Match Group Inc (MTCH) 2015 Q4 法說會逐字稿

Good day and welcome to the IAC Reports Q4 2015 results conference call.

(Operator Instructions)

At this time I would like to turn the conference over to Mr. Jeff Kip. You may begin.

Thanks, operator, and thanks everybody for joining. Our apologies for starting a little late here. We wanted to give everybody some time to get over from the Match call. Welcome to the IAC fourth-quarter earnings call. I'm here with Joey Levin, our CEO. Again, Match Group just held their call prior to ours, and answering questions regarding their release and prepared remarks.

We'll be focusing on IAC [X] Match on this call. As a reminder, we're not going to read the prepared remarks which we released last night. They're currently available on the Investor Relations section of our website.

Before we go to Q&A, I want to remind you that during this call we will discuss our outlook and future performance. These forward-looking statements typically may be preceded by words such as, quote-unquote, we expect, we believe, we anticipate, or similar statements.

These forward-looking views are subject to risks and uncertainties, and our actual results could differ materially from the views expressed today. Some of these risks have been set forth in our fourth-quarter press release and our periodic reports filed with the SEC. We'll also discuss certain non-GAAP measures today, which as a reminder, include adjusted EBITDA, which we'll refer to today as EBITDA just for simplicity during the call.

I'll also refer you to our press release and again to the Investor Relations section of our website for all comparable GAAP measures and full reconciliations for all material non-GAAP measures.

With that, we'll get to your questions. Operator?

(Operator Instructions)

Jason Helfstein, Oppenheimer.

I will start with two, the first, in the prepared remarks, you talked about suspending the dividend, and you talked about priority, and kind of why that made sense from a financial perspective, partially having to do at the leverage, and then some of the investments you guys are making in Match. But then you also talked about acquisitions and whether the focus would be in buybacks.

Maybe can you help us prioritize, are buybacks more a priority, or are acquisitions a priority, and are there any tax or issues where could you not buy back stock if you are contemplating a spinoff of Match. Secondly, on Angie's List you clearly decided to make your discussions with them public versus you could have kept that private, maybe comment on why you did that, and maybe give us since you have made that public, what you think the strategic rationale for merging the two businesses are?

Thanks, everybody, from the switching from the West Coast speed to the East Coast speed this morning, and sorry for the delay in between. I think if we are going have that delay in the future, maybe we should sell the commercial breaks, some ad space, and make money in that.

On your questions Jason, first buyback versus acquisition. We do both of those things opportunistically, so I'm not going to say we favor one over the other at the moment right now. I think there is opportunities in both, and we constantly evaluate one against the other and we will continue to do that.

There are not any tax restrictions I am aware of that limit our ability to buy back IAC stock right now. In terms of how we think about acquisitions, there is really two buckets of things to acquire. One is to help or add to our existing business, and the other is totally new businesses.

Certainly our track record, and adding to existing businesses, is I think very strong, and there is a reason for that, which as we know those businesses well, we can evaluate them, we can understand what trends look like, what trends shouldn't look like, and sometimes we can know those businesses as well or better than the seller at least certainly better than other buyers. We focus capital there, and we will continue to focus capital there because I think we can get good returns.

But we also have to think about the long-term future of IAC in the next 5, 10, 15 years, and we want to start planting some of those seeds now. Those tend to be a little bit riskier, but we also going to be more conservative with capital there. Hopefully, that gives you a sense.

In terms of Angie's List specifically, the reason we made that public is we talked to the-- we tried at least talking to the board and management team for quite some time without much success, so we said why don't we put this out there and see how the shareholders feel, and the shareholders clearly responded that they were not interested. That is really it.

Sorry, your last question was, what was the rationale for the deal and the strategic rationale for the deal? I think that one thing that Angie's List has done a very nice job of is building their brand. They put a lot of money into that, and I think that has value, and that is what we were interested in.

Like I said, we put something out there, we tried to engage with them, and they were not interested. That is the story.

John Blackledge, Cowen and Company.

Couple questions, could you walk through the bridge from the $300 million Search EBITDA to the $200-$225 million Publishing and Apps guide, what are the moving pieces, how we get there? And then on HomeAdvisor, domestic growth was really strong again in 4Q, and the guide for FY16 indicates total revenue growth could accelerate, may be discuss the drivers there? And then just on Angie's, are you still interested in Angie's?

