Match Group Inc (MTCH) 0 Q0 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to the IAC Q2 earnings conference call.

During today's presentation, all parties will be in a listen-only mode.

Following the presentation, the conference will be open for questions.

(OPERATOR INSTRUCTIONS) This conference is being recorded today, July the 31st, 2007.

I would now like to turn the conference over to Tom McInerney, Executive Vice President and Chief Financial Officer.

Please go ahead, sir.

Thank you, operator.

And thank you, everyone, for joining us today.

During this call, we may discuss our outlook for future performance.

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

Also, you are aware that there are risks and uncertainties associated with these forward-looking statements.

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.

I refer you to our press release and the investor relations section of our website for all comparable GAAP measures and full reconciliations.

I will highlight a few items in our financial results before turning it over to Doug and Barry.

By now, I'm sure you have all seen our press release with our results clearly laid out.

So I won't be repetitive, and will only highlight a few items.

While the Q2 consolidated results were not what we had hoped, they were directionally what we expected, with a couple of exceptions.

As anticipated, we saw year-over-year profit declines at HSN, LendingTree, and excluding an accounting change, at Media & Advertising.

However, unexpectedly, we also saw a much weaker domestic concert industry and Ticketmaster was comping against a strong year-ago quarter.

We continue to see very good results at Interval, Match and ServiceMagic.

Our consolidated results also reflects the completion of our Retailing International sale and the reporting of that operation as a discontinued operation.

This cost us $0.01 in adjusted EPS.

Turning first to our retailing sector, where at HSN, we remain in the midst of a turnaround and Doug will speak to our efforts there in just a bit.

For the quarter, excluding the results of America's Store, HSN grew revenue 3%.

Profits were impacted by a 290 basis point decline in gross margins year-over-year, the drivers of which largely mirrored those of Q1, namely excessive inventory leading to increased markdown and liquidation activity, and to a lesser extent, mix effects and lower initial mark-ups in certain product categories.

While we anticipated the year-over-year gross margin pressure and hence, profit impact, the magnitude exceeded our expectations entering in the quarter.

We've been fighting this inventory issue since the beginning of the year, when we bought to an over-aggressive sales plan.

It wasn't until the back half of the second quarter that we really felt we had made progress addressing the issue.

Excessive inventory leads to a multitude of issues in this business, including the need for increased air time devoted to clearance activities, markdowns, higher reserves as inventory ages, and reduced inflow of new products as purchases are cut to get back in balance.

All of these issues have to be managed and strategies for addressing them developed down to the item level.

Where are we on fixing this?

At the end of the first quarter, we carried gross inventories which were $49 million or 25% above the prior year Q1 amount.

At the end of Q2, gross inventories were only $18 million or 8% above prior year Q2 levels.

We ran a number of dedicated clearance days, reduced purchases and took other actions to make substantial progress, although we still view inventory as too high in certain areas.

As such, we expect Q3 gross margins to again be down year-over-year, albeit to a lesser extent than in Q2.

As we strive to invigorate sales, we are also reducing operating costs for the remainder of the year.

We now enter the second half of 2007 with the expectation that operating expenses will be slightly lower than in the same period last year.

Combination of these efforts to fix the gross margin issue and reduce operating costs, in combination with the top line initiatives Doug will discuss, leave us optimistic for improved, although still down year-over-year profits in Q3, and what we hope will be a better holiday season in Q4.

Although, obviously, we will update you more on that next quarter.

Turning now to LendingTree.

Results in the quarter continued to be impacted by many of the same trends witnessed in Q1, namely lower close rates and a shift to lower margin conforming loans.

Rapidly increasing interest rates during the period compounded the problem even further.

As a result, revenue declined due to fewer loans closed and sold, mostly in the home equity category, as well as lower average revenue per loan sold.

In addition, we saw our average cost per loan increase due to lower close rates and stricter underwriting criteria.

We told you we would take action here to bring costs in line with current realities.

We did just that in the quarter, reducing the LendingTree work force by 20%, which resulted in a $3.7 million charge.

Absent the charge, profits would have risen 72% sequentially.

We will continue to monitor the cost structure of this business to insure it is in alignment with its operating environment.

Now to Ticketmaster, where ticket volumes during the quarter were softer than we expected and a lower mix of concert ticket sales led to a modest decline in the average revenue per ticket.

In all, tickets sold increased slightly, reflecting a 17% increase internationally, but a 7% decline domestically.

The recipe for success in this business, over multiple years, has been to leverage our continued investment in products and technology and to very strong competitive performance and hence, increased volumes.

This has allowed to us share an increasing percentage of our revenue with our clients, while simultaneously increasing our own profit margins.

In a quarter like this, where volumes surprised us negatively, really for the first time in many quarters, the leverage worked the other way and profits declined in the quarter despite revenue gains.

Income was also negatively impacted by a $7 million increase in certain legal expenses.

The outlook for Q3 domestic concert volume is better.

While this has never been a true backlog business with great visibility, July volumes were solid.

This definitively does not insure that they will remain so for the full quarter.

Tours and shows get added and dropped in this business on short notice all the time.

So all we can do is tell you that we don't think Q2 is indicative of the rest of the year.

We've also taken action to reduce investment spending at Ticketmaster for the back half of the year and expect a resumption of profit growth in the third quarter.

