Match Group Inc (MTCH) 2019 Q2 法說會逐字稿

Good day, and welcome to the ANGI Homeservices Reports Second Quarter 2019 Results.

At this time, I would now like to turn the conference over to our CFO of IAC, Glenn Schiffman.

Please go ahead, sir.

Thank you, operator.

Good morning, everyone.

Glenn Schiffman here, and welcome to the ANGI Homeservices second quarter earnings call.

Joining me today is Joey Levin, Chairman of ANGI Homeservices and CEO of IAC; and Brandon Ridenour, CEO of ANGI Homeservices.

Joey and I will also address any questions you may have on IAC's second quarter results.

Similar to last quarter, supplemental to our quarterly earnings releases, IAC has also published its quarterly shareholder letter.

We will not be reading the shareholder letter on this call, but it's currently available on the Investor Relations section of our website.

I will shortly turn the call over to Joey to make a few brief introductory remarks, and then we'll open it up to Q&A.

Before we get to that, I'd like to remind you that during this call, we may discuss our outlook and future performance.

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

These forward-looking views are subject to risks and uncertainties, and our actual results could differ materially from the views expressed here today.

Some of the risks have been set forth in both IAC's and ANGI Homeservices' second quarter press releases and our reports filed with the SEC.

We'll also discuss certain non-GAAP measures, which, as a reminder, include adjusted EBITDA, which we'll refer to today as EBITDA for simplicity during the call.

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

We also may conclude the call a bit early.

We've heard from a lot of you that it's a busy morning with a lot of potentially conflicting reports out there.

Of course, the management team is available today, tomorrow and thereafter to address any other questions.

With that, I'll turn it over to Joey.

Thanks, Glenn.

Thanks, everybody, for joining us again.

In aggregate, another good quarter for IAC, though not flawless this time.

Everyone saw the Match results, I'm sure, and you can see it's just anabsolute rocketship there.

And not just the stock price reaction yesterday which was, of course, very strong, but really, what's exciting to us is what's underlying Match right now.

They're really delivering on almost every area we hope.

The team has really come together, but the product is doing a phenomenal thing for the world, which is making people happy.

And when there's so much going on, so many forces, it feels like, pullingpeople apart, it's nice to be part of the business that's really bringing people together and doing that globally.

And you saw for the first time this quarter, Match had more subs internationally than domestically, and that's, I think, a harbinger of things to come.

In terms of the underlying metrics, I mean, they're accelerating revenue, they're expanding margins, they're turning everything into true free cash flow.

And the best part is they're still investing for the future.

So Match is really in a phenomenal place.

In terms of ANGI, while we didn't love the quarter, we still love the business.

There's some things to fixbut I think our biggest problem there might have been just bad forecasting.

The business is growing 20% year-over-year.

We're adding service professionals.

We're adding homeowners.

We've got to get customer acquisition cost in line, which, I think, is a problem that we've addressed before in many of our businesses, and I'm confident we will address going forward.

And we're really excited about these pre-priced services and the promising future there.

Dotdash had another fantastic quarter.

I would challenge anyone to find a digital publisher who's doing what Dotdash is doing right now, really growing, accelerating margin, building brands, also investing for the future.

It's an exciting place to be with an exciting team.

Vimeo also saw accelerating revenues, and the rest of the businesses are stable and feeling good.

Of course, the news that was also in our release here, which we've said is also not really news, is that we've begun to more seriously consider spins of both Match and ANGI.

As you know, we talk about this every quarter and we think about this all the time, but we have advanced our thinking a little bit about the perpetual consideration, and we're going to start evaluating that more seriously from here.

And just wanted to let everybody know, that's where we are in our process.

I suspect we'll get a bunch of questions on that.

We won't be able to answer all the questions because it's early and it's a work in progress, but we'll do the best we can on questions there.

So let's start with the first.

Operator?

(Operator Instructions) Our first question will come from Eric Sheridan with UBS.

And of course, I'll follow up on the potential spin-off, hopefully, but I'll try to come at it from a different angle.

I know you're not going to tell us sort of the end result, but can you just walk us through what the thought process might be?

What are you looking for when you examine the businesses on whether they're ready to be spun off from IAC?

Just so we can better understand maybe some of the guardrails you'll be going through as the Board thinks through the process.

And then second, I thought it was really interesting in the letter, Joey, that you laid out the framework by which you invested in Turo.

And you also took, a minority interest without necessarily a path to control.

That seemed like a pretty big sea change for the company.

Want to know if I can get a lot more granularity there on whether that's a shift in your investment strategy and how we should think about that versus your broader investment approach, especially given the cash on the balance sheet now after all the recent corporate actions.

Thanks, Eric.

On the spin, I think we always say that there's not one particular formula, there's not one particular moment.

I think one thing that has historically been a catalyst among others and is relevant now is the size of Match relative to IAC, that one starts to look like a proxy for the other and in a very good and healthy way, casts a shadow over the rest of IAC, and that really was sort of the starting point of our recent thinking.

And of course, you start thinking about a Match spin and then that leads to, okay, well then, do you also think about an ANGI spin.

And as we were thinking about those and as we were preparing for earnings and said -- given that these are both public companies and that we could cross some disclosure thresholds in one way or another, we're better off just disclosing that now that we're thinking about those things.

I do think that, as I've said in the letter, anything is possible from here.