I will take quickly the bridge. In terms of the $300 million, I think the thing you have to realize is that as we said about 20% of that in the remarks is going to be in Publishing, and about 70% of that will show up in Apps, and you have an impact on the Publishing side of some investment that is coming in from the Daily Beast, and then you also have some profit that is moving out in terms of PriceRunner that is going to other. When you think back to the prior year, the $300 million was, call it $180 million, $185 million and $190 million, and then you had $25 million of that total impact of Daily Beast investment and PriceRunner profit moving to get you back to the $300 million.

I think that bridges the pieces there for you. Want to take the HomeAdvisor question?

Was HomeAdvisor driving growth acceleration? So, there's a whole series of things, and many of which we have talked about. Huge investment we've made over the course of 2015 in the brand, and television advertising, and advertising in general.

We, I think, tripled that year-on-year, and we will grow that again in 2016, and that has, to few effects, certainly builds brand awareness, which is great, but also brings in a higher quality lead, which is good for the service professionals because it delivers higher converter for the service pros and better jobs. That is one.

The second is related-- all of these really reinforce each other. The investment of the sales force, again a huge investment in the sales force, in 2015 I think we grew that something like 40-something percent, and that brings in more service professionals, which brings in more coverage, which makes the marketing more efficient, and also brings in better service professionals.

We have changed our sales process meaningfully over time and our incentives meaningfully over time to bring in the right service professionals and retain the right service professionals. Which goes to the next thing, which is retention and revenue per SP. With better leads coming in the door, the service professionals hang around longer and spend more money.

All of those things reinforce each other to deliver real growth for 2016, and we will continue to step on those same levers, meaning we will continue to grow the sales force in FY16, we will continue to grow the marketing spend in FY16, and of course, behind all of this is product. We talked a little bit in our remarks about InstantConnect and InstantBooking. We think those are really transformational products for the category, fantastic for consumers and fantastic for service professionals, and we can see it directly in the customer feedback. We would like to really grow those products, and so far the trajectory looks really nice.

Want to add something?

The only thing I was going to add is that some of this is mathematical, in you had higher domestic growth in 2015, but you had decline internationally because of the restructuring we did getting rid of unprofitable revenue lines at the end of 2014, and that drag on a consolidated basis is going to go away and give you potential consolidated acceleration. I don't think we expect the domestic business to continue to accelerate all through this year. In fact, the domestic business may come in a little lower on a percentage basis even though it will add tremendous sales, and all the factors Joey is talking about.

This is a question on are you still interested in Angie's List?

Yes, like I said, we put an offer on the table, we attempted to engage with them. They had no interest. In the meantime, things have changed, markets move.

We have a lot going on ourselves, we have a business to run, and we have a ton of opportunity in our business. We are focused on our business right now. I don't really have more to say than that.

Brian Fitzgerald, Jefferies.

Two quick ones, maybe on HomeAway first, it was strong again. How do you think about share shift in the industry, do you feel it is kind of accelerating towards you, and what do you attribute that to? Maybe you already answered that, but just want to know if you feel like it is moving in your direction, momentum-wise?

And then on Vimeo, historically you have talked about being focused on the user experience, not wanting to disrupt that with any type of advertising, but given the type of content there, we think a simple pre-roll there even is palatable for sure. How do you think about the advertising opportunities there?

You mentioned HomeAway, which is sort of tangentially in the family, but ours is HomeAdvisor. We do think it is gaining share in the category.

I think -- that is almost irrelevant at this point, in a sense, that the category is so big and so under-penetrated with these kinds of solutions, that there is enormous runway before you get into share shift. But I do think, from a service professional perspective, that is, really meaningful, meaning, we're starting to see service professionals, we have for a long time, but more and more we see service professionals meaningfully build a business on the back of HomeAdvisor.

I got an email from a customer the other day that was saying the vast majority of their business, the million dollar business in pest control, the vast majority of that is coming from us, and they watch the leads from HomeAdvisor to the minute, because if it turns off for a day, it makes a difference on their business. From a service professional perspective, I think we do see that, but it's a huge runway.