Now to areas of the business that continue to exhibit positive momentum.

Interval, ServiceMagic and Match all had strong quarters.

ServiceMagic continues to exhibit truly exceptional results, with over 50% growth in revenue and operating income before amortization.

In the second half of the year, we will open a new call center in Kansas City and continue to test offline advertising.

As such, profit growth will remain strong, but we cannot expect to sustain the level of growth achieved in the first half of the year.

Steady-as-a-rock Interval continued its long trajectory of more than solid performance.

They had very balanced growth in the quarter, with double-digit top line and income growth.

Top line growth benefited from membership growth, transactional volume, higher average fees, and the acquisition of ResortQuest Hawaii.

We've got a number of initiatives underway here to bring increasing value to our -- develop our clients, looking to ensure that the levels of growth Interval has enjoyed continues into the future.

Finally, our Media & Advertising business benefited from continued growth in queries in our syndicated search business, as well as query and revenue per query growth at Fun Web Products.

Though light hearted in nature, our Fun Web Products business is no small endeavor financially and constitutes an increasing percentage of our Media & Advertising business.

Segment profits improved modestly during the quarter, reflecting a $7 million reduction in the current year expense related to the capitalization of certain cost per acts -- acquisition toolbar distribution expenses, which began April 1st, 2007.

Excluding that benefit, profits would have declined as expected, impacted by higher costs associated with marketing Ask.com and higher revenue share payments to third parties.

Our Emerging Businesses results were positively impacted by an $8.2 million non-recurring gain from our previous investment in Reveille.

Free cash flow for the first six months of the year was $194 million.

This was down from $292 million last year, due to lower operating profits, lower cash collected from clients at Ticketmaster and higher taxes paid.

The latter two factors are largely timing-related and not unexpected.

Because of our retail businesses and EPI, we tend to be back-half weighted, in terms of free cash generation, and other than lower than initially expected profits, we are generally on plan in terms of cash generation through the first half.

The Q2 effective tax rate was lower than normal, due to benefits from foreign tax credits and state taxes that were unique to the quarter.

We therefore expect effective tax rates in the back-half of the year to return to more usual levels.

To summarize, Q2 results were largely as expected, with the exception of Ticketmaster domestic volumes and the fact that HSN gross margin pressures were more significant than anticipated.

Challenges remain at HSN and LendingTree and we are addressing them head on.

Just one example, these two operations eliminated approximately 600 jobs in the second quarter.

Our balance sheet is solid and our cash flow is strong.

While addressing our drags, we will continue our strategic agenda of investing in our businesses, old, new and emerging, to foster future growth.

Given the challenges of the first half, it's a virtual certainty that we won't tally the year at the double-digit rate we aspired to.

We said earlier in the year we would be devastated if this were the case and that sentiment prevails.

But we are simultaneously focused and optimistic for a better back-half (technical difficulty) in growth in 2008.

We anticipate flat profit growth in the third quarter with the resumption of year-over-year growth in the fourth.

But more important than this aggregation of results is a (technical difficulty) -- Is the operator available?

-- continuing the long-term track record of growth at Ticketmaster, Interval and Match and setting the stage for sustained profitable growth in some of our newer businesses.

With that, I will turn it over to Doug.

Wait.

Wait -- apparently --

(technical difficulty) operational detail onto the financial results.

Beginning with retailing; while we are obviously disappointed with HSN's bottom line and gross margin declines that Tom discussed, top line growth of 3%, excluding America's Store was modestly encouraging.

We are focusing on improving our margins and our core merchandise strategy is the same as we've discussed previously and we are making progress.

We've created a differentiated brand identity, reduced reliance on some older core brands and suppliers and increased the quality of both product and process.

During the quarter, our active customer base was relatively flat and declined less than 1%, which is the lowest level of decline since December 2005.

We are retaining more of our repeat customers and our moderate to heavy users have increased 3.5%.

You are seeing this modest improvement in customer trends because we are executing on the strategy we laid out almost a year ago.

The merchandising team has broadened the assortments across all categories and the number of unique items aired during the period increased 10% over the same period last year.

The way we attract and retain vendors has fundamentally improved and personalities like Emeril Lagasse and Tori Spelling have introduced new products on air in addition to our existing partners introducing new product lines.

[Lafore's] success on HSN continues and has spawned several standouts like GoSMILE, Dior and T3.

HSN.com, under the leadership of William Lynch, who joined HSN seven months ago, is showing real progress.

Total visits to the site increased 7% in Q2 year-over-year and sales grew at a low double-digit rate.

Today we've relaunched the site, incorporating our extraordinary wealth of video content to create a new and truly unique online shopping experience.

If you haven't seen it yet, I encourage you to check it out.

Finally, as many of you know, HSN celebrated its 30th birthday in July, during which we witnessed some key successes in all categories, amidst renewed customer energy.

We increased productivity in both our core and new brands and had numerous product sell-outs in our new launches during the month.

In fact this past week, our worldwide launch of our new Thermolon Cookware sold out 24,000 units in just four hours.

And our July Fourth and Christmas in July events both produced double-digit growth in net sales versus the same events last year.

A turnaround in retailing never moves on a set schedule and it is very much an iterative trial-and-error process, constantly adjusted to learn from successes and failures.