I think that Match was perhaps the original catalyst and is probably the more obvious candidate on typical metrics that one might consider.

The other thing that factors into the thinking is the focus of the team, where to put your energy, how to make smaller bets matter, how to focus on building little things bigger, and all those things will go into the mix.

But again, I think it's important to convey that any of the alternatives are possible from here.

As it relates to Turo, it is a shift -- sorry, it is a difference from what we've done historically.

I would say it is not a fundamental shift in philosophy.

It is perhaps, a new openness.

In other words, I wouldn't expect us to use our cash balance from here exclusively or significantly or majority-wise on minority investments.

But we're open to it and we're open to it in ways where we think that we can impact the outcome of the business, where we think that we can be really helpful and where we believe we have a chance to increase our ownership over time.

And that may not be through an explicit road to control, but it would be with, again, desire to just aggregate ownership and aggregate shares when we think there's an opportunity and when things are working.

And Turo was, when we looked at it, a really interesting business in terms of having lots of analogies to things we've seen in the past, disaggregated supply, disaggregated demand, a marketplace in the middle that solves the problem for why the supply and demand can't come together and make those things much easier.

It's an asset-light business, and it had those sort of general things that appeal to us.

And at the same time, it was in this category that's fundamentally transforming, which is urban mobility.

And you look at all the ways that, that's happening and all the companies that are playing in there, and most of them are very expensive and less clear in terms of margin and profitability and profit potential.

And we just saw Turo there, as thiskind of a hidden gem and got really excited about getting involved.

And this was the way we could do it.

In terms of Turo, don't forget to put it in your sum-of-the-parts.

Well,just to put some numbers around what Joey said around the sizing of our businesses relative to IAC as a whole, we've talked about this in the shareholder letters.

But again, just to get really granular, we own 226 million shares of Match.

So for every IAC share, based on the share price last night, Match represents $240-odd of an IAC share.

And then ANGI, we own 422 million shares of ANGI.

So for every IAC share, you get about 4.8 shares embedded-- in your share of IAC of ANGI.

And even in the aftermarket trading -- with the ANGI stock price movement, that's another $50 of value.

So between the 2 pieces, you're at $290 per share of IAC, and that ignores all the other businesses that Joey mentioned and our excess cash net of debt.

Our next question will be from Jason Helfstein from Oppenheimer.

I want to ask, too, about ANGI and I'll go back in the queue for maybe another strategic question.

So at ANGI, it seems missing a Google algo and pricing change is a rookie mistake, and your team is not rookie.

So I guess what have you done from either a head count or systems change to prevent it doesn't happen in the future?

And then in the letter, you're talking about moving into managed fulfillment at ANGI similar to the Porch model where a consumer purchases and schedules the job from you, then you hire the pro and pocket the difference.

Can you talk about the -- how the economics differs in that model versus the traditional lead model that you've had?

And then how deep can this go because this doesn't really work for biddable projects, which have been a big part of the HomeAdvisor model?

Sure.

I'll start and then I'll turn it to Brandon on some of that.

In terms of how this happened, I agree, an avoidable mistake.

I think I'll start by saying that Brandon, certainly, and the team has the full support of IAC in working through this issue.

And we have absolute confidence that they will deliver that.

I think what happened here is we did a significant acquisition and a significant integration.

And we really focused on the things that we needed to get done in that acquisition and integration.

And other things got ignored.

Now it's not a good excuse.

It is probably the most likely thing.

And in particular, On customeracquisition where we had so much demand coming into the business that we took our eye off that ball on demand, and we are focused on things like the supply side and other components around integration.

So we didn't naturally force these issues to the top or have to, but I think the good news is they ought to befixable.

And as it relates to the business model, I think you're right.

This will not apply to all of the service requests in our network on HomeAdvisor.

I think there's still a significant portion of the business that will continue for bidded jobs and things like that where the model can help.

But there area lot of jobs that we both see today and match, a lot of jobs we see today and don't match and a lot of jobs we don't see today because the process is tooannoying.

And that's what we're trying to solve here with pre-priced services, and I think we can.

It is a different take rate, so to speak.

And as I might have indicatedin my opening, the really exciting part about that is instead of the service professionals paying us, we pay the service professionals, and I think that works.

I would say it's different than maybe some of the other things you've mentioned or referred to in a sense that we have a marketplace today, we have a marketplace for service professionals, and we're still operating in the middle of that marketplace, bringing those things together.

We're just simplifying kind of the tools so that both sides don't need to hasslein the same way that they may have hassledhistorically.

I'm going to let Brandon...

Yes.

I think on the first question, I mean, I would agree with Joey that with the focus on the merger and integration last year, we probably had decreased focus on customer acquisition and didn't make some of the investments that we should have made.

Separately, on the managed fulfillments and then the question of how far can you go and where is it working and where is it not, I think the first thing you have to realize is we have tens of billions of dollars of unfulfilled demand in categories and project types that you would think of as both easy to fit in this model, maybe a little more difficult to fit in this model and some that perhaps won't fit in this model in the long run.

There's a lot of room to grow and provide fulfilled services where it makes sense.

And I think, in some of the categories where you might think it's harder because they're traditionally bidded projects, I think you might be surprised at what the future could look like there and the ability to actually calculate a realtime bid and offer somebody a fixed price upfront.