On Vimeo and advertising, I wouldn't rule it out completely, but it is not a focus right now. The reason it is not a focus is because I think part of what meaningfully differentiates the user experience and the service professional experience is not having ads. I think a lot of people, certainly YouTube has been phenomenal in that category, and a lot of others have come and gone in the video space or the video aggregator space with an ad-supported model.

Ours is different, and the lack of ads enables a lot of things. It enables a cleaner user interface, again both for consumers and creators. It enables a different sort of content, when your content has to service advertisers, there is less things you can do with that content, and sometimes our content can be a little more interesting as a result of not having to work within those constraints.

It is not a priority right now. At some point if our creators say, boy, we would really like to show ads, and we'd really like that service available from you guys, it's something we think about, but right now that is not a priority.

Ross Sandler, Deutsche Bank.

One for Joey on Publishing and Apps, and then a follow-up on HomeAdvisor. Joey, do you feel like with the new agreement, the $1 billion revenue trajectory you called out last quarter and this new $200 - $225 million in EBITDA should be stable for the duration of the deal, or is it just too hard to predict? And are there any terms in the new agreement that allow for some predictability, and do you feel like the stuff that you had to clean up on the legacy business has been de-risked fully to support this new EBITDA run rate? Any comfort there would be helpful.

Then, Joey or Jeff on HomeAdvisor, the trajectory looks really solid, and you called out that you expect to see a strong ramp in EBITDA in 2016 after this big marketing push that you did in 2015. How does the strategy to hit that 2016 goal change, and how could your strategy in 2016 change from here if Angie's List decides to ramp up their marketing, or if other competitor responses are needed?

On Publishing and Applications, Ross, I think we should be able to grow from 2016. I view 2016 as a trough for the business. And it is, this business is not perfectly predictable; it has had volatility in the past, but if you look at where we took the hits specifically on the new contract, it was in the areas that had been the most troubled, and that had had the most volatility, specifically the Apps business and the B2B partnerships business.

I do think that alone improves predictability or limits volatility to some extent. The other piece I would add is, over the course of this contract negotiation, one thing that Google certainly did was go very deep through all of our products in all of our practices and affirmed the thing we were comfortable within the contract going forward. I feel reasonably comfortable about that.

Google is a big machine that moves in a lot of different directions, and you cannot eliminate the risk that things change unfavorably to us but in the scheme of time and in the scheme of recent history, I would certainly feel more comfortable and confident now than I have historically, really based on that process of the contract, and based on the specific changes that we made in the contract and which businesses were most affected by that. When you look at the outlook for Premium Publishing, sorry Premium Brand within Publishing and consumer Applications, I think that from 2016, those businesses should grow.

On HomeAdvisor and the strategy, we are focused on the long-term there. I think, I have said that a few times, and I will keep saying it. We are focused on taking share in the category and growing.

We are able to do that with margin right now, and I suspect we will be able to do that with margin going forward. I don't really worry about other people marketing. I think, again, it is still so early in the category that category awareness, the overall category awareness probably trumps competitive back and forth.

The other thing is, in the -- I believe that the size of our service professional network provides a meaningful competitive advantage, along with our business model. For other people to spend on the scale that we are spending, I think it would be very difficult for others to get the same return that we can get on that spend. When we spend our marketing dollars today, all of our marketing dollars today, aside from the usual experimental dollars, all of our marketing dollars today come at a clear, very clear positive ROI, and I would expect that to continue. You want to add to that?

No, I think that is right. I think you have to have the capacity to absorb the consumer demand. We have double the service providers anybody else does, and I think if you expand your consumer spending when you do not have the capacity to absorb that, you will have unhappy customers, because as we have said over and over again, the key to satisfaction in this business for the customer is getting matched with the appropriate service professional. The key to satisfaction of the service professional is having legitimate customers coming through the phones.

Eric Sheridan, UBS.

Maybe two on the advertising side, one in calling out the Publishing business, you talk about the opportunity ahead to capture off-line dollars. Wanted to understand better what some of the investments that might have you made, whether it's add tech, programmatic, to build out scale on the content side, to recognize that opportunity. And then going back to the comments on capital allocation, how do you think about broadening out scale in digital advertising and allocating capital to deepen your scale there?