We are in the middle of that process right now and we will continue to have challenges, but I do believe we are making real progress.

At LendingTree, macroeconomic factors continue to impose their will on the sector.

Lenders have lowered their appetite for risk and shifted attention to conforming products, squeezing margins across all loan types.

Interest rates rose precipitously during the period, jumping close to 60 basis points from the beginning of April through mid-June, making it even tougher to grow our loan pipeline, and liquidity in the secondary market remains tight.

And continued stagnation in housing prices means that many customers who want to refinance simply can't.

These challenges are all reflected in LendingTree's numbers.

Revenue and OIBA were approximately $100 million and $2 million, respectively, and key operating metrics continue to soften.

(inaudible) rates and close rates dipped 17% and 32% respectively, below where they were two years ago.

Revenue margins per loan sold have declined 18% year-over-year.

Under our new CEO, C.D.

Davies, we have a revamped management team and a plan is in place to address this market.

There are several key initiatives that we are aggressively tackling.

Following a 20% work force reduction, we've realigned our sales teams at LendingTree Loans to focus more on conforming loan products, shifting away from home equity and sub-prime.

But we will continue to test the waters on those products as appetites in the market returns.

We've also delayed spending on all but the most critical technology products until profit margins stabilize.

But we are investing in sales force automation technology that we expect to implement by year end.

LendingTree's marketing remains a bright spot.

We continue to shift dollars in realtime to our most profitable products, while testing new creative and increasing site conversion significantly.

Going forward, we are working hard to improve automation, streamline our processes, improve how leads are transmitted to the lender network and keep our costs low.

We are now better positioned for sustained profitability throughout the remainder of the year, albeit at current modest levels.

And as margins return to normal, we can grow again as a much leaner operation.

Turning now to Ticketmaster, which faced difficult comps during the quarter compared to the prior year period and followed a record quarter for ticket sales in Q1, partly due to some summer concerts going on sale earlier than normal.

Ticketmaster remains the premier destination for tickets, with over 40 million registered users on the site.

Additionally, the development and rollout of our Auctions and TicketExchange products continue to gain traction.

Twelve national tours enabled TicketExchange for the majority of their event dates, including The Police, Keith Urban, Kenny Chesney and Justin Timberlake.

We ended this quarter with 263 venues participating in TicketExchange, up from five a year ago.

We have added more than 165 since the end of 2006.

Volume of tickets sold via TicketExchange in Q2 '07 was nearly triple that of Q1 '07.

The number of auctions conducted this quarter grew 41% versus the same period last year.

Recently, we announced our intention to acquire Paciolan, a ticketing software and services company, providing a ticketing solution to those clients wishing to manage and distribute their own tickets.

This would provide a new avenue for future growth for Ticketmaster, particularly in collegiate sports, and enable it to offer an entirely new array of customers and a wider variety of ticketing services.

Still in the transaction sector, our real estate business is making real progress in a difficult market.

Company-owned brokerage continues to expand its footprint in its nine markets.

108 more agents joined the business during the quarter to work on 20% more leads than in Q1.

Agents and house hunters alike are warming rapidly to the model.

Meanwhile, ServiceMagic's success is building on itself, with customers and contractors increasing nicely.

Service requests increased 51% and the number of service professionals grew 21%.

Repeat usage and the average spend per service professional continued to grow during the quarter, expanding 67% and 29% respectively, a real testament to the service this business provides.

Our Membership & Subscriptions sector; Interval once again posted excellent results.

Marketing programs and inventory gains drove an 8% increase in transaction volume among Interval's members.

At Match, solid revenue and OIBA growth was driven primarily by a 10% increase in revenue per subscriber.

Overall subscriber growth remains low with domestic declines resulting from price increases late last year.

In Q2, our first marketing campaign promoting Chemistry.com drove substantial growth for this business.

Previously, 80% of Chemistry subscribers came from cross-selling to existing Match.com traffic.

Now two-thirds of Chemistry's subscribers are coming directly to Chemistry, making the right trade-off between subscriber growth and pricing, along with constant product and service innovation has been the recipe for success in this business and we're working to insure we continue to strike the right balance.

Our Media & Advertising sector grew revenue over 30% this quarter, driven largely by growth in our syndicated search and Fun Web Products businesses.

The latter continues to demonstrate explosive growth.

Zwinky.com now has over eight million registered users, spending on average 64 minutes on the site each session.

The recent April launch of the Zwinky Virtual World, Zwinktopia, has led to over 15 million transactions, using the Zwinky virtual currency called Z-Bucks.

In addition to monetizing through search, there are clearly e-commerce opportunities with Zwinky, as well.

Query growth over at Ask.com was slower than we would like due in part -- due to less effective marking spend in the period, comping against the successful March 2006 rebrand and relaunch of Ask.com.

Queries did grow but revenue per query declined slightly because the new Ask 3-D, launched in June, is a much better experience and most users click on the paid links fewer times than before.

Early indications are that users love the Ask 3-D experience and Ask's net promoters score has risen 32 points following the launch.

Abandonment rates have declined 25% and users are using the zoom feature and increasingly using the right pane in the search results where our new morph algorithm serves up videos, images and related content for every query.

User retention and search frequency are up 8% and 5% respectively since the launch, which in the long run will more than offset RPQ decline.