People, more and more, are moving towards a desire for extremely low friction, digitally fulfilled solutions in ways that wouldn't have made sense traditionally.

And I think our move in this direction offers near-term, high-confidence growth in the project types where we have a tremendous amount of unfulfilled demand where this works as well as the opportunity to evolve, like I said, in ways that may be surprising in terms of where this might apply.

Yes.

And just, I think we talked about in the letter and Brandon alluded to it, but we're starting out with our pre-priced services on the 40% of our SRs that go unmonetized.

We've already paid for them.

They're already coming through the system.

So that obviously would be accretive to margins, for sure, and accretive to unit economics.

And then as Joey said, the take rate is a little better.

And with all the product things that we're doing here, we're attacking 3 very important things for the health of the business and the go-forward revenue and EBITDA margin: one, repeat rate, try and increase it; two, 0 accepts, trying to decrease it; and three, SP retention, obviously, trying to increase it.

Our solution works for hundreds of thousands of SPs extraordinarily well and tens of millions of consumers extraordinarily well.

And this is about making it work better for those people and work for more and more homeowners and SPs.

Our next question will come from John Blackledge from Cowen.

So just 2 questions on ANGI.

First, for the top line, can you just further explain how the marketing issues impacted the 2Q revenue shortfall and how we should think about top line trajectory in 2020 and beyond just relative to your prior comments about ability to do 20% to 25% annual top line growth?

And then second, given the lower 2Q EBITDA and lower fiscal '19 EBITDA guide, will the higher Google marketing cost persist into 2020?

And more broadly, how should we think about the 2020 margin profile?

And then longer term, can you adjust to kind of mitigate some or all of the Googlepricing impact over time?

Yes.

Thanks.

So in Q2, we actually started out the quarter well and consistent with our expectations.

I think April came in at 23% year-over-year growth.

However, in May, we began to see significant cost acceleration or continuation of a pattern of significant cost acceleration.

And in our efforts to rein that in, applying some of the tactics that we used last year to optimize margin, we lost volume temporarily.

And overall, May ended up coming in quite disappointing at, I think, 15% year-over-year.

Subsequent to that, we sort of undid those changes and drew the conclusion that, in fact, if you will, the entire environment had seen cost inflation.

In other words, the price of doing business there in Homeservices has simply gone up.

And so we have a lot of activities under way that obviously intend to fix that.

And then there are a number of ways we can do that, including promising technologies on the sort of bidding engine front for SEM.

In terms of the rest of the year, July was, I think, our best month of the year so far, and we still expect growth to accelerate from the first half to the back half.

In terms of the margin, we do still stand by and expect the 35% long-term margin target that we articulated when we announced the Angie's List deal.

We think that it will probably take longer, and we have to get the marketing under control, which, as Brandon said, we are.

As we said in the letter, marketing has stabilized here, and our guide obviously reflects that.

Even this year -- just to talk about the margin profile of this business.

Even this year, if you put marketing aside and you put our discrete investments that we made, we've talked about them before, it's Handy, it's Fixd, it's discrete investments in product of which Brandon spoke about, we create incremental margin on everything but marketing.

We created incremental margin in G&A, in product, in operations and in sales.

And it's that incremental margin that allowed us to grow marketing.

And marketing as a percentage of revenue was a lot higher this year, obviously, than it was last year.

But actually, it was the same as it was in 2017.

So we obviously skipped a year in terms of our progress on margin.

In terms of 2020, obviously, we're working through this marketing issue.

We think we have it scoped out.

We think it's stabilized.

And we think we have a clear path to getting that under control.

But I wouldn't expect material margin improvement next year, either, as we continue to work through the marketing issues and as we continue to roll out our pre-priced offering here.

And like we always do, you may see us investing to success here, which we're excited to do.

I talked earlier about repeat rate, 0 accepts and SP retention.

And just to give you a good heuristic around it, if we increase any -- if we increase those 10%, and that's our repeat rate going from 1.8 to 2.0, and if we get better on our 0 accepts by 10% going from 40% to 36% and we increase our SP retention 10%, that alone drives 6 margin points in terms of long-term margins.

So these are very powerful levers that we have at our disposal, and everything we're doing on product is to get here.

Our next question will be from Doug Anmuth with JPMorgan.

This is Cory Carpenter on for Doug.

Two, if I can.

Maybe first on ANGI.

Could you talk a bit about the service pro supply issue that you saw in the quarter, maybe your level of confidence in being able to address that and how it could impact SP growth in the second half of the year?

And then on Dotdash and Vimeo, could you talk about just what's driving the revenue acceleration at those businesses?

And Vimeo specifically, any update on the integration with Magisto?

Sure.

Thanks.

I'll address the service pro question.

First of all, we made a change, I would say, close to a year ago that really incentivized our sales force to focus on higher-value, higher-capacity service providers.

And you've seen that decision and the resulting actions flow through in the form of decelerating sort of nominal growth, but accelerating spend per SP over the last several quarters.

We are interested in SPs with higher capacity, but, of course, we also want nominal growth.

And we are in the midst of making additional changes that will hopefully give us both sides of that and will reignite nominal growth, particularly as we head into the remainder of the year and next year.

We will be focusing on bringing in small SPs and large SPs, those with higher capacity and those that tend to operate in some of the categories where the businesses are smaller.