On technology-- technology, specifically support ads, we're making real investment here. We started this actually within Dictionary.com, because we had a product that was certainly very brand safe, but also very generic in the sense that it appealed to everybody equally and wasn't particularly demographically focused.

We had a hard time selling that on a direct premium basis, because it was not a must-buy an because it was not narrowly targeted. We said, but okay, we have got great audience and brands are very comfortable being here, so how do we get the appropriate prices for this inventory? We looked at the data that we had across the other businesses, and said we know this person for example is buying shoes, or we know this person for example is shopping for travel or things like that.

When we know that data, we can sell them in a very brand-safe way within Dictionary.com with that information. We have gotten, that is an anecdote of how it works, and the technology behind that is very complex and only gets more complex over time. We are meaningfully investing in that right now.

We have seen huge returns and quick returns. We were doing a lot of that manually in the beginning, and we're moving that to a lot more automated over time. We've been moving that to a lot more automated over time.

We will continue to invest there, and I think we will see, we have seen leaps of 10%, 20%, 40%, 60% in CPMs on the programmatic stuff when we compare the right data with the right audience, and do it on products, sorry on properties, that we own and that brand-depreciate. That, I think, is your first question.

Your second question was, I think in terms of acquisitions, to get scale in digital advertising. I think we have made some contact acquisitions, About.com was an example, Investopedia was an example. I think we can today to look in that category for opportunities, things have been priced pretty extensively for a little while there now, but we found opportunities, and we will continue to look for opportunities there. I think that scale can be helpful to a degree there.

In terms of buying ad technology, that is not something we have ever done, and probably not something we're going to do in the future. We like to build those things, and we like to partner on those things, obviously we've had a massive partnership with Google in terms of ad technology for over 10 years, and that has worked out very well for us.

When these markets are competitive, we think we can capture the lion's share of a lot of the ad technology revenue through bidding it out to providers and getting a good share for ourselves. I do not see us making acquisitions in that category, but I think we could on the content side.

Mark Mahaney, RBC Capital Markets.

I wanted to ask a couple of questions back to HomeAdvisor. You talked about the very material increase of think you said 2,000 BPS in terms of the retention rate. Could you talk about where you think that can go, how many more things you can do to improve that retention rate, or is that a level that you think is sustainable or mature.

You talk about the long-term margin potential of HomeAdvisor, and finally on the international side, we know you have gone through your restructuring a little over a year ago. Is that international at a point now where you can get sustained growth for HomeAdvisor?

On your first question, Mark, there is step function changes in the model you make to move retention in huge chunks like we did. I don't think you can count on us moving in huge chunks from there, but I don't think it is mature in the sense the things that will move retention over time as being much more relevant to the service professional, and that is quality, that is technology, that is one of the things I didn't talk about what we were talking about what drives growth and what drives investment is the technology in our matching algorithm.

We have invested a huge amount in that matching algorithm. That can meaningfully move retention because there is a number of factors that you put into that algorithm. The specific task, the specific geography, pace in terms of how to get the leads to which service professionals over time, and matching the right consumer with the right service pro. The better you get at that, the more relevant you are to the service professionals, and the more they retain.

I think that over time, we can absolutely move it, we will absolutely move it, but we what I see it move in massive leaps. We will see it move incrementally, and we will always have a team full-time on trying to move retention. Our internal goal there is to always move that up. I think we will.

On long-term margin, we've talked about this a little bit before. Is this a business that, at maturity, could be at 20% or north of 20% margins? Sure. I think that is absolutely in the cards. But, near-term that is not going to be our focus. Our focus is going to be growing in ROI-positive ways for the near-term.

On international, I think we have now rationalized that. I think it is relatively small, and I think we can grow from there. The stage over the course of 2014, certainly 2014 and over the course of 2015, was stabilize it, stop the unprofitable businesses, and then refocus to get the growth.

Now we're on that stage of refocus to get the growth. I think that in terms of resources and priorities, there is so much ahead of us on the domestic business that it is hard to prioritize just given the relative size of the international right now, but we have to focus on that, we're going to focus on it, and I think we can grow it from here.