Before I close, I would like to highlight a couple examples of our continued integration efforts across IAC.

Mentioned on the last call, we were collapsing our CPM advertising spend on to a single platform.

We've made fast progress here and have successfully migrated 97% of our buying to the platform with the rest to follow shortly.

On the sell side, we expect to be fully migrated to a new platform by early 2008.

We have also started a pilot on behavioral targeting, leveraging the common data across IAC properties.

We think this will enable us to better serve up content, services and adds that are directly relevant to the user.

Finally, leveraging both our deep pools of content across our many verticals and our significant experience in search, we continue to build out specialized tool bars.

The latest example of this is our Ticketmaster Insider Toolbar, which launched late in June, and features services and content from Ticketmaster, LiveDaily, Ask, echomusic, Gifts.com and more.

Currently, this toolbar is available for download on Ticketmaster but we will look for other avenues of distribution as well.

We will soon launch a local services toolbars featuring content from Citysearch, RealEstate.com, ServiceMagic and Pronto, distributed on Citysearch.

By the end of the year, we will release six or seven more such toolbars which will help leverage our huge audience to drive Ask.com share.

With that, let me turn it over to Barry for some final thoughts.

Good morning, everyone.

You've heard from my colleagues about the numbers and the trends for the businesses.

This has not been a good quarter and you are not going to have any defensiveness from me.

And I do understand that there's no productivity in making upbeat promises for future quarters.

They will reveal themselves as they occur.

And while I do believe our growth is temporarily stalled and that the basics of our business and our strategies are sound, and that under any circumstances that I can foresee, we'll produce plenty of positive cash flow this year; the balance of the call should be to give you the most time for us to answer your questions.

I only want to add that while we didn't repurchase any shares during this period, not having done so doesn't change anything.

We have been and will continue to be net buyers of our shares over the long term.

You should not read into our long-term intentions based upon short-term inactivity.

We've brought in a ton of stock over the last years and quarterly activity or non-activity just isn't indicative of much.

You won't find us wavering from our policy of not commenting on any aspect of our share repurchases until after the fact in the official reporting periods, other than continuing to say that; one, we're long-term net buyers, and two, we purchase stock opportunistically.

With that, operator, let's please go to questions.

Ladies and gentlemen, we will now begin the question-and-answer session.

(OPERATOR INSTRUCTIONS) Our first question is from the line of Justin Post with Merrill Lynch.

Please go ahead.

Yes, thank you for taking my question.

Tom, could you talk a little bit more about the Ticketmaster trends -- really the variance in the quarter?

If you look about -- at the way the quarter is laid out, how much of the 2Q sales do you think might have happened in 1Q?

Can you quantify that versus last year?

And can you give us a growth rate in July?

I know you mentioned that in your remarks.

And then I have one follow-up.

Sure, Justin.

It's hard to quantify it precisely.

I think -- as I said earlier, the domestic business was really the weakest, kind of external market we've seen since probably Q3 2004.

So we've had kind of 10 straight quarters of uninterrupted favorable environment.

We did pull -- we did have a very good March.

And I think some of the Q2 volume may have pulled into Q1, but I -- I don't want to overstate it.

I think it was just a light quarter and it's hard to know exactly what that was.

We were comping against a very good quarter a year ago.

We've analyzed it kind of up, down and sideways.

There weren't the same magnitude of big blockbuster tours and acts, but it was also deeper.

Some of the on sales for the summer were -- in outdoor venues were light.

So it was really just the domestic volume industry.

And it was also a mix issue, because as we didn't have the concert volume -- last year, we were -- 64% of our domestic volume was in concerts.

This year it was only 58%.

So our -- our domestic convenience and processing per ticket was also off.

So when the volume is not there, you kind of get the triple whammy.

First the loss of the ticket, obviously, and then, because it wasn't there in music, you get the negative pricing mix.

Then we compounded our own problems by investing very heavily, perhaps inadvisably so in hindsight -- hindsight is always 20/20 -- but operating expenses were up sharply in the quarter, notwithstanding some of the one-time items we had in the quarter.

And so all three of those things came together.

And there's a lot of operating leverage in this business, and so when the volume is not there and you compound your worries, you get the double whammy.

July was solid.

We grew year-over-year.

It's early.

This is not a backlog business.

And we have been saying that quarter after quarter for years.

All we can say is, we are guardedly optimistic about Q3 and the rest of the year.

We don't think this was any kind of permanent sea change in the trend line.

A couple of follow-ups --

You can't -- I just want to -- you can't -- with Ticketmaster, it is not a business where you can really look quarterly, except -- I wanted to hone in on share, because that's really the relevant factor, share and expenses.

And share for the quarter was not affected.

Tom has talked about expenses.

But given that we are totally dependent upon selling tickets to concert events during this period -- not totally, but to a large degree, they will come and they will play or they will not play.

Timing -- they are not timing their appearance to our quarterly time period/reporting periods, awkwardly said.

Do you have a follow-up?

Yes.

I guess you are not going to give us the July -- ?

Maybe you could tell us if it was double digits or not?

And then on the balance sheet, we did see loans available for sale really come down quarter-over-quarter and then the cash was down.

Maybe you could comment on those two things and then I will let someone else ask a

Yes, I think the -- loans available for sale is, obviously, to some extent, an indication of going forward production.