The reason for that is that we have customers coming to us for a broad range of services, including things like handyman services, cleaning services, and these tend to be smaller companies in general and we don't want to neglect them.

And you've seen, obviously, on -- some of the metrics around our SP population.

Revenue per SP was up 14% to a record $1,161 this quarter.

So our migration to quality and our focus on bigger-budget SPs, obviously, is coming through.

I think I mentioned once before that our 2018 cohort of SPs is the highest from a lifetime value perspective, and it looks like 2019, we're beating that.

I will cover Dotdash and Vimeo revenue acceleration.

On Dotdash, it's a lot of things that we've been working on for a long time, optimizing monetization, so again, staying both the lowest ad density on the page and relative to competition but having more effective ads.

And we're seeing that play out with repeat rate among advertisers, spending more and expect each of them spending more individually because the ad performed.

We have a really simple, but, I think, somewhat unique thing among publishers at Dotdash right now, which is we say to the advertisers, just come and try the product.

And if the product works, spend more money.

And if it doesn't, don't.

And we find that, that's a very effective way to get people onto our platform and get people to stay on our platform because we encourage them to evaluate us as a publisher against any other publisher where they want to put ads and just look at the relative performance against the metrics that they want, and it works.

And the reason it works is because the content that we have has intent embedded into it.

It's not just news.

We don't really do news there.

It's content with intent and, therefore, that is going to end up performing with the advertisers, provided we understand that intent, we can share that intent with the advertiser.

And by the way, that delivers a more compelling experience for the reader because they're getting something that's consistent with what they're trying to accomplish at that time.

So the more content we now put in there, the more we can grow that business and we're continuing to grow the content base, continuing to grow that moat and invest more into that business, which shows up on the revenue accelerationside.

On Vimeo, Magisto is going well.

I think we're only 2 months into that, so we haven't really done the integration, meaning where we're actually cross-selling to Vimeo user Magisto or Magisto user Vimeo.

That will happen I think relatively soon.

Right now, the only thing that's happening is Magisto, on its own, is growing very nicely.

It's going according to plan.

Again, 2 months in, I would hope so.

But it's going according to plan.

The biggest driver of revenue growth on Vimeo, excluding the acquisition, is the enterprise business.

That continues to grow very nicely and accelerate, and we have big hopes for the enterprise business there.

We just rolled out a new product on that side.

We're really starting to integrate some of the things that we've purchased previously, like Livestream and VHX.

That's now on a very neat product called Vimeo Enterprise.

And we have salespeople there that, of course, helps drive growth.

But really, the product is resonating and seems to be bringing in bigger customers, spending more money and happier.

So it's a combination of things, but all the things that we think have a lot more gas in the tank.

Our next question will be from Ben Schachter with Macquarie.

A couple on ANGI and then one on Match.

Can you quantify what percentage of service requests come from Google?

And assuming Google does not reverse that change, where do you focus your efforts to increase non-Google driven requests?

And then related to that change, are there issues with what Google did or is doing that you think could or should be looked at by the regulators?

And then separately on Match, they changed the payments flow on Android and it's obviously really helping gross margin dollars.

I'm wondering if there are any other IAC businesses that could potentially see lower app fees.

So I'll take the first part of that question.

In terms of quantifying our reliance on Google, just about 40% of our customer acquisitions come through Google.

About 1/4 of that 40% is actually people directly seeking out our brands in response to either previous experience with us, but also perhaps some of our branded marketing and TV marketing.

So I think you can look at it as perhaps 30% reliance on finding new customers.

Our long-term strategy has been to diversify our source of customer acquisition broadly.

And we have, over the years, made that a priority and even though we're still at 30% reliance, that's way down from where it has been historically.

But it's clear we have more work to do if we want to control our own destiny.

And so we will continue to not only get better and put more investment into mastering Google because it's an important place to find customers, but we will continue to make it a priority to diversify where we're putting dollars to work and where we're finding customers.

And both of those things will remain important to us.

Separately, if we're going to sort of achieve our aspirations here, we need to become effectively a direct destination brand.

And Glenn alluded to this in terms of repeat use.

But what I would say is we need to form stronger bonds with our customers and a more loyal relationship and see them come back directly to us more frequently.

The path to get there is, essentially, mostly through product and product innovation.

And we have a lot of things in the pipeline that we will bring to market over the coming months that we think will make a very large difference there.

Separately, while we talk a lot about the cost of acquisition and how it's gone up, which, obviously, is important, our strategy around fixed price sales can make a very large difference.

First, it positions us well with emerging consumer expectations.

I think Joey said it well on the letter, where people now expect solutions with a click of a button, not just information.

Particularly, with millennials, the expectation that you can transact digitally even in homeservices is going to become more and more prevalent.

And our early experience integrating Handy really already shows the level of engagement and interest from a sales and conversion rate standpoint with our customers at HomeAdvisor.

Aside from that, the great thing about offering essentially a buy-it-now feature is that for the 40% of SRs, or service requests, where we had not been able to match that consumer with a service provider, we will now have a solution broadly available for those folks.

That does a couple of things.

It obviously improves the quality of the experience for those people in a dramatic way, but it also -- these are service requests that we've paid for.

And to have 40% of the service requests we paid for go unmonetized and unserved is obviously harmful to our unit economics.

And if we can make great headway in monetizing those requests, all of a sudden, the acquisition costs that we're paying don't look so prohibitive.