Chris Merwin, Barclays.

First one on HomeAdvisor, it shows very good momentum, obviously, but how do you think about the addressable market for the category, is it big enough in your mind to sustain this type of revenue growth for the next few years? And then secondly, do you see a pathway toward organic consolidation of the category even if Angie's List remains independent?

A second question on Vimeo, I know ads are not a priority, you mentioned that, but is there anything else you can do from a product perspective to maybe accelerate modernization? I know you've got an on-demand model now, but maybe you can create a SVOD model, or subscribers can get a premium share of content, just curious about any potential ideas there.

Both veery good questions. On the total addressable market for HomeAdvisor, we see numbers all over the place. The overall home-improvement market as maybe $400 billion or something like that, I could be off by $100 billion, but what is $100 billion between friends?

The addressable market within there is what you would spend on customer acquisition within that $400 billion, and could that be 5%, could that be 10%, I think those are reasonable numbers in there. If you look at us and everybody else in the category, it is, I think, tiny as a percentage of the total spend right now.

I think huge room for growth, and I do think growth rates are sustainable for a while. Who knows going so far out, but I do think growth rate there is sustainable for a while, and I think there's a lot of things we can do to be much more relevant to the consumer and the service professional over time. There are huge businesses built on adjacent services in the category, like home warranty and scheduling and things like this, that have huge off-line businesses right now that I do think makes sense in this category over time.

In terms of organic consolidation, I do think that is possible, if not likely, but who knows, you've got to see how the market evolves. On a product at Vimeo, a lot of the things you raised are absolutely things we are thinking about. I think we have to think about it in the Vimeo way, with the Vimeo creator in mind, and the Vimeo consumer in mind, but absolutely things that we're thinking about.

We do have today, we offer our creators the ability to launch their own SVOD service in a very limited way, but we're going to expand that, we have to expand that, and allow them to fully offer a robust SVOD solution for themselves. Whether we do an overall Vimeo SVOD offering is something that we're thinking about among a bunch of other things.

It is not a bad idea, and there is certainly merit to that, along with some drawbacks. It is something we're thinking about.

(Operator Instructions)

Dan Kurnos, Benchmark Company.

I appreciate the increased disclosure on this, hopefully it will give investors some deeper insight here.

I want to focus my questions around Search. High level, no real surprises, maybe bit more surprise in terms of bucket allocation and pacing. Joey, I want to break it into two parts.

Let's start with Publishing, and I will follow up with Apps. Can you just confirm that Q2 should be a trough for premium brands in term of revenue? Do you have a sense of when or if Ask and Other can return a sequential growth? On the margin side maybe if you could address the pretty steep decline to this high single digit margin on a comparable basis if you exclude the reallocation issues you mentioned earlier, and the timing of recovering that margin if possible?

And then I will ask the Apps question afterwards.

The first question is-- I might have missed the second question-- the first question is when will Ask return to growth?

The questions were trough in Premium brands in Q2, yes or no, Ask and Other, can it return to sequential growth and how you are thinking about that, and then the margin question.

On Ask and Other returning to growth, I think it should return to growth after 2016, yes, and I do think that Q2, I do think that Q2 is a trough, although it is hard to say perfectly in a sense, because there are tail things that run off, and new things that start, so it is a little imperfect, I cannot say it precisely.

On overall Search & Applications, I'm sorry, your second question was on overall Search & Applications?

No, on the margin on the Publishing side, there is a pretty steep decline, call it high single digit margin on a comparable basis if you exclude the investment in Daily and the pullout of profit, just want to get a sense of your expectations of timing and recovery in Publishing on the margin side, and how you are viewing that business and profitability in light of the new contract.

I think the key factor on margin is I think 2015, 2016 Premium is going to be stable in the mid- to-high teens, give or take. The big detriment you're having is significant decline in revenue against fixed expenses in Ask and Other, so that is where you're seeing the detriment in margin across the Publishing businesses. Does that answer your question?