And as Doug outlined in his remarks, and I did as well, there's no question the rate rise in the beginning part of the quarter has continued to impact what has been a negative trend line in this business.

That is -- obviously only applies to LendingTree loans, not to the entirety of our LendingTree business.

And I don't want to over-interpret the data.

It's not a straight line by any extrapolation from that figure to revenue for the business for lots of reasons that are too complicated to get into in this call.

But there's no question, the environment has been very difficult and production in our -- in our kind of captive brokerage operation is down in response to that environment.

Ending cash -- net cash down a bit quarter-over-quarter?

Sorry, Justin, could you just repeat that again?

I think your net cash was down quarter-over-quarter a couple of hundred million, what drove that?

We made a number of investments.

We were free cash flow positive, pretty good considering the seasonality issues I mentioned, in terms of free cash flow for the quarter.

We did make a number of investments in the quarter that -- that press releases have gone out on.

None that are overly major, but I think some of that timing drove that.

Thank you.

They added up to a couple hundred million dollars.

Exactly.

Next question, please.

Our next question comes from the line of Jeetil Patel with Deutsche Bank Securities.

Please go ahead.

Great, thank you.

A couple of questions.

You had mid single digit volume growth in '06, and the ticketing business looks like similar maybe this year, given the good performance in Q1, tougher numbers in Q2.

Can you just give us a sense of -- in aggregate -- if you are looking at mid single digit growth in aggregate in the business, on volume?

I guess can you just break down domestic versus international?

And I guess on top of that, when does Asia Pac start to impact numbers on the positive front as you potentially look at expanding there, especially with the Olympics coming up?

And then I have a quick follow-up.

If I understand your question right, Jeetil, I think through time we have gotten, despite our historical success, good volume growth both domestically and internationally.

Certainly because of the acquisitions we've made and the fact that some of these are more emerging, kind of less developed live event markets than the U.S., we would certainly expect over time the international volume growth to outstrip that domestically.

I don't have a good volume estimate domestically for the year.

I just said Q1 was very strong.

Q2 was down 7% in terms of volume.

And we are guardedly optimistic for the back half of the year.

How that adds up, we will see.

But certainly, the domestic market -- we are not going to extrapolate from one quarter to anything more permanent; although we do expect international will grow faster over an extended period of time.

In terms of Asia Pacific -- I think that's a longer term strategy.

Certainly the Olympics and some other activities we have going on there are a good catalyst for that.

I think it's not in kind of the financial planning horizon, in terms of the next several quarters, year out.

But I think longer term, it should be a good opportunity.

And in between, we have lots of other opportunities, including investments we've made in various European markets.

In general, if you look at the ticketing business -- or the number of acts on a year-on-year basis, flat or up, would you say, for the industry as a whole?

It's down.

It's down.

Significantly, and that is just again, it's a function of when people release their records and follow-up with tours.

It's going to ebb and flow.

Next question, please.

Thank you.

Our next question comes from the line of Aaron Kessler with Piper Jaffray.

Please go ahead.

Yes, on the Ask business, can you give us a sense for when do you expect increased frequency and retention on Ask to result in market share gains?

And on the marketing campaign -- how are you measuring the success on the marketing campaign thus far?

Thanks.

On frequency and retention in terms of market share, that's going to happen over time.

As you know, the business is related to driving new users, obviously frequency and retention.

We have seen good improvements in frequency and retention, but it's offset by not having the growth in new users on the Ask.com business.

And so the driver there will be the new marketing.

But I think the frequency and retention gains should start to kick in more Q4, later in the year, albeit they are small, as I laid out.

Small but certainly encouraging.

In terms of the marketing, we can very scientifically look at the marking spend in the U.S.

and relate that to new user growth.

And so the growth -- so the way to measure it is by new users showing up at the site.

And we are not seeing it with this marketing campaign, the way we have seen it with prior marketing campaigns.

What we are doing on that front is retooling the marketing campaign, making it much more -- much stronger call to action and a much -- much more product demo spots for later in the year and we hope that will have some effect.

Great.

Quickly on the lending business.

What kind of exposure does LendingTree have in rates of lower quality or higher risk loans versus the industry average?

Or is it pretty comparable?

I think we are -- it depends on the lender you would look at, but versus -- overall, we have a very low exposure to subprime and lower quality loans.

And now even less so, because we have really aggressively moved out of those products.

That said, we will move back into them once margins stabilize and improve.

Great.

Thank you.

I was just going to add on marketing -- on Ask.

The strategy that we used at the beginning of the year and for the first six months is a -- is brand related, more to make people understand that there was a different brand, Ask.com, as against the Googlization of the world.

And this was really a set-up to a more direct product-oriented campaign.

Which we are now just finishing the buying process for and will begin a little bit later -- I think a little bit later in this month, but predominantly September, October, November.

And we think that -- that it was effective.

It was not necessarily effective on day counts of additional users for queries for Ask, but -- or new users, but it certainly was effective in repositioning Ask and introducing Ask X, which is the new Ask.

There's no question, given the product reviews of it, we do have a compelling product.

We have got to be more direct in telling people about it, which is our plan for the balance of the year.

Next question, please.

Our next question comes from the line of Anthony Noto with Goldman Sachs.

Please go ahead.