And our buying power, obviously, as you understand, would increase pretty dramatically.

And then lastly, and this also goes to the question of SP capacity, we have a perennial problem here, which is there is more consumer demand each year than -- that's growing and in balance with our ability to bring capacity to the market from a provider standpoint.

Obviously, we've grown our service provider network dramatically, but it does not keep pace with the really unbelievable amount of consumer demands around homeservices.

So our traditional model works well, but with fixed rate services, we'll be able to complement that.

And the beautiful thing about it is we'll be able to go to service providers, and instead of asking them to pay us for an advertising product, we'll be able to take a job to them for which we will be paying them.

And that's a powerful concept and, I think, a powerful tool to help us really bring a lot more provider capacity to the marketplace to serve all this underserved demand.

On the question of regulators, look, we get inquiries from regulators all the time, as you can imagine.

That is not our strategy.

That is not our plan on how to address the issues that we have in this business.

I think everything Brandon said is exactly right and is exactly the strategy.

If I say itto make it really simple, we have to deliver a better product so that people come to us directly always.

And there're blueprints for this.

I think eBay did a nice job on this over time.

I think Amazon is the ultimate -- had done a nice job over this.

It has to be that -- and today, I believe this is absolutely true.

Our product is unequivocally better than the product of going to Google or going through Google to us.

Coming to us directly is the best solution in the marketplace right now.

But I also think we can make that meaningfully better and meaningfully better than the alternative.

And if we can deliver that, then we'll get the customers directly, and that's our biggest strategic focus right now, for sure.

In terms of your last question, lower app fees, I don't think it's a meaningful driver elsewhere in IAC.

Mosaic does pay app fees and that business is entirely a split of iOS and Android, but I don't think that there's a meaningful untapped opportunity in those businesses right now.

Our next question will be from Ross Sandler with Barclays.

Just a general question around, like, the investment philosophy.

So the release mentioned the Pinterest stake, which, I think, you've been asked about before, and now we're talking about it.

So can I get you -- can you talk about the history of that investment and what kind of return you guys realized?

And then as it relates to Turo, and this is probably a much larger bet where you don't have a controlling stake, SoftBank-esque in terms of it being a later-stage company and a minority investment.

So can you just talk about the overall thinking around the investment strategy going forward as it relates to controlling and noncontrolling and then maybe what your play is on Turo specifically?

Sure.

Good question, Ross.

I've answered a little bit the Turo one there, but I'll go a little bit deeper on that.

In terms of Pinterest, we -- I think we ballparked, (Glenn correct me), we turned $2 million into $200 million, something like that, in that neighborhood.

Yes.

We have about 4.6 million net shares right now.

And you see it -- our cash balance of $2.7 billion includes marketable securities, of which the value of Pinterest at 6/30is in that number.

Yes.

Of course, we'd like to do that exclusively from now on.

But I don't think that's going to be our strategy.

That actually originated with a woman named Shana Fisher who we backed -- who used to work for IAC, and we backed with a pool of capital to make early-stage investments, and she did just a phenomenal job on that.

And Pinterest was a grandslam, of course.

And there were other great ones there, too.

And so overall, I think she's just done a phenomenal job.

She now has her own fund and, I think, continues to do a phenomenal job on that.

That is not -- I think spreading around minority investments and VC stage investment is not really a core function of IAC.

It's not something you'll see us do a lot of.

There will always be exceptions.

Where we find something that makes sense for whatever reason, either strategically where we think we can learn something or we're so in love with something, it's the only way in, but we're not focused on becoming a venture fund or significantly expanding venture investments.

I think that Turo, like I said earlier, is unique.

It was a business that's we thought fit with a lot of the themes that we've succeeded in historically, we've been helpful in historically and that we thought had great potential, and this was the only way in, in that.

So we are open to those opportunities, but we are not fundamentally shifting towards pursuing that from here.

We've significantly favored majority acquisitions, significantly favored majority deals or deals where there's a clear path to control, and that will be our priority.

Just we will be open to alternatives.

Does that answer the question, Ross?

Yes, super helpful.

Our next question will be from Dan Salmon with BMO Capital Markets.

Maybe one for Joey/Brandon, I'll let you guys dive into the first one, then maybe just a quick one for Glenn at the end.

But just, Brandon, I appreciate the mea culpas on the marketing missteps.

If we put those aside, could you maybe just step back a little bit and talk about the broader competitive environment for ANGI right now?

In particular, some of the bigger vertical Internet players -- or excuse me, horizontal players I look at like a Facebook Marketplace, where you're a partner obviously, but Amazon Home Services, how are you viewing sort of what the big guys are doing in your space these days and if there are any other major competitive changes you can talk about?

And Joey, I'd love to hear your thoughts on that as well since it does touch on the big guys and you're always thoughtful on that.

And then lastly just for Glenn.

I think the last line of Joey's letter confirms this, but I just want to be clear on the -- a timing here that it sounds like you will have an update on the Match and ANGI stake process by this time next quarter.

Brandon, why don't you start and I'll...

Sure.

So I think in terms of competitive landscape, in particular with the big platform players, obviously, any time they get involved in something, you want to keep an eye on it.

But it's not -- I guess from my perspective, has not materialized as a significant threat.

I think Amazon's efforts have mostly, to date, focused on product installation and product support, which makes a ton of sense.