That is helpful, so it is mid-to-high teens in Premium, that is what I was getting at. On the Apps side, we would assume partnership attrition will continue, so if that is the right way to think about it? And then on the margins side, given the profitability on consumers, is it fair to say that after the reset we should sourcing at least incremental improvements in margins possibly as soon as Q2?

I'll let Jeff answer the second part of that, but on the first part the answer is yes. Meaning, I think it is right to think about the partnership continuing to decline.

In terms of margin improvement following Q2, I think that you should see general growth going forward, although perhaps not 100% consistent quarter to quarter, depending on variability in marketing opportunities etc.

Does that answer your question? Before we go to the next question I do also want to go back to something Chris asked on Vimeo. One of the things, to the extent we go and think about SVOD offerings, I don't think you should think about us as going head-to-head against Netflix or an Amazon with their content budget. The thing about Vimeo is, it is a marketplace, it is a creator marketplace, a place where video sellers find video buyers and vice versa.

You look at the fastest-growing piece of Vimeo, it is what we call organic sellers, meaning what we call organic buyers, meaning we didn't touch the content in any way, it found the platform, and found its audience or vice versa on there. That is growing very nicely, and that is something we're going to continue to encourage and put in the tools to help those things happen. I do think within that framework, we may be able to offer more valuable solutions to the creators around subscriptions, but that is-- and to the consumers around subscriptions, but that is kind of the way we think about it.

Kerry Rice, Needham.

Just a couple of questions on HomeAdvisor, I wanted a clarification, in the metrics page versus, or the press release versus the home, versus the remarks, you mentioned there was 106,000 paying service professionals. I think in the press release there was something about 102,000, so what is the difference there?

106,000 is just as of today.

Then, I know again in the remarks you mentioned that you spent heavily on TV, it tripled, but have you changed the mix sense, as you went through 2015, maybe in 2016, where you continue on TV, scaled back online, or is there any changes there?

Then not a lot of discussion on Other. ShoeBuy is in there, and you obviously had a fairly impactful Q4. Should we think that as not being strategic, and you guys looking to do something with that? Or any context on how we think about Other going forward.

On HomeAdvisor marketing, we are growing all forms of marketing, so television is growing, but so is online, and all channels are growing. Television is certainly growing faster than other channels, so as a percentage of total spend, that will be higher by definition, but we are growing all of the channels.

On the Other segment, it is other in the sense that it does not fit naturally within any of the four main segments, so I suppose you can read something into that. It doesn't mean we need to do something there, or we need to sell or make a big move there, it just means it doesn't naturally fit within the other categories, and so if there is something to do with it over time we will, and if there is not something to do with it over time we won't.

Maybe one follow-up clarification, there was some discussion early in the call about I think the Premium brands, and I know that was about $300 million in 2015. Was that discussion about that same level for 2016, or was that just specific to 2015, and the breakout between the different components of Premium brands?

I think if you look at what we say about Publishing, we say that Publishing will decline next year, driven entirely by the Ask & Other businesses. We will take one more question, if there are any.

Heath Terry, Goldman Sachs.

I was wondering, on the guidance in the Search and Applications business you've adopted for this year, can you give us a breakdown or just a rough idea of what the second half of that is going to look like, just trying to better understand how much of that is related to trends we have been seeing in the business, versus the Google deal specifically that goes into effect in June.

The Google deal goes into effect April 1, so what we have done is we've given you some guidance on the first quarter, and then you can assume the second quarter is lower, and then in general as our businesses generally have, we will build from there, maybe not dramatically but I think you should think about it that way.

When you say "build from there," is that suggesting that second quarter is going to be the low point in the Search and Application profitability?

Yes, that's what we said earlier.

I think that is true on the Publishing side in terms of, it will be, Q2 would be down from Q1, and should grow from there. On the Application side it is a little bit more complicated, because, remember, as we started to say before there is a tail on that business, so there is older businesses, sorry, there is revenue from prior practices that continues to flow in over the course of Q2, and really longer than that but certainly most pronounced in Q2. I'm not sure that Q2 will be down from Q1 in the Applications business, but I'd still think of Q2 as probably a trough or close to a trough in the Applications business.

Thank you very much everybody, and as always, we are around if you have additional questions. Thank you.

Thank you for your participation. This does conclude today's program. You may disconnect at any time.