Thank you very much.

I had three questions, Barry, and I will ask them in succession.

My sense is you will not answer the first one, but I have to ask.

Last call, you had mentioned that you had not bought back stock because you were in the process of potentially pursuing some type of transaction -- or being involved in a transaction.

I was wondering if you would comment -- if that is, again, the same reason this quarter?

Oh, that's a pause?

I thought you were going to do all three questions.

Well, I figured I'd let you answer one.

You are giving me the opportunity to be -- not responsive, cumulatively?

Yes, sir.

So no, I won't answer it.

I mean, I -- as I say, we just can't get into the area -- other than when we are, so to speak, blocked from doing so.

So I guess the absence of a comment is a comment.

Great.

That's helpful.

Second question, you've talked in the past about the fact that you are paying higher cash taxes this year than previously.

And that it may be beneficial to shareholders to protect some of the pre-tax income through leverage.

Obviously, the credit spreads in the credit market have widened, making the cost of debt greater.

Has your view -- ?

-- (inaudible) of Expedia, as you may know.

Correct.

Has your view on that changed, given the credit market and -- obviously different capital structure and free cash flow characteristics of IACI?

Well, the cash flow characteristics of IAC are similar to those of Expedia.

Produce at both companies very large cash flows.

And we do not have -- we have no leverage.

Or what happened with Expedia, which is that when we set out -- when we made our announcement, that -- we announced our tender offer for $3.5 billion.

Everything -- every respect said to us that getting the money on decent terms was the easiest trick.

And the initial discussions were exactly what you would expect.

What happened is that every day for about three weeks it literally changed, where at the end, there was -- there was and is a credit freeze up.

It will abate, more than likely.

Certainly, it will abate at some point.

And when it does, you would see us doing -- both for Expedia and for IAC -- sensible leverage in the companies, which we know makes sense.

We're desirous of doing it.

You can't do it during a credit freeze -- not really freeze, but it's pretty cold.

That's our intention, and -- and no extraneous reason other than some -- some pretty extraneous reason, will deter it.

Great, then last question, Home Shopping Network continues to obviously be a challenge -- and you have the right people there.

I was just wondering if you could comment?

Is the opportunity to do an asset swap with HSN still a possibility or is that dead in the water?

I don't know that it's dead in the water.

I mean, the issue is that I believe we -- we have very good management at HSN.

I think we are beginning to see the -- the signs of that management -- after a relatively short time, we are beginning to see the signs of what is just much clearer -- I mean, just look at HSN and look at the new products we are introducing.

And some of the very big days -- we had a $13 million day on Sunday -- Sunday or Saturday -- Saturday, I think it was.

So when the product is there, and it's getting there with more and more frequency, the early teething problems that come with having a new group of people are working their way through the system.

It's not going to be overnight, but we are very confident that as time goes, that HSN is going to be very competitive.

Now relative to an asset swap with Liberty and discussions we have with them, as you all know, discussions between -- particularly maybe these parties can go on endlessly.

And it probably will continue at some point.

Whether or not it will ever be in our interest to do so or in their interest, I can't really tell you.

Great.

Thank you.

You're welcome.

Next question, please.

Thank you.

Our next question is from the line of Mark Mahaney with Citigroup.

Please go ahead.

Thank you.

I wanted to ask two questions, please, related to the Ask business.

First, any update or new thoughts on the Google relationship and the potential for substituting away from that?

And secondly, as a strategy for bringing in new users, any thoughts on using points or contests with prizes as a way to attract new users like Microsoft has been doing with Windows Live Club Search?

Thank you very much.

We have looked at prizes and ways of incentivizing.

We still look at them.

We don't -- we really think the best approach is a direct one.

Our product is compelling.

It is definitely differentiating -- than other search products.

And over time, we think it's going to get adoption.

We use any trick we can to get there.

If we ever find a good scheme on points, rewards, prizes, we will certainly use it.

As it relates to -- to renewing our very long association with Google, which expires December 31st, we are in the position we hoped we would be in when we originally got into this and purchased the Ask Jeeves company.

Which is that we have interest and discussions from the three ad networks and -- and that interest level is good enough for us to believe that whatever happens with this, we are going to be in a very good position '08 for our ad business.

I think that's kind of a full answer, unless anybody else here wants to say anything.

Thank you very much.

Next question, please.

Our next question is from the line of Brian Pitz with Banc of America Securities.

Please go ahead.

Thanks.

Can you provide a little more color with respect to Ask margins in the quarter?

As well as the longer term outlook there?

And as a follow-on to a previous question, do you expect the Ask marketing spend, going forward, to be as heavy as it was in the second quarter?

Thanks.

Can you repeat the first part of your question again?

There was a little scramble.

Sure.

Just with respect to the OIBA margins for the Ask business in the quarter, can you give us a little more color as to what was driving those margins?

And then some outlook, going forward, in terms of improvement on that side?

Thanks.

Yes, I will take the first part.

We don't break Ask out specifically.

But we have been investing in Ask.com, with both kind of product and technology investments, as well as marketing investments -- as we indicated previously, was heavy in Q3.

We saw some query growth in the U.S.

business but we are still at the very early stages of kind of adoption and promotion of Ask 3D, which is what we are calling the new product.

We also had negative year-over-year revenue per query impact in the Ask business.

