margin improvement next year?

I don't know if you are willing to talk about that.

Do you think you're over investing this year relative to where you need to be?

No.

Again, over investing, I think what we're doing -- look.

Excuse me.

Early days -- so far so good.

We have got very, very good query growth.

We have not spent a fortune.

We've got very good query growth.

I would not make any predictions on margin expansion at this stage.

This is a period when the smartest thing for us to do -- I think the great benefits of the kind of company we have is we are making, we think, really sensible investments in Ask because we think it's really worth the candle.

If we can increase queries and increase the frequency within those queries, then we're going to have the next -- I don't know -- year, two, three.

Not beyond the horizon.

We're going to have a great business.

So, to us, we're -- I don't want to be redundant about it.

I think we're on the right path, and I just -- I wouldn't either suppress or impress, push margins at this time.

What we're pushing at this time is sensible growth, sensible expenditures, good returns, good revenue gains.

Thank you, Barry.

Pleasure.

Next question.

Thank you.

Scott Kessler, with Standard & Poors Equity, please go ahead with your question.

You've talked about prioritizing -- well, at least you've implied prioritizing organic growth more recently over the last several quarters, and I'm wondering if you could talk about efforts to garner both revenue synergies as well as perhaps cost efficiencies?

Thanks a lot.

I think we're attacking this in a number of ways.

On the revenue side, I think the thing that we will continue to focus on is how all of our other properties can take their enormous audience and leverage that to the benefit of Ask.com and helping to grow query growth.

We've taken a very good first step in that respect, and it's generating already a meaningful number of queries for Ask.

Now, you'll continue to see us as we are more centrally organized in my new role.

You'll see us continue to develop cross business deals with all the sites, and we'll continue to do that.

The big focus, though, that we're going to do is on deploying best practices, as I mentioned, and really finding ways that we can deploy something that's going grate in one area, whether it's online marketing, whether it's direct mail, whether it's off-line marketing and try to deploy that across the Company.

We're systematically doing that.

Where you'll see that show up time is not in revenue from cross company deals but in the revenue and the profits of the individual businesses themselves.

On the cost side, we've definitely made a lot of strides in that area over the last few years, and that just continues, and those efforts by streamlining and centralizing the processes by which big capital expenditures get approved really gives us the ability to leverage the buying power of IAC with outside vendors and also to hold costs under control.

One of the things that I've been very, very pleased with in this new role is how willing and able and enthusiastic all of our businesses have been and really been cooperative in this process, and it's starting to yield results.

If I could follow-up, is it fair to say that, in terms of driving increased margins that maybe best practices and cost efficiencies are having a greater impact and are expected to continue to have a more significant impact than revenue synergies over the foreseeable future?

I think you have to start by looking at the path and then go forward.

I think in terms of the past that those revenue synergies have had a very small impact, and it starts with the kind of generally attractive margin characteristics of our businesses.

The places where we're operating, generally, if you get good revenue growth, you're going to have opportunities for margin.

Tend to be good operating leverage, good operating margin businesses, and that certainly is a key priority as we go forward to continue to drive revenue, drive share, and to bring what we can to the bottom line.

We had a great year in that regard last year.

Q1, Q2, in any given quarter it may vary, but that's the key focus.

And then I think adding to that, as Doug said, under our new structure with our new focus, we think there will be opportunities to do that from a revenue and cost synergy.

What the relative weight of those things are as they affect margins, who knows?

We're going to push on all of them and we're going to get it where we can.

Next question, please.

Thank you.

The next question is coming from Robert Peck with Bear, Stearns.

Please go ahead.

We had a conversation with marketers recently and they had a lot of praise for Citysearch and promise for Ask going forward.

If you look at Ask Jeeves, how do you look at long-term differentiation?

When will we see more local integration with Citysearch?

And can we have any more data around some of the specifics with Ask as far as click fraud you are seeing, click throughs, as far as click rates, demographics, that type of thing?

First of all, we don't expect very much from Ask Jeeves since Mr. Jeeves has departed.

But there's a current big priority project which is to integrate Citysearch and Ask much much more fluidly.

I think that there's no question we have the best local content.

We've got it in breadth and depth.

And the quality of the local content, I think, puts anybody else locally to shame.

Getting that content again perfectly fluidly into Ask is a project that I think is -- it's high up on the list, and I would say it's in the next four months, maybe six months max.