I think Home Depot has always had that kind of service, so that's not really particularly new.

I don't think Facebook is really active in this space anymore.

And obviously, Google has competitive products which perhaps compete with us from an acquisition standpoint, but I think, in summary, in the long run, there is real desire for a vertically focused, deep solution by homeowners.

And you're just not going to get the same depth of experience and the same focus from people that are doing this part time as you're going to get from a team that's focused on this day in and day out.

I think that's probably my view on the strategic front.

Yes, I agree with all that.

I guess I'd add.

Some of these businesses have some fundamental advantages, for sure.

Distribution would be the biggest.

Google has a massive distribution network, of course, by far the biggest; and Amazon does on the back of some other things.

But they don't have the fundamental product advantage and they don't have what we have, which is very hard, very labor-intensive, very capital-intensive, which is the service professional network.

And we've spent a lot of time, a lot of capital and a lot of learnings on getting that right and how to satisfy a service professional and how to deliver them the things that they want in the form that they want it.

These platforms, given their scale, have generally been able to force people into the format that they already have, and that isn't going to work for all service professionals.

And we are focused on delivering this.

We have to deliver the best product in the category.

I'm confident we have, by far, the best product in the category today.

And I'm also confident the things that we've built, the service professional network in particular, but all the things we've built around product, canallow us to build that next generation of product and be that destination here.

And you see, really, particularly in the mobile landscape with apps, people like a dedicated solution for a dedicated problem, and I think we can be that solution and will be that solution solong as we stay ahead on products, which I'm confident we can do it.

Is there another question there?

Yes, just timing.

Will we reach a conclusion by the next earnings call?

I think that's our target.

It's not a guarantee lock that we'll be there then, but that's certainly our goal.

And Dan, in terms of competition, as Match has proven over the last 18 months, as long as you continue to delight your customers, give them the best product experience and invest in your brands, you can persevere through so-called threats.

Our next question will be from Kunal Madhukar from Deutsche Bank.

Two for me.

One, with regard to the service professional spend on marketing, so on their budget, how much does Angie's List get today or ANGI Homeservices as a whole kind of gets today?

How much of that do they spend on Google Search and on other sources of traffic?

And then on the spin, with regard to the debt, does that -- and as you look at it and as you evaluate the spin process, do the -- does the debt move with the spin -- spun-off companies?

Or will that debt stay with IAC?

Because if that does, then the leverage here would be significantly higher.

I've lost a bit of that at the end.

I'll cover the last bit and then go back to Brandon.

We have the flexibility to move the exchangeable securities to either subsidiary.

I think that's true of all 3 different buckets of our exchangeable securities.

So that is something that goes into the consideration set in terms of how we might do a transaction.

To the extent we pursue one or both, how we might do it, those are things that will go into the consideration set.

Yes, Kunal.

As you saw, we have $2.7 billion of cash, well, well, well in excess of our debt.

And each of our 3 financing entities, Match, IAC and ANGI have significant debt capacity therein.

And then in terms of share of service provider advertising budget we're getting, the research is a little rough around that, but our best numbers say that we're getting around 1/3 for the providers that are part of our network.

But of course, we also only have a small portion of the overall providers in the economy.

So there's both room on more share of wallet from an advertising budget standpoint, but also just getting more penetration into that market.

Our next question will be from Brent Thill with Jefferies.

One of the questions from investors is on the Match potential spin.

Given that it has one of the highest operating margins in the industry, what does that mean for your overall profitability?

And are you effectively considering a big margin reset given that hit?

I don't think I follow the question.

There's the math of Match's margin relative to all the other businesses, and one doesn't change the other.

But yes, if you take a higher-margin thing out of the total and what's left behind is smaller, then it's smaller margin.

Does that answer your question?

Or maybe I don't understand it.

Yes.

Just the overall profitability hit, Joey, how you think about managing the business given that is one of the best performing stories that you've had.

And effectively, the profitability is among the highest in the industry.

Got it.

Look, one is that translates into, of course, cash -- Match's operating margins translate into, of course, cash flow for IAC.

IAC is currently very well capitalized.

To the extent we pursue this, we can further well capitalize IAC in that, and there are ways to accomplish that through spin-offs and things like that.

So that -- we can organize cash -- we can organize the cash into different places, and that's something that we think about and will continue to think about.

So it's a question really of -- there's one question of will each business be okay from a balance sheet perspective.

And the answer to that is we have lots of flexibility there.

When we talk about each individual business, it's a different story.

Each individual business has a different margin profile, both short term and long term.

I think you're seeing now with Dotdash, where -- and we had said it earlier, I think, but Neil Vogel has just done a phenomenal job.

We're starting to generate real margins there, and that business is therefore starting to generate cash flow that has, we think, great potential.

Vimeo, Anjali Sud has done a very nice job at that business.

We're growing very nicely.

We have, I think, market potential there.

That's not -- I'm sure, market potential there.

That's not short term, that's longer term.

But that business as a recurring SaaSbusiness can have a great margin potential.

The applications business delivers real margins.

But each one of those things is different.

We'll have businesses generating margins.

We'll have businesses consuming margin and being in their investment stage, like Vimeo is right now, and that's all okay.

That's not dissimilar from frankly where we were in 2008, where -- when, after we did 4 spins, we weren't really generating any cash flow or margin of note.