We think that's good news in a sense, because as users were using the new product, they were clicking on the paid links more and interacting with the algorithmic -- clicking on paid links less, sorry, and interacting with the algorithmic links more.

We think that is a favorable user experience, we saw retention increases and frequency increases as a result of that.

But it does have that kind of short-term impact on revenue until you build up that user base further.

So all kind of a long preamble but the Ask business remains a continuing investment business for us.

It was in the quarter and we expect it to be going forward.

The good news is, and you see it in our aggregate Media & Advertising results, we are getting very strong performance, both top line growth and profit margin growth in our Fun Web Products business, our syndication of network businesses are very strong.

So we have the luxury of being able to invest in Ask.com, while still doing just fine from an overall Media & Advertising perspective.

And to the point of marketing spend and will it continue, I think -- it will continue and the reason is we have now got an absolutely fantastic product that consumers are reacting to very, very well.

It's truly differentiated in the market.

And we have got to tell people about it so we can grow shares.

We are going to do that smartly and we are going to do that and expect to get share gains.

The other point to what Tom said is all of this toolbar business and consumer applications business also helps to get -- not only drive significant OIBA for the Company that we can reinvest in advertising, but also gets the Ask brand out there on millions and millions of desk tops.

Particularly with young people.

Absolutely.

And that's a very good point, too.

Those products are all targeted at young people, which, we think as you turn them, that certainly helps.

When people begin their habits, rather than having already hardwired to Google, is a very good opportunity for us.

Great.

Very helpful.

Thanks.

Next question, please.

Our next question is from the line of Robert Peck with Bear Stearns.

Please go ahead.

Yes, hi.

Just sticking along the same current theme; could you comment a little bit about in Ask, what you are seeing as far as -- click- through rates, it appears, I guess, they are down.

But we would have guessed that maybe it would have been offset by CPCs?

And secondly, Barry, could you also talk about -- we love a lot of the products on Ask.

Are there any barriers to entry there to prevent a Yahoo, a Google, et cetera, from replicating it?

And the last question, Tom, Fun Web Products; could you tell us what percent of Media & Advertising Fun Web is?

Thanks.

The first one.

I don't want to go through the metrics in specificity, we don't divulge them.

But just generally, coverage was down as we saw -- kind of a continuing trend towards less commercial queries.

We were getting CPC rates up, but not enough with the coverage decline and the click- through rate decline, so that the overall RPQ was down on Ask, specifically, in the low single digits.

We have seen this before.

When you change the product, you get very different monetization impact.

And there's very subtle changes you can make that will change that and skew that.

We don't worry at all about short-term blips in monetization.

As I said, retention was up 3%, frequency was up 4% on Ask in the quarter.

As long as people are using it, we can tweak the monetization.

And in the underlying ad networks, Google's performance has been just fine.

We will make our money.

Your second question?

The second question was about barriers to entry.

There are none.

But one thing that I think has been consistently true -- certainly consistently true over the last two years -- which is that the group at Ask has continued to innovate, they continue to be on the leading edge, I think, of search innovation.

And I think they are going to continue to be.

The differences between search engines are profound.

Meaning Ask as against everyone else.

Because Ask's concept of searching deals with expert community rather than simply popularity -- allows us to do a whole series of things; smart answers, it allows us to do -- really easily expanding or narrowing your search.

It gives you much better context.

Now I'm not saying that people can't copy that, they can, but I doubt that the other search engines are going to do so, because their whole concepts are different than ours.

And the last question, the Fun Web business is approaching 20% of the search and media revenue.

The Media & Advertising number we report also includes Citysearch, so it would be down into the mid-teens, I guess, of the reported segment.

But it's been growing very quickly and, again, at good and healthy margins.

And that's probably all we'll say about that.

Thank you.

Our next question is from the line of Jeffrey Lindsay with Sanford Bernstein.

Please go ahead.

Hello.

We wanted to ask you a little bit about Match.com.

Overall, if Match.com's revenue grows at 1% and international group 13%, does this imply that the domestic business shrank?

And if so, by how much?

And secondly, we know that marketing expense was up in international group.

Is it the case that marketing expense was up because of the growth in the international business?

Thank you.

The North American business was off slightly on a subscriber count basis, but it grew on a revenue basis.

We implemented a pricing change at the end of last year and we really try and optimize -- although we certainly want a very healthy subscriber growth base, just for the liquidity of -- kind of the service and the quality of the service market by market.

We are constantly tweaking with pricing and packages and things like that to try and optimize the business from a revenue perspective.

So that's kind of our first test.

And we grew quite nicely in kind of mid-single digits in our North American business year-over-year in the quarter.

There's no question the international business is growing faster, on both a sub basis and a revenue basis.

And as we look at those markets, and it varies market by market, they can be anywhere from one to three years behind where the U.S.

market is in terms of development.

And we have pretty good share in a number of countries, we're certainly the largest pan- European competitor.

So we think that's healthy for the business.

While we have good share in some places, we are going to be really aggressive in every place where we can compete -- we should compete much more strongly in certain markets where we're late entrants and haven't been as strong.

So that you'll see -- certainly in the next year or so.

Next question, please?

Our next question comes from the line of Jeff Shelton with Natexis Bleichroeder.

Please go ahead.