We don't want to be out -- we ought to be out there and fairly smooth.

In terms of metrics and things and click fraud, look, we suffer click fraud to the degree anybody else suffers it now.

Really, this is in this case because Google is our ad network, they take responsibility for it.

It's there.

And it's not a major, major part of the stream, but it's certainly got an effect.

I think there are mechanisms now getting deployed that are going to make it even less.

On other metrics, I don't know what we've got to say other than what we've said, which is the only thing metric that counts.

Two things count.

How many queries and how are we fulfilling them, how many of them do we cover with advertising?

It's really a huge change.

One year ago, we hit 10 paid links on the page.

We thought that was a bad consumer experience.

We took it down to three.

We did it with the argument that, in doing so, it would take some time, but our revenue would actually increase, not decrease, even though we had less than 1/3 as many opportunities.

And we've achieved that in a pretty short period of time.

The metric to pay attention to is queries, frequency, and coverage.

And in all of those -- I mean, coverage percentages have, I think, basically remained in a pretty high level in the 60s.

Is that right?

Higher than that on Ask.com.

What are they?

Do you know that Tom?

I don't really know specifically.

I think up in the 80% range.

In coverage?

Yeah.

Well, that is an increase.

But certainly queries and revenue, all of the key issues, drivers, metrics for Ask.com are more than we had wanted, and actually we had pretty aggressive goals, and we're 10% ahead of our plot year-to-date.

So so far okay.

Again, that brass ring is certain -- has certainly not been achieved, meaning significant revenue and share that I think we're going to get over the next several years.

But we're on our way.

One quick follow-up if I may.

Could you elaborate a little bit more on what's going on with Ask in the UK?

Yeah.

UK, number of factors.

First of all, UK was very over monetized.

The stand-alone Ask business before we bought it, Ask was doing a lot of revenue, and it was one of the key things where they met their orders.

I don't know how many links they had on the page, but I don't think they had anything but paid links.

We took that down recently.

That really hurt revenue.

We also had a number of problems in the market that were -- some were infrastructure.

Some were other marketing issues, et cetera.

Recently, we've had real improvement in the UK.

I mean, it's not back to anything that you'd call robust, but it's certainly on the way.

We changed the management.

We've really cut staff in various areas that were really inefficient.

Big emphasis that Jim Lanzone, who is the CEO at Ask, has put on it to earn it pretty good results, pretty good turn.

But nothing that shout about yet.

And put in place an organizational structure where I think it will be much easier to move products and technology from the U.S.

Definitely.

And that all reports to Jim who runs the Ask business.

Let's do one or two more questions.

Next question, please.

Hello?

Michael Millman with Soleil-Millman Research, please go ahead with your question.

Two questions.

One is on the real estate you said you have 130 brokers now.

Can you give us some idea of when you're heading?

And it does certainly look like it's a general brokerage.

In other words, most brokerage today use the Internet extensively to bring in prospects.

And secondly, on vacations, which looks like a great business, timeshare is growing about 15%.

You're growing the business about 5%.

Why the disconnect or how do you --

On the real estate business, first let me just highlight the strategy, because it is certainly anything but traditional.

The strategy in real estate is first to centralize the marketing and customer origination.

Typically most brokers effectively outsource the customer acquisition to local real estate agents and then pay that agent effectively 80% of the commission income, leaving not very much for the broker and also having very large bricks and mortar cost.

What we have done is he have he had -- effectively had no in-market offices and -- we are going to substantially drive the leads into the market.

We drive the leads from RealEstate.com into a call center and then immediately effectively hot transfer those leads to an agent in the market on a revenue split which keeps much more for the house, so to speak, so the agent gets a great source of new leads, and they still make a lot of money because they don't need to go out and prospect for business as much as they have had to in the past.

Now, they still can, but we think we can do that very efficiently.

So it's a very different business model.

As I said, it's growing.

It's up to 130 agents already.

The nice thing is these are independent contractors, so it doesn't really, quote-unquote, cost you anything to continue to add new agents.

Clearly there's some cost in infrastructure as you add new markets, but it's fairly small.

And as far as specific plans, I would say we're not going to give specific numbers of agent counts that we would hope to add over time, but we would expect it to be robust as profits continue to generate here.

One thing I would add is we are seeing great agents actually want to come to this platform.