We had lots of things in investment mode or earlier in their stage -- earlier in their life.

And we built things up to generate that margin and that cash flow.

Yes.

And just to put another number around it.

IAC ex Match ex ANGI in 2018 had $1.4 billion revenue.

So there's a lot of opportunity embedded therein.

And by the way, I skipped over our Applications and Ask Media business, which are 2 cash flows machines -- I mean Tim Allen and Katie Van Den Bos who run those businesses are cash flow machines.

Okay.

Just a quick clarification on ANGI.

You don't believe this is anything external in terms of competitive forces.

This was more internal and related to Google?

Yes, absolutely.

I think it's really specifically cost inflation from the search engine environment.

And obviously, Google is the largest of those.

And I know we spend a lot of time talking about, obviously, the impact of that, which, near term, is a headwind.

But the real opportunity for us is to address the other side of the ledger, which is we need to have breakthrough repeat use from our customers so that we're not having to acquire them, particularly multiple times through places like Google.

And we need to bring more provider capacity to the problem of our 40% of unfulfilled demand.

And if we can do that, the -- honestly, the acquisition cost will be somewhat irrelevant.

Our next question will come from Robert Coolbrith with Wells Fargo Securities.

A couple of follow-ups on ANGI.

First, on the Google issue, just wanted to maybe understand the cost inflation pain a bit better.

Do you understand that to be a relevant assessment applying to aggregators versus the local SPs or a broad-based issue across every one in the category?

Anything more you can tell us about that?

And then going back to the 40% of SRs that result in 0 matches today, I imagine that's either limitation on ad budget capacity or actual work capacity.

Out of that 40%, just wondering if you have a thesis on how that can be attributed across ad budget capacity versus actual work capacity among the SPs and how you're thinking about the opportunity to drive down that percentage of 0 match SRs with the on-demand offering.

Yes.

Great question.

So with regard to cost inflation, just to put a number on it, we were seeing acquisition costs that were up greater than 30% year-over-year, sometimes quite a bit above that.

And so obviously, that's material.

In terms of why that's happening, our original assumption was that this was something that was within our control and that we could manage the margin back down without losing volume.

Unfortunately, what we found was it looks like it's just broad-based increase in cost and price, at least for homeservices.

And we were not able to bring the price back down without losing substantial volume.

In terms of what's causing it and whether it's targeted towards aggregators versus local SPs, no one knows.

There's no visibility in there or transparency into that question -- or answer to that question.

However, I would highly doubt that we're paying a different price than your local SPs.

It just doesn't seem reasonable.

I think that there are a bunch of factors which are driving increased competition, including changes to the structure of the page, competition from other Google products to the traditional SEM product and, honestly, just more participants participating in the auctions.

The costs there do typically go up every year, which isn't surprising.

What is exceptional is just the sheervolume of appreciation that's occurred this year.

On the 40% of unfulfilled SRs, those are evenly distributed across all the project types that we service.

Homeservices are an amazingly fragmented and hyper-local type of problem to solve.

And so the reason why we have so many that are unfulfilled is a combination of factors.

Sometimes, we don't have a provider who does that service in that location.

Oftentimes, we do have a provider, but they're simply at max capacity.

And in other times, we'll have a provider, but perhaps they have already spent all their advertising budget, again, largely because of the imbalance of too much consumer demand for the amount of provider capacity we can bring to bear.

And I think, fundamentally, obviously, our traditional model here continues to grow nicely, but is unable to keep up with the growth in consumer demand.

So we have, I think, as our -- obviously, top priority is figuring out how to productize this demand and take it to market, take it to providers in new and more compelling ways that complement our traditional service.

So offering a buy-it-now feature, either when we don't have anybody at all or perhaps even alongside local providers will give us -- will, one, give consumers, homeowners the option to choose the experience of their preference.

And for those that want a purely digital solution with standardized upfront pricing, they'll have that option.

And then it gives us the opportunity, when someone does purchase, to take that demand, take that project out to a much broader set of providers, perhaps those for whom our traditional product isn't appealing.

Or maybe those who are in our traditional product would have additional capacity and can take a job where they're going to get paid for rather than having to pay us.

The one thing I'd add is I do believe that Google does not favor "aggregators." I don't love that term, certainly, as a reference to us.

But -- and I think that's a mistake on their part, and that's an advantage on our part.

We add a lot of value in matching the right consumer with the right service professional, which takes a lot of technology and takes a lot of, to some extent, manual labor.

And that delivers we think, a more compelling experience for the consumer, a better price for consumer because we can help the consumer through that process.

Without the aggregators, the consumer is somewhat left on their own.

And I don't think Google's solution solves that for the consumer.

I actually think that solution, without players like us, makes it -- I really believe this makes it worse for the consumer that they end up with generally the highest priced provider or a provider who's working their ecosystem in a way that may not be optimal for the consumer, the homeowner.

And our confidence in fixed price is borne of observable inputs from 2 very important learnings that we've had over the last year.

One is the Handy experience.

And for certain tasks, that's just the better experience with all the collateral benefits of repeat rate and customer satisfaction.

And Brandon was the architect and the driving force behind that acquisition.

And then Brandon invented a product last year, the opt-in product, which also taught us that the SP's capacity is actually a lot higher than his budgeted or her budgeted capacity and that if we give someone a specific job, which the opt-in product is a path to fixed price, if we get them on a specific job, they react differently, better, our win rates are higher for our SPs, and that also gives us a lot of room on the take rates.