Thanks.

How much of the softness in the Ask.com revenue was related to international versus domestic?

Another question; you indicated that traffic acquisition costs for you guys was going up.

Have we reached a point where that stabilized?

Or do they continue to inch up?

Finally there was some cross talk, when you were talking about the OIBA expectations for the year -- the remainder of the year.

I was hoping you could mention what those are again?

Thanks.

Sure, let me take the first and the third and I may ask you to repeat the second unless my colleagues got it.

First of all, there was no softness in the Media & Advertising line.

We had a very strong revenue quarter there, up over 30%.

And in the UK business, which is a smaller piece of our overall business there, revenue was -- we don't break it out separately -- it has not grown as quickly.

It's been a very competitive market for us.

We are rolling out the same products and marketing strategy that we are doing here in the U.S., but certainly didn't negatively impact the aggregate segment, because it's a small piece of the aggregate segment.

On the third question -- and I will turn it over to my colleagues in a second.

The only thing I said earlier was that, as it related to Q3, we were looking for a flat operating income before amortization quarter year-over-year.

Obviously, plenty of moving pieces to that, but that was what our target was.

And on the traffic acquisition costs, I wouldn't read much into that in any quarter-to-quarter swings.

At the end of the day, that business, which has been doing very well and continues to, is managed for OIBA -- managed for OIBA growth.

And they are doing a great job signing up new deals.

Some of those deals come in at higher margins, some of them come in at lower margins, in terms of tack.

But what is great about that business is, not only do we have a very good syndication business with the Google length, but in addition, our own Ask sponsored listings business is doing very well.

It's adding thousands of new advertisers and it's growing and it's doing just fine in certain key verticals.

Next question.

I think we will do two more questions.

We want to be (inaudible) here today.

We don't want to cut anybody off, but we've been at this for an hour with you -- and we'll let you get to other earnings or other things.

Let's do two more.

Next?

Our next question comes from the line of Doug Anmuth with Lehman Brothers.

Please go ahead.

Thank you.

Can you provide an update on the L.A.

on-air distribution for HSN?

And then secondly, Tom, can you comment on how we should think about the legal expenses for Ticketmaster, if these are really one quarter in nature?

Or if we should think about them as a little bit more ongoing?

Thank you.

Yes, the -- we are still not back on our analog distribution.

We have digital carriage in L.A.

For those that don't recall the history, we have agreed to work with Time Warner on some capacity issues they have there related to the acquisition they did.

And we agreed to kind of temporarily give up our analog distribution at their request, with the expectation that it will return.

I don't have a precise estimate on it.

But that continues to be our understanding with them.

On the Ticketmaster legal, yes, it was one time.

And that's probably all we need to say.

Great.

Thank you.

Next question -- last question.

Our next question comes from the line of Imran Khan with JPMorgan.

Please go ahead.

Yes, hi.

Thank you for taking my questions.

Two questions.

Media and advertisement business is seeing strong growth from syndication business.

If you look at your competitors, their syndication or network business growth rate decelerated significantly.

Trying to get your perspective on what kind of confidence level you have on the growth of that business?

And secondly, not to nitpick -- the return rate for Home Shopping Network was high.

I think the highest since Q1 of 2002.

What are you doing to reduce the return rate?

And why do you think the return rate was so high?

Thank you.

Yes, on the first of your questions -- the growth has been very strong.

You see it in the metrics and it's been an increasing percentage of the mix.

It's like a lot of things.

It's hard to predict that it will sustain at these levels, but this market is growing explosively.

What we are finding is that, notwithstanding that as we work with various partners -- notwithstanding that it's competitive and there are other people in there -- we approach clients with customized solutions, things that in certain cases, maybe, competitors won't do -- focus on service, focus on meeting their needs and we win some attractive business.

Sometimes it's at a higher tax rate than we would prefer but it's still profitable.

And the business has been a very nice driver of our results there.

Can it continue at these levels?

I don't know.

There's a lot of business, though.

We don't see anything that says it's necessarily going to slow.

We will just have to see how it plays out.

On the HSN return rate question -- we have been seeing higher return rates for the last several quarters.

We have analyzed this top down and sideways.

And our best bet -- and it's an instinct more than something we can prove absolute, because it tends to cut across a number of different product categories -- is that it relates to changes we made that actually made the product easier to return for customers in -- phased in, but it was basically in the back half of last year.

And this is an easy return thing where you can pick off the label and put it on.

It's much easier to get the product back.

We think by doing that we have encouraged -- and again, this is one of these things again -- once you comp it -- comp the year when that was implemented, that should benefit you.

And if you are doing the right thing by the customer, ultimately you will be fine.

And every other possible cause, in terms of product quality, complaint, everything else, is not something that we can -- we can put our finger on it.

So we are hoping that's it and we are hoping that will change once we comp that and ultimately lead to increased loyalty.

Well, with that --

Great.

Thank you.

With that, we thank you all.

And we look forward to talking to you next quarter.

And we are hopeful that the -- that that quarter is going to certainly solidify from this quarter's core performance.

And nothing that we see today, thus far, would make us feel otherwise.

So thank you all.

We'll talk with you soon.

Ladies and gentlemen, this concludes the IAC Q2 earnings conference call.

You may now disconnect.

Thank you for using ACT Conferencing.