We've got fantastic tools, fantastic technology, obviously great marketing and very good training and development for agents which we think is unique in the industry, and that's why they're coming to us.

And, Michael, on vacation, I'm not sure what statistic you're looking at.

It may be a dollar-based statistic.

We tend to agree the market growth in the U.S. in terms of number of owners, which is really the relevant piece for us, in had kind of the mid to high single digits, usually closer to the mid.

Our data on that suggests that we're at least holding if not gaining a little bit of share with kind of mid-single digit volume growth in terms of number of new subscribers and the lot.

If you measure on dollars or the dollar value of transactions, then that may not necessarily translate straight to revenue since a good portion of our revenue is subscription-fee based.

Next question.

Thank you. [OVERLAPPING VOICES]

We'll make this the last question, Thanks.

Go ahead.

Sorry.

Imran Khan with J.P. Morgan.

Good morning.

A couple of questions.

Doug, I think last quarter you talked about your customer acquisition cost for Lending Tree grew almost like 50 percentage points year-over-year.

I was wondering if you can give us some sense like how the customer acquisition cost for Lending Tree was in Q2 and how should we think about it the second half.

And secondly, Barry, in terms of Ask Jeeves, two-part questions.

I'm sorry, but I've got to -- it's not Ask Jeeves.

I don't want to show any irritation here, but my God, please.

I apologize.

Don't apologize.

Don't apologize.

Just go on Ask.com.

Use the service and then you'll know it's not anything but Ask.com and you'll be a happy person.

Sorry.

What's the question?

Going back to Ask, two parts on Ask.

One was up double digits.

You're talking about coverage of 80%.

I'm trying to get a better sense.

Is the coverage driving the monetary position growth?

And secondly, our understanding is that employee retention site, clearly the job market is pretty tight in West Coast.

What are you seeing in terms of the employee retention and hiring front?

Thank you.

It's Tom.

Let me start, and then I'll kick it to Doug on the lending side.

The marketed costs were up in Q2 year-over-year but not as much as Q1.

I think in Q1 we were something like 10 points of marketing costs relative to revenue year-over-year in terms of an increase, negative variance.

In Q2, that was probably closer to 7 points.

But we still saw marketing costs increase year-over-year, and our cost per QS was probably up about 12%.

And when you combine that with the lower close rate, there's no question costs per customer acquisition are growing even in excess of that.

And I think overall the thing to focus on is really the interplay between customer acquisition costs and revenue per customer customer.

You could, as you add on more marketing, move by definition into channels which cost you more on a very incremental basis.

That said, what I would say on Lending Tree, they have done a really fantastic job this year substantially improving our online marketing efforts on both broad reach, for display advertising, and in particular search marketing where we are doing much better than we have in years past.

Lending Tree, prior to last year, was very, very focused on off-line marketing and not as much focused on online marketing.

We brought in a great team, really beefed up efforts in that regard, built on some of our successes in the past, and what we're seeing is that the Lending Tree brand, since it's so well-known off-line, can really pull through online.

They've also made a number of changes to the site which help pull customers through the process more easily.

On Ask and employee retention, California is of course the top market, but we've got a really great leader in Jim Lanzone and he is has been able to attract, keep, etc.

And then we operate in such hot spots as Pisa, Italy, Piscataway, New Jersey, White Plains.

So we've got people everywhere.

And some of the places I think we're probably a bigger factor than we would be in the true hot spot of California.

And I think the last bit of your question was in terms of is coverage driving the higher revenue per query?

The answer is it's part of it.

We're also seeing cost per click up.

And, importantly, I think there's a couple things behind this.

One is some of the macro things that are going on in Google's advertising business generally, which is obviously supporting our paid advertising system, but also with the Ask.com rebranding, the aforementioned Ask.com rebranding, we think we're really shifting our mix of usage towards more commercial categories, and that's helping us in the monetization process as well.

Ask used to be very much research oriented as its audience -- and a very large audience of younger people looking to research various things -- and one of our biggest thrusts was to get Ask to be used for every day things by a very broad demographic.

That is beginning to take place, so that shift has happened.

I think that's it.

Well, there's an "it"?

We've gone through an hour of questions, and we hope that, even though -- well, we hope everybody is cooling off wherever they can for the rest of the summer, and we'll be back with you hopefully, if it ever gets colder, in a few months.

Thanks very much for joining us today, and we'll see you soon.