The next question will be from Mike Ng with Goldman Sachs.

Just had a few.

First, in the letter, you said the majority of the guidance reduction for ANGI was because of higher marketing.

Can you talk a little bit about your decision to spend more marketing instead of dedicating even more to accelerate the rollout of the pre-priced services given the attractiveness there?

And then on the higher marketing, is that simply a function of cost inflation?

Or are you actually trying to increase reach and frequency and experiment with new channels?

I think we'll turn to Brandon.

Very good question, one that we've talked about quite a bit internally.

What was it again?

The -- well, the first one is what is -- why are you spending on marketing as against?

Yes.

So I mean on the first question, one, we're going to do both.

We are spending on marketing to continue to drive growth, to bring consumers to our service providers.

That might seem silly on the surface when we spend most of the time talking about lack of capacity, but the issue is that the nature of the business and the marketplace is extremely hyper-local.

And most of our advertising is on a national or, at least, regionally broad basis.

And so unfortunately, we have -- in order to get the service request and customers and the demand from them that feed our service providers when we do have capacity, you also get a lot of requests for which we don't.

And there's really no easy way or no effective way to target at that level from a marketing perspective.

So we think continuing to grow our marketplace, continuing to feed our growing network of providers needs to be a priority.

All that said, part of the change here is to give ourselves the flexibility to radically accelerate our efforts around fixed price.

We are going to move quickly.

The goal is to expand as fast as is possible.

That will largely not be governed by investment limitations, but will be governed by our ability to fulfill services at a high level of quality in a way that is satisfying to our customers.

One thing we know for sure is that it's easy for us to sell these.

We've launched -- I think we referred to this earlier, but we recently expanded the business.

We've been operating in several categories for most of the year, traditional Handy categories.

We recently expanded to 19 new categories where we're seeing very good customer engagement and conversion.

So we know we can sell these services.

What will be our limiting factor here is ensuring that we can scale and fulfill very reliably.

And I think we have more to learn there.

And I think the answer to your second question, although I might have forgottenit, was that we would see a combination.

We do think that ecosystem has gotten more expensive and we do think we've had some self-inflicted wounds where our costs were not in control in ways where we've now brought them or in the process of bringing them under control.

And I think we'll go -- we're almost out of time.

We'll go on maybe until we can squeeze 2 more questions, but this may be the last question.

Our next question will be from Ygal Arounian from Wedbush Securities.

So feels like there's 2 kind of distinct but very closely related issues with Google.

One is the algorithm issue we've talked about extensively.

And then the other is that Google is just giving more of its real estate to its own products.

And so it's -- what's your view on -- does this change the overall dynamics of SP growth, how much you're consistently spending more on marketing?

If consumers are going to Google and just looking -- even if it's not as strong of a service and they're not getting the best experience, they might not know that if they're clicking on the first couple of links, can that have a long-term impact on the actual SR growth trajectory?

And you noted July was a really strong month.

I'm just curious what -- if your outlook on the year on SR growth has changed at all.

Yes.

So we mentioned earlier that about 30%, 40% overall but 30% that could be affected by these types of changes, of our customer acquisition comes from Google, so we're really well diversified.

And of course, we're still going to continue to push on that.

But we're also -- we certainly believe that we can continue to be successful in the Google ecosystem.

In fact, we have to be.

It's too important of a place for finding customers.

And so we are ramping up our investment and our focus and have some promising initiatives and technologies in the pipeline that we think are going to make a difference.

Longer term, we need to acquire our customers and keep them, as I mentioned earlier.

Our focus -- and fixed price is part of this, but there are other things as well.

Our entire focus is to create a much stickier experience with the homeowners such that we acquire them once and then they come back to us time and time again.

I think, for us, that is the breakout change that will really transform the business in a number of different ways, both in terms of the quality of the service and the experience for homeowners, but also, obviously, in terms of the economic profile and margin profile.

We've got a lot coming on that front.

You'll see a lot of changes over the coming year -- coming 12 months that go directly at that opportunity.

And the 30% from Google in the unbranded sense, I don't think there's new consumers discovering Google today in America and that are increasingly going to Google for this.

And I'm certain that with the product that Google is offering there, that there's not -- they're not more likely to start to go to Google to see that product.

Will the 30% be more challenging?

I think yes.

I expect that to be more challenging for eternity.

But we still got work to do in there.

I think we can improve what we're doing in there for sure.

And we've got the other 70% that's the world is our oyster, and we feel -- we're excited about the things that we're rolling out there.

And to your last question, which is the last question we can answer, is that the service request forecast, I don't...

Yes, we -- we're 15% last quarter, 17% this quarter.

We don't think it's going to materially increase from there, high teens, maybe 20% on a go-forward basis.

But you know what?

There's a lot of volatility in the ecosystem for sure, and we just have a lot of different levers.

Remember, you have revenue per SR as well here.

And then as we continue to get more successful on fixed price, that could change the underlying metrics as well.

But all supports, obviously, our 20% to 25% revenue growth on a go-forward basis.

All right.

Thank you, everybody, very much for the quarter, for your questions.

And we'll speak to you again in 90 days.

Ladies and gentlemen, this concludes today's teleconference.

You may now disconnect.